INSURANCE SUPERVISION DEPARTMENT

INSURANCE SECTOR IN SERBIA Report for First Quarter 2016

National Bank of Serbia

Contents: 1 Insurance market ........................................................................................... 4 1.1 Market participants ........................................................................... 4 Insurance undertakings ........................................................................... 4 Other market participants........................................................................ 5 1.2 Insurance portfolio structure ............................................................. 5 1.3 Balance sheet total and balance sheet structure ................................ 7 Balance sheet total .................................................................................. 7 Structure of assets ................................................................................... 8 Structure of liabilities.............................................................................. 9 2 Performance indicators ............................................................................... 10 2.1 Capital adequacy ............................................................................. 10 2.2 Quality of assets .............................................................................. 11 2.3 Investment of technical provisions ................................................. 11 2.4 Profitability ..................................................................................... 12 2.5 Liquidity.......................................................................................... 12 3 Motor third party liability ........................................................................... 14 4 Conclusion .................................................................................................. 15

2

Insurance Sector in Serbia – First Qurter Report 2016

List of abbreviations mln bln Q1

million billion first quarter (1 January – 31 March)

3

National Bank of Serbia

1 Insurance market1

1.1 Market participants Insurance undertakings At end-Q1 2016, the insurance market in Serbia comprised 24 insurance undertakings, down by one2 in year-on-year terms. Twenty undertakings engaged in insurance activities only and four in reinsurance activities. Of the insurance undertakings, five were exclusive life insurers, nine exclusive non-life insurers, while six provided both life and non-life insurance. The breakdown by ownership shows that of the 24 insurance undertakings, 18 were in majority foreign ownership. Since foreign-owned insurance undertakings arrived in the market and obtained greenfield licences, at end-Q1 2016 they continued to record a dominant share of 93.2% in life insurance premium, 61.7% in non-life insurance premium, 75.1% of total assets and 68.5% of total employment.

Chart 1.1.1 Structure of insurance undertakings by ownership

Chart 1.1.2 Balance sheet total of insurance undertakings by ownership

(Q1 2016)

(Q1 2016)

Italy, France, Croatia, Netherlands, Ireland, CzechRep, Russia 29,2%

Spain 8,3%

Serbia 25,0%

Serbia 24,9%

Netherlands 22,8%

Austria 20,8% Slovenia 16,7%

France, Croatia, Ireland, CzechRep, Spain, Russia 7,7%

Italy 7,8% Slovenia 5,0%

Austria 31,9%

Source: NBS.

1

The Report is based on data that insurance undertakings are obliged to submit to the NBS, but their accuracy was not verified by the NBS in its on-site examinations. 2 In April 2015, one life insurance undertaking obtained the NBS’s consent for voluntary liquidation.

4

Insurance Sector in Serbia – First Qurter Report 2016

Other market participants In addition to insurance undertakings, the market consisted of 20 banks and one financial lessor, licensed for agency operations, 87 legal entities (insurance brokerage/agency services), 89 insurance agents (natural persons-entrepreneurs), as well as 15,701 natural persons licensed to engage in insurance agency/brokerage.

1.2 Insurance portfolio structure Total premium generated from insurance business in Q1 2016 came at RSD 21.9 bln (EUR 178 mln or USD 202 mln)3 which is an increase of 9.7% on a year earlier. The share of non-life insurance in total premium was 77.7% and the share of life insurance premium 22.3%. The share of life insurance rose from 21.6% a year earlier due to nominal growth in life insurance by 13.0%.

Chart 1.2 Total premium by type of insurance (Q1 2015 and Q1 2016, in %)

21,6

15,8

22,3 16,4

7,2

7,5

Q1 2015

Q1 2016

25,1 30,3

24,9 29,0

Property insurance

Motor vehicle liability

Full coverage motor vehicle insurance

Other non-life insurance

Life insurance Source: NBS.

3

At the NBS middle exchange rate as at 31 March 2016.

