Expectation of insurance market growth stimulates rating activity in Poland.

After two years of extreme volatility, the Polish non-life insurance market has stabilised and now looks set for a period of growth that could see Poland taking a significant role in the future of the European insurance industry. Despite narrowing margins and increased competition in the market, the current low level of insurance penetration, set against a large population and a rising rate of economic growth, has provided a backdrop ripe for growth.

As the market grows, there is likely to be a greater demand for ratings and Standard & Poor's, which has been active in the Polish market since 1985, will increase its rating activity during 2001. Standard & Poor's expects Poland to become a major European insurance market within the next ten years and therefore is gearing up to provide a comprehensive rating service for the region.

The rate of growth in the non-life insurance market will be related, in part, to Poland's accession to the European Union (EU), which it expects to achieve in the next two to four years. Although Poland has made significant economic developments in the past few years, with its gross domestic product (GDP) as low as $4,370 (£2,980) per capita, insurance penetration among its 40 million-strong population has inevitably remained low. Further economic development through EU membership, however, will improve Poland's GDP and should result in a subsequent boom in the insurance market.

The market also looks set to benefit from a better understanding of the Polish insurance sector among its foreign players, which entered the market because their home markets had reached saturation point. After an initial boom in the mid 1990s, mainly in motor insurance, the level of insurance penetration peaked and competition crept into the market, resulting in significant losses. Consequently, many companies have now had to recapitalize, although their experience means that they are now likely to manage their capital better.

Although many insurers are now better placed to improve their market share and subsequently their earnings potential, the reality could nevertheless be difficult. Powszechny Zaklad Ubezpieczen (PZU), the former state insurer, is firmly established as the market leader with a 57% market share, which, to the detriment of the rest of the market, appears to have stabilised.

After Polisa – once the third-largest insurer in the Polish market – and one other insurer went bankrupt in 1999, many policyholders turned to the long established PZU for security. With its extensive distribution network, PZU – which is now ranked 25th in Standard & Poor's Top 50 list of European business insurers – has an exceptionally strong position in the market. This is exemplified by the fact that the market's combined ratio in 1999 of 107%, jumps dramatically to 124% if PZU's results are excluded.

Accepting PZU's dominance, many of the newly recapitalised companies are now looking to expand outside of the motor market – which accounts for nearly 70% of all non-life premiums – into untapped business lines. Although motor business grew quickly due to the high consumer demand for motor vehicles, other personal lines insurance, such as property, are largely under-developed in the Polish market. Consequently, as Poland's GDP grows, property lines look as though they may offer opportunities for growth.

Some market insiders have claimed that healthcare will provide the next major revenue stream. There are very few private healthcare facilities in Poland, however, and this is holding back growth in the sector.

Instead, the big opportunity for growth in Poland's insurance sector is in its life insurance market. Poland, like the rest of Europe, has an aging population and state pension provision will be insufficient. The third pillar of the pension system – the purchase of voluntary pension provision – is underdeveloped and there are significant growth prospects. Individual pensions will further promote the development of unit-linked style products.

The insurance market
Prior to World War II, there were over 100 insurance companies in Poland. However, only two of these continued after 1945 following the transformation of the political and economic system. With the introduction of the insurance law in 1990, the market was opened to competition and overseas investors were free to participate in the market.

At the end of 2000, 69 insurance companies held an authorisation from the Finance Minister. Of these there were 35 life insurers, 33 non-life insurers and one reinsurer. Also during 2000, the first branch of a foreign insurance company was established.

The market is still dominated by motor business, which comprised 68% of gross premiums in 2000. This results largely from the compulsory nature of third-party motor liability. Other insurance lines remain much less developed reflecting the still relatively low level of disposable income.

The market has traditionally been dominated by PZU, the state-owned company, which captured a 57% share at the end of 2000. The second largest company is Warta, a former state-owned insurer, now privatised and quoted on the Warsaw Stock Exchange (WSE), with a 13% market share.

PZU's market share had been trending downwards following the rapid establishment of new insurance companies, many backed by foreign capital. However in 2000 following further bankruptcies including, at the time, the third largest company, Polisa, consumers have switched back to more established companies.

A number of companies were badly hit by losses in the motor sector during 1999 and 2000, largely as a result of stiff competition as the post-liberalisation insurers jostled for market share. However, the battle grounds appear to be cities and larger towns while PZU continues to profit on motor business in the more lucrative rural areas where the company has an established network.

PZU's market share is still expected to decline as a significant recapitalisation of foreign insurers in 1999 and 2000 has prepared them for aggressive growth.

The privatisation of PZU is still to be completed following a significant, politically-driven, delay during 2000 and 2001. However, agreement has been reached between the pan-European insurance group Eureko and the Treasury that will allow the privatisation of the company through an IPO either late in 2001 or early 2002.

