XPRIMM: How would you generally comment on the insurance market's evolution during 2018 and the first part of 2019?
Mehmet Akif EROGLU: As the second largest sector of financial markets after banking, the insurance and pensions sector continues to be a strategic actor for the Turkish economy, with its critical functions and an asset size of TRY 201.9 billion, according to the results of the first six months of 2019.
Premium production was TRY 54.7 billion, by 17% nominal increase in 2018. Although the premium production increased by 17%, the real growth decreased by 2% because of the high inflation rate and negative effect of life branch. The non-life insurance branches' real growth rate did not change, however the life branch's growth rate decreased by 16% in real terms. Casco and MTPL were two important factors to affect the premium production negatively. Casco branch grew by 13% nominally, but the real growth decreased by 5%. Also, the MTPL branch, excluding the risky insureds' pool, grew by 15%, but the premium production of MTPL decreased by 4% in real terms. The monthly tariff increases that started with the ceiling tariff (premium cap) implementation in the motor insurance branch were not sufficient against inflation.
Turkish insurance and pension sector has a critical importance for the Turkish economy, providing for a TRY 126.9 trillion insurance coverage (34 times of GDP). Insurance sector protects individuals and institutions with the paid claims on one hand and takes the burden of the state on the other hand. Total gross claims undertaken by the sector in 2018 was of TRY 36 billion. Direct and indirect employment provided by the sector reached 200.000. Short term, middle term and long-term fund provided by the Turkish insurance and pensions sector, reached TRY 167.4 billion in the first six months of 2019.
The growth in consumer loans is one of the most important drivers of the premium production in life insurance. Consumer loans decreased to 0.3% in the first half of 2019 compared to the same period of the previous year, as a result of the increase in the interest rates. Accordingly, premium production in life insurance increased by 19% in nominal terms and 3% in real terms with respect to the same period of the last year and has actualized as TRY 4,6 billion.
Similar to the previous years, the credit linked life insurance dominated the sector in the first half of 2019. However, with the development of the return of premium (ROP) insurance products, which have become widespread in recent years, credit-linked product dominance is expected to be slightly broken.
The private pensions system (BES) provides important resource for the national savings; it was established in 2003 and continued its steady growth since its inception. Although the system expanded largely thanks to the 25% state contribution in 2013, the positive effect on the steep increase in the number of participants slowed down recently.
Yet, the number of participants in the private pensions system was recorded as 6.8 million and the total fund size including state contribution increased by 23.4% and reached TRY 100.1 billion by the end of the first half of 2019.
Looking at the countries with private pensions systems established historically and very well entrenched, where the size of pension funds exceeds the country's GDP, it is essential to take actions to maintain the growth. While the ratio of private pension funds to GDP is 118.7% in OECD countries, the share of private pension funds in GDP is only 2.5% in Turkey. Also, in countries where auto-enrollment is successful, employees are not allowed to opt out of the system.
Thanks to the auto-enrollment implementation that came into force on January 1, 2017, 15.8 million employees were enrolled in to the system until the end of June 2019. 5.1 million of these employees continued to stay in the system and the amount of the auto-enrollment funds reached to TRY 6.4 billion. 63% (TRY 4 billion) of these funds are invested in interest-free pension funds and 37% are invested in conventional pension funds of auto-enrollment implementation. As a result, a significant number of employees were covered by the system in a short period of time and an important amount of funds was collected accordingly.
By the implementation of the auto-enrollment, a slowdown in new contributions to private pension plans (BES) is recorded. This deceleration arises from the fact that new entries to the system are realized through the auto-enrollment rather than the third pillar. In addition, the yields of alternative investment instruments, which fluctuated in 2018-2019, also contributed to the increase in the investment appetite of participants to generate returns in the short term.
XPRIMM: Are there any noteworthy changes in your market's structure? How would you characterize foreign investors' attitude about the Turkish market potential?