5

National Bank of Serbia

The insurance premium structure by insurance type in Q1 2016 somewhat resembled that recorded a year earlier, with MTPL insurance accounting for the largest share of total premium (29.0%), followed by property insurance (24.9%), life insurance (22.3%) and full coverage motor vehicle insurance (7.5%). Non-life insurance premium grew in Q1 2016 by 8.8% y-o-y. MTPL insurance premium and premium for accident insurance expanded by 5.2% and 1.5%, respectively. Having discontinued the downward trend in Q3 2015, premium for full coverage motor vehicle insurance (“kasko”) continued up, rising by 13.9% in Q1 2016. Accident insurance, including, inter alia, compulsory types of insurance such as passenger insurance in public transport and insurance of employees from injuries at work, professional and work-related illnesses, accounted for 5.2% of total premium in Q1 2016. The share of voluntary health insurance premium showed an increase from 2.9% in Q1 2015 to 3.3% in Q1 2016, and a nominal growth of 23.8%. Two insurance undertakings covered almost three quarters of the market. Table 1.2 Ranked list of five largest insurance undertakings (in RSD mln, %) 31 March 2015 Amount

Share

31 March 2016 Rank

Amount

Share

Ranking change

Rank

by total premiums Dunav

5671

28,4

1

6199

28,3

1

-

Generali

4761

23,8

2

5128

23,4

2

-

DDOR

2344

11,7

3

2569

11,7

3

-

Wiener

1765

8,8

4

1931

8,8

4

-

Triglav

843

4,2

6

998

4,5

5

increase

Uniqa n

977

4,9

5

979

4,5

6

decrease

by non-life premiums Dunav

5355

34,2

1

5869

34,4

1

-

Generali

3094

19,7

2

3190

18,7

2

-

DDOR

2165

13,8

3

2354

13,8

3

-

Wiener

988

6,3

4

1065

6,2

4

-

Uniqa n

977

6,2

5

979

5,7

5

-

by life premiums Generali

1667

38,6

1

1937

39,7

1

-

Wiener

777

18,0

2

866

17,7

2

-

Grawe

645

14,9

3

649

13,3

3

-

Uniqa l

399

9,2

4

457

9,4

4

-

Dunav

315

7,3

5

330

6,8

5

-

Source: NBS.

6

Insurance Sector in Serbia – First Qurter Report 2016

Observed by insurance premiums, there was no change in the ranking of the top five non-life and top five life insurance undertakings in Q1 2016. These undertakings accounted for 78.9% and 86.8% of their respective categories. There was however a change in the ranking of the top five insurance undertakings (which take up 76.7% of total premium) when observed by total premium. The Herfindahl Hirschman index, calculated by summing up the squares of the respective market shares or, in this case, balance sheet totals of all insurance undertakings, points to moderate market concentration. At end-Q1 2016, the HHI was 1,200.4

1.3 Balance sheet total and balance sheet structure Balance sheet total Balance sheet total of insurance undertakings increased at end-Q1 2016 to RSD 205.5 bln (EUR 1,671 mln or USD 1,892 mln),5 up by 14.6% y-o-y.

Chart 1.3.1 Balance sheet total of insurance undertakings (as at 31/03/2016, in RSD mln)

Sogaz; 1701

Generali Re; 4424

DDOR; 16019

Merkur; 2964 Triglav; 5984 DDOR Re; 1189 AS; 775

Grawe; 21668

Uniqa nl; 7194

Dunav; 34892 Globos; 891 Societe Gen; 918

Wiener Re; 5204

Dunav Re; 5961 Axa nl; 2568

Milenijum; 3466

Axa l; 799

Uniqa l; 7664

Generali; 46782 Sava nl; 2844 AMS; 3752

Energoprojekt; 1167

Sava l; 658

Wiener; 25981

Source: NBS.

4

HHI up to 1,000 indicates that there is no market concentration; 1,000-1,800 indicates moderate concentration; above 1,800 indicates high concentration. 5 At the NBS middle exchange rate as at 31 March 2016.

7

National Bank of Serbia

In terms of the industry’s balance sheet total, there was no change in the ranking of the top five insurance undertakings, which in Q1 2016 accounted for 77.0% of the total. Table 1.3 Ranked list of five largest insurance undertakings by balance sheet total (in RSD mln, %) 31 March 2015 Amount

Share

31 March 2016 Rank

Generali

36243

22,4

Dunav

32936

Wiener

Amount

Share

Ranking change

Rank

1

46782

24,8

1

-

20,3

2

34892

18,5

2

-

21451

13,2

3

25981

13,8

3

-

Grawe

17410

10,7

4

21668

11,5

4

-

DDOR

15357

9,5

5

16019

8,5

5

-

Source: NBS.

