Expert corner

Aug 31, 2007

Pace of Change opens up Further Opportunities in CEE

By Roger Gascoigne, Partner, Regional Head of Insurance CEE
KPMG in the Czech Republic

In the countries of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS), economies are growing and the regulatory environment for insurance is strengthening. No wonder they continue to be a focus of interest for the major global insurance players.

Since the insurance markets of Central and Eastern Europe began to open up to foreign investment in the early 1990s, we have witnessed the increased presence in the region of most of the major global insurance groups. In the early years the main emphasis was on establishing a presence, building a network and gaining market share. Many of the former state monopolies have been privatised, new companies have been set up by national as well as international investors and regulation and regulators have been bolstered.

Yet, despite strong growth rates over the last fifteen years, and impressive growth of 20% in 2006, the region’s insurance markets continue to lag behind western Europe, both as a percentage of GDP and per capita. To put this into perspective, the total written premiums for the combined CEE/CIS region are slightly higher than those of Ireland whilst the combined population exceeds that of the United States of America.

A region of contrasts

It would be a mistake to treat the region, even if one excludes Russia from the definition, as homogenous. When one considers economic development, population, pension and health reform, regulation, European Union membership or even demographics, no two countries are alike. Most obviously, the countries vary widely in size – the populations of Ukraine, Poland and Romania amount to more than 100 million; the three Baltic States total just 7 million in aggregate. More generally, the countries’ insurance markets are also at very different stages of their economic and regulatory development. EU accession has had a significant impact on the legal, regulatory and accounting environment in the existing member states as well as exerting pressure fro reform in the aspiring candidates, predominantly in the Balkans and Ukraine. Nevertheless, EU regulations, even where implementation has resulted in some inconsistencies, provide greater political and business stability.

The precise interaction of these factors will drive the potential market entry and development strategies for a specific market.

As a few major insurance groups begin to dominate the region, whether measured by written premiums or by geographical footprints, the question is – is it already too late ?

Looking for opportunities

Following the recently announced joint venture between Generali and Česká pojišťovna, which will combine the Czech market leader with Generali’s CEE operations, the four Central European markets – Poland, the Czech Republic, Hungary and Slovakia (CE4) – are now, with the major exception of PZU in Poland, dominated by foreign-controlled insurance groups.

These markets are experiencing a battle for market share, evidenced by ongoing consolidation within the markets and tough competition for brokers, banking partnerships and other key distribution channels.

Here the opportunities for new entrants would seem largely limited to niche products, such as credit or agricultural cover, or innovative distribution models, such as the recent arrival of direct insurance writers.

As a result, interest over the last eighteen months has turned towards the new EU member states, Romania and Bulgaria, as well as countries which are even less developed, such as Ukraine and Serbia. Unlike the CE4 these markets offer potential acquisition targets for those investors with strong nerves and deep pockets. As always where potential buyers significantly outnumber willing sellers prices for such targets have been bid up to often seemingly ludicrous figures. Nevertheless, demand continues to mount as ever more insurers announce their attention to offset declining margins in established markets with expansion into CEE.

“He who hesitates is lost”

Despite the incredible development of the CEE markets over recent years, significant growth opportunities still remain. Going forward, the largely unreformed pension and health markets will throw up fresh incentives to existing and new players. The previous examples of Poland and Slovakia, and the current scramble for pension policyholders in Romania, exemplify the importance of pension reform as a one-off shock to shake-up the market. As capital adequacy rules align with EU standards, the less-developed markets to the south and east will see further market consolidation.

Each market is different. Of course, there is a greater element of risk and uncertainty in approaching countries such as Ukraine, Belarus, Albania or Kazakhstan. But the experience of the last fifteen years shows that there is little downside to expansion into developing markets; and the majority of the benefits have accrued to the companies that entered the markets first. If we look across the region, today’s market leaders, tend to be those who acquired companies with strong market positions or were among the first to establish local operations.

Because of the diversity of the region, any approach has to be tailored to meet the specific market, economic and political situation of the target country – and even then, the approach has to be flexible enough to move quickly as opportunities arise. But the prospects for growth are significant, and delay could be expensive.

E-mail Article Print Article