M.A.E.: In 2018 and 2019, foreign direct investment has been limited. However, by the end of 2018, the amount of foreign capital share among 60 companies, which are currently active in Turkish insurance sector, is roughly 68%. The premium production share of the foreign-capitalized companies is roughly 58%.
The amount of foreign direct investment into the sector is USD 8,1 billion between 2002 and August 2019. Foreign investments have been an important sign for the potential of our country's insurance sector, as well. Foreign investors who want to use this potential continue to invest in Turkey.
Establishment of the Turk Reinsurance (Turk Re) company has been one of the most important developments in 2019. The aim of Turk Re, whose entire capital is covered by the Ministry of Treasury and Finance, is to increase the capacity of domestic reinsurance and retakaful and to run the risk management adjustments within the public interest.
XPRIMM: Motor insurance business in Turkey continued to experience a rather difficult period. How would you comment on its current status? What is the impact on the motor insurers' profitability?
M.A.E.: The MTPL insurance premiums in Turkey were determined based on a tariff system until 2008 and a partial free tariff between 2008 and 2013 and the insurance companies have been freely determining the premiums since 2013. The MTPL insurance premiums vary due to the competitive market. Discount is granted to vehicles not giving cause for indemnity and premiums of vehicles giving cause for indemnity are increased to distribute the costs among such parties. In case of a contrary practice, there shall be no difference between a vehicle that has not been involved in any accident and a vehicle having, for example, 10 accidents in a year. This brings a huge burden on the vehicle owners who drive carefully by respecting the rules and who do not give cause for any claims and it leads to inequality.
Insurance companies use several criteria such as driver's age, type and age of vehicle, year of driving license, city or district, accidents in previous years and amounts of claims paid while determining their tariffs. Thus, insurance companies separate drivers respecting the traffic rules and not involved in accidents from drivers frequently involved in accidents by accurately pricing the risk and the cost caused by a driver at fault is not imposed on a driver not at fault and a fair policy complying with the insurance technique is followed.
But the ongoing structural problems in this branch have delayed taking actions expected from our sector for the MTPL insurance business. At the end of this process, the public authorities stepped in and price cap was enforced as of 12.04.2017. This practice abandons the free market system we argue as a sector and determines ceiling premiums.
On the other hand, after this legal arrangement, the "Risky Insureds' Pool" was organized to be operational as of 12.04.2017 for bands and /or vehicle groups with higher claim frequency in order to overcome the problems experienced by the companies.
As known, the companies have had some problems in the process of adapting to these systems and legislative amendments. Since the third quarter of 2017, the sector continues to have technical loss in the MTPL branch. As of the end of 2018, technical loss amounted to TRY 808 million. Excluding investment income, technical loss reached TRY 2.2 billion in this branch. The premiums earned are insufficient to cover the losses and this is also a negative effect for profitability of investors. Unfortunately, it points to an unsustainable structure for the companies in Turkish insurance industry.
Accordingly, the primary way of resolving these problems is to minimize the number of accidents and thus claims cost. As a result, it seems very unlikely that traffic insurance premiums can be improved. For this reason, training, fines etc. should be used to encourage drivers to drive more carefully and the free tariff system of MTPL insurance should address the matter with a holistic approach by rewarding the good drivers and punishing the bad drivers.
So, Turkish insurance industry should not compromise on any method which is against free tariff system. We believe that methods such as maximum premium based on types of vehicle will have negative impact on the market dynamic.
In conclusion, an integrated approach that involves our sector and all stakeholders must be adopted for actions to be taken for minimizing cost and accident frequency, including burdens on the MTPL premium. The free tariff system must be restored after taking necessary actions as a result of such integrated efforts.
XPRIMM: How popular are in the Turkish market the new technologies, as for example the use of telematics, claims management intelligent systems, IoT use etc.?
M.A.E.: Insurance relies heavily on data therefore new technologies and insurance applications are interbedded. Precise and reliable statistics provide crucial information while actuaries work on tariff. By leveraging a smartphone or installing automotive telematics in a vehicle, insurance companies collects data about driving patterns that are crucial to ensure road safety such as sudden acceleration, hard breaking, speed limit overrun, mobile phone use while driving. These information provide for a driving score for each driver and improve insureds' driving behavior and, depending on the feedback received, more accurate and fair insurance premium calculated.