Structure of assets As at 31 March 2016, assets of insurance undertakings comprised debt securities available for sale (37.5%), fixed income debt securities (10.4%), property, plant and equipment (9.0%), receivables (7.1%) and debt securities recognised at fair value through income statement (6.4%).

Chart 1.3.2 Structure of assets (as at 31/03/2016)

Real estates 9,0% Fixed income debt securities 10.4% Remaining Debt securities 29.6% available for sale Recievebles 37,5% 7,1%

Debt securities at fair value 6.4% Source: NBS.

8

Insurance Sector in Serbia – First Qurter Report 2016

Structure of liabilities At end-Q1 2016, technical provisions accounted for 69.5%, and capital and reserves for 22.2% of total liabilities.

Chart 1.3.3 Structure of liabilities (in %)

100 Remaining

Remaining

Capital

Capital

90 80 70 60 50 40

Technical reserves

Technical reserves

30 20 10 0

Source: NBS.

Q1 2015 Mathematical reserve Other technical reserves

Q1 2016 Unearned premiums reserves Capital

Outstanding claims Remaining

In Q1 2016, capital grew by 29.3% y-o-y and amounted to RSD 45.4 bln, while technical provisions increased by 12.4% relative to the same period, reaching RSD 142.0 bln, the most significant portion relating to mathematical reserve which recorded growth of 21.6%. Technical provisions enjoyed an interrupted growth in both nominal and real terms.

9

National Bank of Serbia

2 Performance indicators

2.1 Capital adequacy The solvency of an insurance undertaking depends on the adequacy of its technical provisions for liabilities and adequacy of the available solvency margin as a form of protection of insured persons in case of unforeseen operational losses, and/or as safety buffer against losses not covered by the technical provisions. In accordance with the new regulatory methods for determining capital adequacy in force as of 2015, the available solvency margin of Serbia’s insurance sector (insurance and reinsurance undertakings) as at 31 March 2016 measured RSD 33.9 bln, and the required solvency margin RSD 14.7 bln. Capital adequacy ratio (ratio of available to required solvency margin) was 225.3% for all non-life insurers and 249.1% for all life insurers.

Chart 2.1 Capital adequacy ratio of insurance undertakings

300% 250% 200% 2015 150%

Q1 2016

100% 50% 0% Undertakings engaged primarily in

Undertakings engaged primarily in

non-life insurance

life insurance

Source: NBS.

10

Insurance Sector in Serbia – First Qurter Report 2016

2.2 Quality of assets The share of intangible investments, property, investment in non-tradable securities and receivables (as a type of assets with possible difficulties in collectability) in total assets of undertakings engaged primarily in non-life insurance came at a satisfactory 20.3% at end-Q1 2016, compared to 19.9% at end-2015. The share of these types of assets for undertakings primarily engaged in life insurance declined from 2.6% in 2015 to 2.3% at end-Q1 2016. The ratio was changed due to a drop in the said types of assets.

2.3 Investment of technical provisions In order to protect the interests of the insured and third damaged parties and to ensure timely payment of damage claims, insurance undertakings need not only allocate adequate technical provisions, but also invest these assets so as to ensure that the undertaken obligations are fully and timely met, both at present and in the future period. In order to be able to meet its liabilities, an undertaking must invest its assets taking due account of the risk profile and risk tolerance limits (qualitative and quantitative), by pursuing its investment policy. In compliance with the new investment rules applied as of 2015, non-life insurance technical provisions of all insurance undertakings in Serbia in Q1 2016 were mostly invested in government securities (60.8%), bank deposits and cash (14.6%), investment property (7.0%) and insurance premium receivables (6.0%). Life-insurance technical provisions were in major part invested in government securities (92.5%), followed by bank deposits and cash (5.3%).

