Post Europe - Focus on Greece

What is the biggest risk the international insurance industry underwrites? Increasingly it seems the answer is contagion.

Whether it is the health threat posed by the likes of Bird Flu or the financial threat from the global credit crisis, the interwoven nature of human existence may provide great strength, but it also throws up a vulnerable Achilles' Heel for underwriters to contend with, in that a single point of failure can lead to catastrophic losses across the board.

Recently this has been highlighted by the impact of the sovereign debt crisis that has centred on Greece and swamped Europe.

Athens and its magnificent Parthenon may seem a long way from the UK insurance market, but as events unfolded it became clear that many of the major insurers and reinsurers that are active in the London market were exposed to the crisis in a way that could
potentially affect their performance going forward.

European inpact
Figures issued by JP Morgan at the end of January estimated that Allianz had €3.6bn worth of exposure to Greek government bonds, while Fortis was exposed to the tune of €3.15bn and Munich Re was looking at an exposure of €1.5bn.

Indeed it is ironic that these exposures arose from investments rather than underwritten risks, but this only serves to show the varied fronts on which the insurance industry has to stand guard.

Commenting on the threat that the Greek debt poses, Richard Cumming-Bruce, senior researcher for principal investment management, says: "Greece's debt as a proportion of its gross domestic product will rise to about 130% this year - almost double the European average. For a range of structural and historical reasons about two-thirds of this debt is held by foreign creditors, notably German and French banks.

"In most European countries the majority of sovereign debt is held by domestic pension funds, life assurance companies and banks. This meant that the Greek crisis greatly increased the risk of crossu-border financial contagion and added urgency to the need to prevent default."

Short-tem solution
Fortunately a short-to-mid term solution has been found and it is now up to Greece and other countries to balance their books.

However, while Greece goes through the pain of firmly knotting its purse strings, many in the European insurance market will not just be looking to the Acropolis to monitor their bond investments, but also to see how the underlying insurance market itself is faring, in which so many firms are represented.

Insurers like Allianz, Axa, Aviva and Groupama all have operations in Greece. On the broking front the likes of Aon, Marsh and Willis all have representation in Greece while there are also loss adjustors like Crawford and Co active in the country.

So just what state is the Greek national insurance market in and how is it likely to develop during these difficult times?

Reeling from revolution
The Greek insurance market has already been through something of a revolution over the last 10 years that has seen it dramatically change both its size and shape. Figures from the Hellenic Association of Insurance Companies show in 2000 there were a total of 110 insurance companies operating in the market, of which 20 were life insurers, 76 non-life insurers and 14 composites.

Eight years later, the total figure for 2008 had dropped to only 85, of which 15 were life insurers 58 non-life insurers and 12 composites.

So what has driven the significant reduction in the number of insurance carriers operating in Greece? In short the answer is tighter and more consistently applied regulation.

Stavros Artopoulos, Crawford & Company's country manager for Greece, explains: "There was a big problem with company insolvencies and the reserves that insurers were holding. The state then started to take the matter more seriously in terms of intervening every second day with substantial financial controls, looking at secondary reserves and examining the exposures in place.

"This gave rise to the shrinking number of companies as operating licenses were taken away. This made the insurance market healthier and has left the more compliant firms in place. It was a very constructive approach and has contributed considerably to improving everyone's experience of the insurance market."

According to Mr Artopoulos, the problem was not so much that regulation did not exist, but that it was poorly applied, enabling anybody to establish an insurance firm without the correct checks and balances being made as to their ability to actually run it to the requisite standard.

This more stringent regulatory approach also coincided with a number of legislative declarations coming out of Brussels and in many ways has helped the Greek market to get in step with others across the continent.

Striding forward

Further strides are also being taken to tighten up how the market operates and the Greek Ministry of Finance is currently processing a draft law that will bring significant changes to the insurance sector.

In the first instance, the legislation will bring the supervision of the insurance sector under the Bank of Greece, which is the banking sector's supervisory authority. It will also establish a Private Life Insurance Guarantee Fund.

Evi Tsiouri, public relations officer for the Hellenic Association of Insurance Companies, says there are a number of reservations about this move: "The Hellenic Association of Insurance companies has expressed its concerns for the retrospective coverage provided by the draft law as well as the proposed and extremely high contribution of 1.5% over net premiums."

Looking forward, the introduction of Solvency II in 2012 is likely to put the insurance industry in Greece under further financial pressure and there are many commentators who feel this will again reduce the number of insurers operating in the market.

Opportunity knocks
That said, the Greek insurance market still offers very significant opportunities. Under Greek law, the only compulsory insurance is third party motor liability (see box 1).

As a percentage, third party motor liability makes up 45% of the entire Greek market (see box 2) compared with the UK where motor insurance represents around 30% of the general insurance market.

It would seem, therefore, that there is growth potential for many other classes of business and Panayotis Lisseos, chief executive officer for Marsh Greece, says: "The Greek insurance market remains under-developed. Insurance accounts for only around 2% of GDP against the European Union average of 8%.