Already in 2001 we have seen the merger of ERGO Hestia and PBK Insurance. Also the mutuals Wiener Stadtische (Austria) and HUK Coburg (Germany) have agreed to buy the ailing Compensa from Hamburg-Mannheimer and UNIQA (Austria) also secured ownership of Polonia. Daewoo TUK remains up for sale and according to press statements is under administration by the regulator.

As in non-life insurance, PZU is the dominant player in the life market through its subsidiary, PZU Zycie, which had a 52.8% share at the end of 2000. However, insurance companies with foreign capital exert a significant influence in the market with the second and third players being Commercial Union (19.4% market share) and Amplico Life (10.1%, owned by American International Group).

Significant foreign presence is explained by the fact that whereas the non-life market is loss-generating (due to the under-priced motor policies), the life segment is profitable, particularly on group business. Other substantial players are Nationale Nederlanden and Allianz.

Due to the substantial foreign element within this market, the range of existing life products is broad, offering individual or group endowment policies and unit-linked investments.

At the end of 2000 CGNU sold its subsidiary Norwich Union Life to Sampo. During 2001 we have seen the sale of Compensa Zycie and Daewoo Zycie also remains up for sale. ‘

Market features
Compulsory insurances in Poland are motor vehicle third-party liability, fire insurance for farmers real estate and farmers' civil liability.

Since February 1997, purchase of professional liability for income tax advisors has been made compulsory. There is no taxation of insurance premiums, although stamp duties may apply on certain contracts.

Non-life insurance is currently sold through tied agents and brokers. Commercial lines, however, are predominantly sold through brokers. On the life side, individual products are mainly distributed through tied agents and group policies through brokers. Bancassurance remains an embryonic channel although an increasing number of banks and insurance companies are examining its potential.

Insurance supervision and regulation
The Polish regulatory authority is the state office for insurance supervision, PUNU, at:
Panstwowy Urzd Nadzoru Ubezpieczen
The President
Ul. Niedzwiedzia 6E
02-737 Warsaw
Tel: + 48 22 853 87 27

The Polish Chamber of Insurance – of which all companies must be a member – is located at:

Polish Chamber of Insurance
Plac Defilad 1
PkiN 11th Floor
00-901 Warsaw
Tel: + 48 22 656 79 56

The insurance business in Poland carried out by authorised companies is regulated by the Insurance Act of July 28, 1990, most recently amended in December 2000. PUNU is responsible for the protection of the insured persons, the issuing of permission to perform insurance activities by agents and brokers and, more generally, for the supervising of the insurance industry. It also manages the financial statements provided by companies, assesses their financial condition, and may take the necessary measures to ensure the sound operation of the insurance market. In particular, PUNU can perform an inspection of a company to control the fairness of the accountancy policies applied, verify the methods of calculating insurance premiums and technical reserves, survey the assets and liabilities level together with the profitability and liquidity of investments, as well as verify the settlement of claims, the reinsurance strategy and the compliance with the general terms and conditions of the insurance agreement. In the event the company does not comply with PUNU's recommendations, it can impose financial penalties – both to the company and to its board members – and/or suspend a member of the management board.

The setting up of an insurance company requires a licence from the Ministry of Finance, which consults PUNU. The application, a complex process, must be accompanied by, inter alia, a three-year business plan, details of the reinsurance plan, methods of calculating technical reserves, and acquisition costs. Life and non-life activities must be written by separate companies.

The Ministry of Finance is also responsible for granting licences to companies with foreign capital and foreign insurance companies. Foreign companies have been able to establish branch offices since 1999 as provided under the Association Agreement with the EU and the 1995 amendments to the Insurance Law. Permission from the Minister of Finance, however, will be necessary. Given the somewhat embryonic nature of the market, a sudden rush is unlikely, but it is nonetheless leading to a transformation of the non-life market with most companies seeking to increase their capital base and to broaden their product range.

Both agents and brokers must be authorised by PUNU. Companies are responsible for providing a specified level of training to the agents. Similarly, a licence will be delivered to brokers after they have passed a prescribed examination.

Financial statements must be submitted to the PUNU on a quarterly and annual basis. Accounts must be prepared under a standard form specified by the Ministry of Finance for the balance sheet, profit and loss account and cash flow statement. The accounts, which follow closely the standard accounting principles of the EU, must be audited by an independent auditor and technical reserves certified by an actuary.

The amended Insurance Act of 1995 has led to the establishment of an Insurance Guarantee Fund, which pays out claims arising from compulsory insurance as the result of (i) personal injury when the party at fault has not been identified, (ii) personal injury and material damage in motor and farmers third-party liability when the party at fault is uninsured, or (iii) the insurer's bankruptcy.