11

National Bank of Serbia

Chart 2.3. Structure of investment of technical reserves non-life insurance

life insurance

100%

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

0% 2014

2015

1Q 2016

other

premium receivables

bank deposits and cash

government securities

2014

2015

1Q 2016

real estate

Source: National bank of Serbia

Source: National bank of Serbia

2.4 Profitability A measure of profitability of an insurance undertaking is a combined ratio (the sum of incurred losses and expenses divided by the premium earned). A ratio below 100% indicates that an undertaking is able to cover damage claims and expenses out of the premium written, while a ratio above 100% means that in premium pricing it takes into account potential income received from investments in the financial and real estate markets, which exposes it to additional market risks. In undertakings primarily engaged in non-life insurance, combined ratio dropped from 97.5% in Q1 2015 to 90.3% in Q1 2016. The ratio decline resulted from faster growth of premium earned relative to incurred losses and administration expenses.

2.5 Liquidity To be able to meet its liabilities, an insurance undertaking must ensure an asset liability maturity match and make sure its assets are marketable and of adequate quality. As the size and timing of individual damage claims cannot be predicted, an insurance undertaking must carefully plan the composition of its assets in order to be able to first meet its liabilities under damage claims, and then all other liabilities.

12

Insurance Sector in Serbia – First Qurter Report 2016

Liquid assets to liquid liabilities ratio6 for the insurance sector (insurance and reinsurance undertakings) stood at 155.3% in 2015, and at 142.9 % in Q1 2016. Movement of this ratio suggests that liquid assets were sufficient for timely servicing of short-term liabilities in the insurance sector.

6

For the purposes of this report, liquid assets comprise: financial investments, cash and deposits with banks and other long-term financial investments, while liabilities refer to: shortterm liabilities, accrued costs and deferred revenues, outstanding claims and other technical provisions in insurance up to one year.

13

National Bank of Serbia

3 Motor third party liability At end-Q1 2016, 11 insurance undertakings engaged in compulsory MTPL insurance, as was the case a year earlier. MTPL premium rose by 5.2% in Q1 2016 relative to the same period a year earlier. Portfolio concentration in this segment increased mildly, as three insurance undertakings with the largest share in MTPL premium accounted for 68.2% of the market, as opposed to 66.8% in the same period last year.

14

Insurance Sector in Serbia – First Qurter Report 2016

4 Conclusion The comparison of indicators between Q1 2016 and the same quarter in 2015 points to the following changes: a total of 24 insurance undertakings operate in Serbia, down by one yo-y, while employment in the sector shrank by 2.7% to 10,947 persons; -

insurance sector balance sheet total rose by 14.6% to RSD 205.5 bln;

-

capital increased by 29.3% to RSD 45.4 bln;

technical provisions gained 12.4%, coming at RSD 142.0 bln, and are mostly invested in government securities, both in life and non-life insurance; -

total premium gained 9.7% and came at RSD 21.9 bln;

the share of non-life insurance was dominant in total premium, equalling 77.7%. Non-life insurance premium rose by 8.8%, with motor third party liability insurance, property insurance and full coverage motor vehicle insurance going up; -

the share of life insurance in total premium rose from 21.6% to 22.3%;

the Herfindahl Hirschman index points to moderate market concentration. Insurance regulations adopted in late 2014 and the first half of 2015 laid the legislative ground for a significant convergence of the Serbian insurance sector to that of the EU, with a view to ensuring the level of protection of insured persons equivalent to that enjoyed in the EU. At the time of drafting the regulations, the EU applied the Solvency I regime and hence the domestic framework was designed as Solvency Icompliant, while incorporating some requirements of Solvency II, in response to the level of development of the Serbian insurance market. Accordingly, it may be said that Solvency 1½ regime is currently in force in Serbia. To be exact, domestic regulations have implemented certain Solvency II provisions pertaining to the qualitative requirements under Pillar 2 (governance system comprising four key functions: risk management, system of internal controls, internal audit and actuarial function, as well as own risk and solvency assessment – ORSA, risk-based supervision, fit and proper requirements in licensing of supervised entities etc.). Solvency II will be implemented in stages, placing an emphasis on quantitative requirements under Pillar 1 and requirements under Pillar 3 pertaining to the transparency of operation of market participants, which will include a detailed compliance analysis, compliance impact analysis and harmonisation of the regulatory framework. This process will ensure that by the time Serbia accesses the EU, its insurance sector will have achieved full compliance with the EU rules, i.e. an even greater stability and beneficiary protection.

15