In Turkey, some of the insurance companies have already launched usage-based insurance products and mobile applications are commonly used. However, we can state that telematics has a potential of getting more importance in Turkish insurance industry. As Association of Insurance Companies of Turkey, we consider our responsibility in road safety and we approach to application of telematics from this perspective. The Insurance Information Center is conducting a project about telematics applications for Turkish insurance industry. One of the most important outputs of the project will be determining accident black spots precisely. By sharing these information with government authorities and insurance companies, we expect increase in insurance penetration with more competitive and accurate pricing and increase in road safety by faster improvements in accident black spots.
On the other hand, the Turkish insurance industry is meeting with new technologies especially for claims management systems and big data analyses. Nowadays, we are talking about success stories about settling claims in less than a week. Artificial intelligence has a potential to change the landscape of insurance industry inevitably. First of all, expectation of clients will change in near future. Clients will demand more customized products, better customer services and faster claims handling.
Artificial intelligence also detects interrelated connection between several claims. With the help of artificial intelligence, insurance companies will settle claims faster while detecting fraud risk with elaborated methods. Several Turkish insurance companies are already exploring the benefits of artificial intelligence, especially in claims management systems. According to analyses of one the insurance companies which use Turkish artificial intelligence software in claims management, claim documents corresponds to 70% of emails insurance companies are receiving and artificial intelligence is able to classify claims documents and attach them to related claim files with 98% accuracy. According to this company's experience, the average response time decreased from two hours to minutes. With the help of machine learning technologies, the accuracy ratio has a potential of improvement and ordinary claims might be paid with artificial intelligence. Several researches related to artificial intelligence are going on and in the near future we are expecting that insurance companies will benefit from artificial intelligence in customer services as well when artificial intelligence will be able to respond the frequently asked questions.
XPRIMM: Please give our readers your comments on the insurance distribution channels in your country: which are the most popular on different lines of business and why; what is the status of the insurance brokers etc.
M.A.E.: Before going into details, I would like to provide some insight about how insurance agents and brokers operate in Turkey. An agent might represent more than one insurance company, therefore from the insurance buyer's point of view there is a slight difference between agent and broker, which represents an insurance buyer. In spite of being representative of their clients, brokers do not charge fees to their client, but receive commission from insurance companies like an agent. All the agents act as an independent agent and their income rely on commission. Captive agents, which receive salary from insurance companies, do not exist.
An agent may have permission to collect premiums and bind some types of coverage, but not others. However, insurance brokers neither collect premium, nor bind cover. To initiate a policy, a broker must obtain a binder or policy from insurance company. Neither agents nor brokers pay claims, claims are handled by insurance companies in all lines.
Insurance brokers, another important distribution channel in the insurance sector, are intermediaries who represent policyholders. They generally work for corporate firms and legal entities. As of the first half of 2019, the individual credit linked life insurance line maintain its importance over the other life insurance products as in the previous years and 80.6% of the premium production in life branch belongs to the bancassurance. The other channels following the banks are listed, successively: agencies (10.1%), direct sales (7.4%) and brokers (1.9%).
70% of the production in the private pensions system belongs to banks and individual direct sales follows the banks with a 25% share in production.
A large share (61.3%) of the premium production in our country originates from the agency channel. The other channels following the agencies are Banks (14.4%), Brokers (12.8%), direct sales (7.4%) and other channels (4.1%) respectively. It is obvious that the market share of the agency channel is comparatively higher in the Turkish insurance sector than in the European Countries.
Most of the policyholders prefer face to face communication during the purchase process. Thus, the agencies are positioned as the market leader among all sales channels for a long time. Agencies have large portion in premium productions of motor, fire and health branches. They generally serve in individual and SME segments.
XPRIMM: In your opinion, what are the main challenges and opportunities in your market for the forthcoming year?