Accounting conventions
1 Pre-tax profit
The treatment of unrealised capital gains and losses depends on whether the investment risk is borne by the company or by the policyholder. In the former case, unrealised losses/gains are taken into account in the income statement, while in the latter case, they are taken to the technical reserves.

2 Asset valuations
Investments in the balance sheet are valued at the lower of cost or net realisable value. For life companies, when the investment risk is borne by the policyholder, investments are valued at the net realisable value.

The Insurance Law sets out restrictions on investments which are as follows:

Real estate investments should not exceed 25% of insurance funds with any one piece of property not above 10% of total technical reserves.

Mortgage loans should not be above 25% of insurance funds with any loan not exceeding 5% of total technical reserves.

Bonds, apart from treasury, government and municipal bonds on which there are no limit, should not exceed 10% of its net technical reserves.

Equities, stocks approved for public trading on the regulated market and participations in investment funds/certificates must not exceed 40% of technical reserves.

Foreign investments must account for no more than 5% of total technical reserves unless denominated in the Euro or currency of an EMU state where the limit is 12%. For insurance liabilities situated outside Poland these must be invested in the local currency.

Foreign investments can only be obtained in member countries of the OECD, EEA or those that have signed a mutual investment protection and support treaty with Poland.

The only other exception is where countries have been assigned investment grade ratings for long or short term securities.

3: Technical Reserves Evaluation
Companies are required to set up premium and loss reserves, including IBNRs. Unearned premium reserves are calculated net of acquisition costs, according to a daily pro rata method (the most common method used is the 1/12 or 1/24 method). The basis of providing for IBNR is a simple accruals method with estimates based on prior years' experience. Companies are allowed to create additional technical reserves provided that these reserves have been mentioned in the Articles of Association.

On the life side, the basis of valuing policy liabilities is decided by qualified actuaries as there is no specific method prescribed by the Insurance Law. The contingency is created on an individual basis for each policy, but it can be summarised within a specific group of policies if the result is broadly similar as in the case of the individual method. However, it is compulsory to establish the contingency on an individual method at least once every five years.

4: Shareholders' Funds
An equalisation reserve is allowed.

Poland covers an area of 312,683 square kilometres and has a population of approximately 40 million, with the capital city, Warsaw, accounting for 1.65 million. The currency is the Polish Zloty.

The Solidarity Electoral Action (AWS) party heads a minority administration. Parliamentary elections will take place on September 23 2001. President Alexander Kwasniewski was re-elected in October 2000.

The Republic of Poland's sovereign credit ratings and the positive outlook on the foreign currency sovereign credit rating are supported by:

  • Poland's continuing commitment to and ongoing implementation of structural reform, particularly in the mining, steel, energy, and defense sectors. This reform has gradually resulted in increased efficiency and has helped to further modernise the Polish economy. Standard & Poor's expects the implementation of this reform to continue in the medium term, regardless of the results of the upcoming fall 2001 elections.
  • Recent gains in the competitiveness and composition of Poland's exports, which largely reflect the emergent benefits of earlier foreign direct investment (FDI) into export-oriented sectors.
  • Expected monetary and fiscal policy mix that is more conducive to robust growth. This will result in lower real interest rates and further fiscal consolidation. However, Standard & Poor's does not expect Poland to meet its ambitious medium-term fiscal targets. In particular, it is highly unlikely that the general government will achieve a balanced position in 2003.
  • Poland's anticipated return to stronger growth in 2001 and beyond. Standard & Poor's projects growth of about 4.0 % and 4.5% in 2001 and 2002, respectively. GDP growth rates are then expected to recover toward their 5.0%-5.5% potential.
  • Inflation, which has slowed significantly in recent months, should decline to an average 7% in 2001, down from 10% in 2000. This drop is underpinned by more favorable developments in food and international commodity prices.

    The ratings are constrained by:

  • Continued, limited short- to medium-term fiscal flexibility. While Poland pushed ahead with significant structural public-sector reform, the implementation of this reform affected short-term fiscal performance—even as it solidified Poland's long-term fiscal position.
  • The challenges of further restructuring in the mining, steel, and energy sectors and improving the efficiency of the agriculture sector.
  • Socio-political ramification of high unemployment. Unemployment is projected to rise to 16% or more at year-end 2001, up from 15% at year-end 2000 and 13% at year-end 1999. Reforming the labour market and increasing the flexibility of labour market regulations in the near future will be key to relieving the structural rigidities affecting the Polish labour market and limiting the impact of restructuring on unemployment figures.

    The stable outlook on the long-term local currency sovereign credit rating reflects Standard & Poor's criteria for those sovereigns expected to join the European Monetary Union (EMU). As a potential member of EMU in the medium to long term, the gap between Poland's local and foreign currency sovereign credit ratings will disappear.

    Polish insurance analyst contacts:
    Ashley Gill London 020 7847 7077
    David Laxton London 020 7847 7079

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