BY BURCU GOKSUZOGLU
Q&A with Atilla Benli, President of the Insurance Association of Turkey (TSB)
HOW HAVE TRY DEVALUATION AND INCREAS˹ ING INFLATION AFFECTED THE INSURANCE INDUSTRY?
Inflation, which is a common problem in the world today, deeply affects Turkey. High inflation and increasing costs are the biggest problems in the global insurance sector. Increasing inflation has a corrosive impact on the sector, according to a report prepared by the European insurance and reinsurance federation, Insurance Europe, last year, which looked at 26 European countries, including Turkey. Insurance companies consider the inflation and foreign exchange (FX) effect while they set their pricing policies in this period of high inflation and uncertainty. We are experiencing a period when costs don’t comply with premiums, costs are high, and premiums remain low.
The asset size of our companies rose by 39% to TRY 142bn in the first quarter (Q1) of 2022. Premium production reached TRY 61bn in January-May 2022. On the non-life insurance side, this indicates an 89% growth in the same period. However, the hike didn’t reflect on profitability as there wasn’t a sufficient premium surge when the decline in costs is compared with the surge in premiums. There is a serious decline in the non-life insurance branch in 2022 as compared to 2021. The technical profit of TRY 656m transformed into a loss of TRY 599m in Q1 2022.
IS THE SUB-SECTOR OF NON-LIFE INSURANCE EXPERIENCING THE MOST OBSTACLES TRAFFIC INSURANCE?
The sector is experiencing difficulty in traffic insurance, automobile insurance, and health insurance. These are the three branches have the highest levels of production. We have nearly 21 million traffic policies on a branch basis in terms of traffic insurance. Premium production rose by 86% to near TRY 15bn. However, the loss ratio and the net compound ratio were realized at 188% and 214%, respectively. The technical loss jumped 856% in Q1 2022 as compared to Q1 2021 in traffic insurance. Although automotive insurance has a relatively better situation, there was a technical loss of TRY 599m. There is an obligatory tariff on traffic insurance. We must create our premium and sell through it. However, there is a structure on the cost side that we can’t control and on which FX rate hikes have an effect – we can’t use domestic spare parts in Turkey. Previously, we were able to provide 20% of the cost of domestic spare parts or spare parts corresponding to this ratio. However, the Insurance and Private Pension Regulatory and Supervision Agency (SEDDK) has removed this regulation in line with a decision by the State Council. Within this frame, we haven’t had an opportunity to reduce our costs. We’re working with the President and Board Members of the SEDDK. On the one hand, we hope to move forward by solving the main problem of traffic insurance with work on structural regulations, on the other hand, we are holding talks about prices to strike a balance with deteriorating costs.
WHAT ARE THE YEAR-END PROFITABILITY AND GROWTH FORECASTS IN THIS SECTOR FOR 2022?
Business is better in the private pension system (BES). The BES channel is now included in the path to obtaining Turkish citizenship. The number of participants aged below 18 in the BES has reached 396,000. The total asset size of the BES has reached TRY 477bn. The number of participants in the BES and the Auto Enrollment System (OKS) totals 13.9 million. The total fund size, including state contribution, rose by 63% to TRY 310bn annually. We estimate this figure to exceed TRY 500bn by 2023. We expect to reach 17 million participants.
The technical profitability of the non-life insurance branch transformed into a technical loss of TRY 423m with a 120% decrease in Q1 2022, as compared to Q1 2021. The net loss ratio rose from 114% to 146%.
We estimate a result similar to Q1 results at the end of 2022. We won’t have high levels of profitability this year. However, we will grow in terms of premium in real terms.
WHAT HAS BEEN THE COST OF THE NEWLY DETERMINED MINIMUM WAGE TO THE INSURANCE INDUSTRY?
The minimum wage is among the most important parameters for the industry. Our costs increase as much as the hike in the minimum wage because minimum wage is one of the main determinants of our indemnity calculations. We are calculating and estimating our policies, premiums, and prices at this very moment. Then, we will determine and sell premiums in line with the maturity and requirements of the policies for the next year, for instance. We don’t have an instrument through which we can be influential when costs exceed these calculations and estimations. The current inflation, economic shock, and the latest volatility figures are higher than what we estimated. It’s hard to estimate the current FX rate hike. That’s why we’re now experiencing a loss in terms of reserves, payments, and indemnities, and we are trying to reach a sustainable price by estimating inflation and the FX rate hike when we determine premiums for the new period. There is also a possibility of a decrease in demand. This adversely affects profitability as our sector is very competitive although production has hit 80-89%. That’s why 2022 is a very difficult year for the insurance industry. The margin between the interest rates and inflation also adversely affects us as the insurance industry is a liquid sector. That’s why we hold reserves in our balance sheets to pay indemnities and claims. We even allocate reserves for up to 10 years. This is determined by law. We allocate reserves conservatively. We allocate reserves in our balance sheet even for damages that we estimate statistically will come from previous years although they haven’t been realized yet. We use these reserves in the financial markets and try to transform them into future profits as much as possible.
“High inflation and the impact of the FX rate hike have upset balances in the insurance industry. We are in a period when costs don’t comply with premiums – costs are high and premiums remain low.”