"It is also relatively unsophisticated. In 2008, the motor insurance accounted for 45% of the total Greek non-life market."

Despite the impact of the financial crisis on all sectors of the Greek economy, companies are becoming increasingly aware of the growing number of risks to their business and balance sheets, according to Mr Lisseos: "Much of this is being driven by the implementation of EU directives in Greece. We have seen increased interest from Greek companies in purchasing directors' and officers' insurance, environmental liability cover, insurance for renewable energy projects and insurance to cover pension scheme administration."

Increasing appetite
Certainly this growing appetite for insurance has been reflected in the numbers and there has been a significant rise in the amount of premiums paid between 2000 and 2008 in both the life and non-life markets.

In the life market, premiums have jumped from €1.3bn in 2000 to €2.5bn in 2008. The figure for 2008 is down slightly on the previous year and so whether things will level out remains to be seen, however, there is no disputing the growth spurt the market has enjoyed.

In the non-life market premiums have leapt from €1.2bn in 2000 to €2.3bn in 2008 with the minimum annual rise recorded being 3.5%. Whether such growth is sustainable given the financial situation that has engulfed the country presently will again take time to establish, but the figures certainly point to a market that has an increasing demand for insurance.

Despite these significant rises in premium income, it is interesting to note that profits in the Greek insurance industry have been variable and while the market was in the black to the tune of €168m in 2000, it recorded a loss of €202m in 2002.

In the intervening years it returned to profit but in 2008 it recorded its worst result of the decade with a loss of €492m.

These figures may pale into insignificance when put alongside the Greek national debt, but they do show an industry that is failing to produce consistent returns despite a significant rise in sales.

Admittedly it is operating in the face of greater legislation and a dire economic environment, but then that is the same for any insurance market across Europe and indeed the world at the moment and living with these challenges successfully will be what distinguishes the best markets from the rest.

Fraud factor
Given the economic backdrop against which the Greek market is underwriting its policies, there was a feeling that there would be a significant increase in fraud and Ms Tsiouri says: "There is a growing concern among insurers for the insurance fraud phenomenon, especially under the current financial crisis."

However, this does not seem to have materialised and according to Mr Artopoulos there has been no significant jump in fraudulent activity.

He says there has also been a decline in the number of claims being reported across the market and while he has only anecdotal evidence, he believes this is as a direct result of the financial climate and the increased care people are taking over their businesses and possessions.

He says: "This is due to the fact that a lot of people realise that if they have a claim then it does not benefit them. People have become a lot more careful in securing their property and in running their business, instead of continuing daily life on the previous assumptions.

"Now they are much more concerned about losing their market share because if they have a serious claim they will need a lot of time to restore their business. They are doing everything they can to stay in business."

The Greek insurance market may not be as developed or sophisticated as others across Europe and it certainly has significant problems to deal with in terms of the tighter regulations it is working with, the austere cuts being introduced by the government and the ongoing financial crisis in the country.

However, the market also offers some very welcome opportunities for the future and in recent years has shown its ability to evolve quickly. If it can continue to evolve then both its national practitioners and those that have come into the market from overseas are likely to do very well when things finally settle down in the years ahead.

Box 1

Some of the major classes of business in Greece:
• Motor third party liability
• Third party liability for pleasure craft
• Professional indemnity for insurance intermediaries and auditors
• Oil pollution cover for ships
• Air carriers and aircraft operators
• Shipment of waste
• Workers' compensation (part of state social security system)

Although these insurances are everyday covers considered by most operators the only compulsory insurance is the third party motor liability.

Source: Hellenic Association of Insurance Companies

Box 2

Make up of the Greek Insurance market by class of business for 2008.

Class of business and direct premium/share (%) (Figures in euro)

1. Accidents 53.992.734,81 (2,37%)

2. Sickness 8.288.915,58 (0,36%)

3. Land vehicles 344.506.132,38 (15,15%)

5. Aircraft 457.959,77 (0,02%)

6. Ships (sea, lake and river vessels)23.150.842,63 (1,02%)

7. Goods in transit 44.108.720,86 (1,94%)

8. Fire and natural forces 383.115.184,41 (16,84%)

9. Other damage to property 131.574.025,88 (5,78%)

10. Motor vehicle liability 1.026.834.528,73 (45,14%)

11. Aircraft civil liability 1.786.514,17 (0,08%)

12. Civil liability for ships 6.511.548,17 (0,29%)

13. General civil liability 71.977.455,66 (3,16%)

14. Credits 33.226.316,77 (1,46%)

15. Suretyship 5.979.990,77 (0,26%)

16. Miscellaneous financial losses 20.215.276,61 (0,89%)

17. Legal expenses 49.266.086,34 (2,17%)

18. Assistance 69.647.067,96 (3,06%)

Total Non-life insurance premium 2.274.639.301,50 (100,00%)

Source: Hellenic Association of Insurance Companies