M.A.E.: The insurance sector maintains its growth potential with its strong legislative infrastructure, qualified and well-educated human resources, and experience in the face of economic crises, technological infrastructure and knowledge.
The insurance sector is in cooperation with the other sectors such as production, export and trade. However, in spite of all these critical functions, it is seen that our companies deprived of necessary insurance guarantees because of the low-level insurance awareness, financial literacy and awareness about the benefits provided by insurance products. Therefore, the low insurance penetration is both one of the most hindering issues of the sector and an indicator of the growth potential. In this context, our Association and companies operating in the sector are making the necessary effort to increase the insurance coverage.
The most challenging branch, motor third party liability insurance (MTPL) has the largest share in premium production on the basis of insurance branches in the recent years. During the last decade, significant amounts of technical loss have been recorded in this branch. Moreover, a price cap for the MTPL insurance came into force by the regulatory authority, Ministry of Treasury and Finance in 2017.
Considering the results of 2018 and 2019, policy prices following the tariff implementation on the compulsory traffic insurance are insufficient. In this context, the most important problem in this branch which has been the locomotive of the sector, is the essential need to increase the ceiling tariff prices. This problem is also known by the regulatory authority and is expected to be regulated soon in the forthcoming period.
The increase in the demand for complementary health insurance is one of the important opportunities for our sector in the near future. Currently, the number of complementary health insured has exceeded 1 million. Approximately 13 million blue collar employees are considered as potential complementary health insured candidates throughout the country.
In 2018, TRY 4.3 billion claims were paid by private health insurance companies in Turkey and the share of health insurance sector reached to 25% in private hospital and health institution revenues. Contrary to the European practices, the Law on the Protection of Personal Data, which came into force in 2016, prevented the processing of insureds' data without explicit consent in health insurance. Legislation change is expected for the revision of this regulation which prevents the development of health insurance branch.
In Turkey, premium production in life insurance is directly related to the growth momentum in the retail loan volume. On the contrary, in the developed countries, the share of life insurance in other insurance branches is comparatively higher than our country's situation. Due to the effects of high level income and financial literacy life insurance for the purpose of investment and savings is more common than risk products. In our country, it is important to decrease the suppress of credit-linked products of the life insurance and to encourage the products for investment and individual protection in the sector.
As a result of the aging population structure, the development of the private pensions system is an important issue to be addressed like in the other countries which have great pressure on social security systems. In this context, the private pension system is an important factor for encouraging the retirement savings. By supporting the auto-enrollment and private pension system; new medium and long-term resources will be created for the economy, the depth of the capital market will increase, and the level of savings will be carried up.
XPRIMM: How would you comment on the insurance market's evolution in relation to the general economic environment in your country?
M.A.E.: As of the first half of 2019, premium production in the insurance sector has increased by 19% over the same period of the last year. In total, the insurance sector produced TRY 33.2 billion in premiums. Non-life branches' premiums production increased by 19%, to TRY 28.6 billion and life branch's premium production has increased by 19%, to TRY 4.6 billion.
Fluctuations in foreign exchange rates since the beginning of 2018, inflation and the increase in interest rates had an impact on the premium production and financial results of the insurance market.
High interest rates having provided financial yields helped insurance companies to minimize their technical losses, to a certain extent. Yet, it is estimated that the profitability of the sector will decrease due to the decreasing interest rates in the second half of the year. Therefore, the impact of the increase in costs will be stronger, and the overall profitability of the sector will be adversely affected.
XPRIMM: Considering the market results recorded in the first half of the year, what are your expectations for the year-end?
M.A.E.: It is anticipated that the upward trend in non-life insurance premiums production of the first half of 2019 will continue. As most of the production in life insurance is linked to credits, the growth rate is expected to increase in the remaining half of 2019 compared to the first half due to the decrease in interest rates.
In this context, premium production is estimated to be about TRY 57 billion in non-life branches, around TRY 8 billion in life branches and TRY 65 billion roughly in total.