The insurance market

The insurance market
The Portuguese insurance market is made up of 242 companies, of which 42 are limited companies and two are mutual. The remainder are made up of branches (44) and companies transacting on a freedom-of-services basis (150). The number of limited companies in 2000 has fallen from 49, owing to merger activity. The bulk of the expansion in business conducted on a freedom of services basis took place in 1999, with an increase of 28% on the previous year.

Between 1988 and 1993, the Portuguese insurance market underwent an intensive programme of privatisation, with the majority of companies being privatised. The main exceptions to this switch to the private sector are Fidelidade and Mundial Confianca, which are owned by the state-owned savings bank, Caixa Geral de Depositos. Fidelidade is the market leader in non-life policies. Mundial Confianca was reorganised in 2000.

The market is dominated by a relatively small number of old, predominantly bank-owned
companies. Either through ownership or affiliation, insurance companies have built up powerful alliances with the banking sector.

The so-called bancassurance distribution phenomenon, or the distribution of insurance products via the bank branch network, has rapidly become the most important method for selling life products. The sale of non-life products via bank outlets, however, has been far less successful, with the traditional methods of distribution, chiefly tied agents, still accounting for more than three-quarters of non-life sales.

Constrained growth
The Portuguese insurance market can be seen to be in two parts. On the one hand, there is the expanding life insurance sector, driven by the development of appealing financial products for a relatively inexperienced consumer base via bank channels. And, on the other, there is the non-life sector in which competition has constrained premium growth – although 2000 data indicates a real recovery reflecting more rigorous pricing. Spending on insurance in Portugal is gradually approaching the EU average. According to the Associação Portuguesa de Seguradores (Portuguese insurance association, APS), insurance spend as a percentage of GDP is about 1.5 percentage points lower than the EU average, 1.2 points of which relates to life insurance, with the remaining 0.3 points differential in respect of non-life expenditure.

The underwriting performance of the non-life sector has generally improved in recent years, benefiting from cost savings attributable to greater efficiency, modernised IT systems and staff cut-backs. The APS indicated that, in 2000, non-life business grew by 11.8%, with strong growth driven by increased rates in motor lines. Life business levelled off after several years of double-digit growth.

2000 saw some major reorganisation in the Portuguese insurance sector. Seguros e Pensoes GERE (SeP), the biggest insurance holding company in Portugal, merged with Achmea under the holding company Eureko. Following the merger, SeP (which controls Imperio, Bonanca, Ocidental and BPA) became part of Eureko. The previous controller of SeP, Banco Comercial Portuguese (BCP), now shares control of Eureko with Achmea Association of the Netherlands. The Eureko Group is a leading European insurance group.

The threat posed by foreign insurers in Portugal is limited, owing to the dominant position of the domestic insurance groups. Nevertheless, there is a growing foreign presence in the Portuguese market, highlighted by the sheer number of branches and companies transacting on a cross-border basis. In addition, several high-profile operations have expressed their interest in the region. Axa Portugal has expressed interest in the insurance operations of Mundial Confianca. Overseas interest will continue and is evidenced by several examples. In July 2001, Italy's Assicurazioni Generali expressed an interest in acquiring a 49% stake in Tranquilidade. Earlier, Tranquilidade was in talks with Axa, but the parties did not manage to agree on the price of the stake. Leading Spanish group, Mapfre, was also identified as an interested party.

Industry consolidation is likely to take place among the smaller companies. Consolidation among the larger players (for example, the integration of SeP companies Imperio and Bonanca) will arise as a result of the convergence or reorganisation of the activities of the controlling bank shareholder groups.

Insurance regulation and supervision
The supervision of the insurance and reinsurance activities is performed by the Insurance Institute of Portugal (Instituto de Seguros de Portugal – ISP), part of the Ministry of Finance, and is situated at:

Av. de Berna, 19
1050 Lisboa
Tel: +351 1 793 85 42
Fax: +351 1 793 54 80

Supervision is exercised under decree law 302/82 dated July 30, 1982.

The main powers of the ISP are as follows:-

  • to authorise new lines of business
  • to approve the mathematical reserves and premium rates
  • to withdraw its authorisation on specific lines of business in certain circumstances
  • to propose sanctions which will in all cases have to be approved by the Minister of Finance.

    Insurance activity is permitted only by public companies, companies that have public capital, companies limited by shares, mutuals or general agencies of foreign companies. Public insurance companies or companies with public capital are governed by special legislation.

    Companies limited by shares must respect the incorporation process established by decree law 102/94, namely, to petition for an authorisation to engage in insurance activities. Authorisation to form new insurance companies will be granted by the Prime Minister and the Minister of Finance on the recommendation of the Portuguese Insurance Institute. In order that such an authorisation can be given, the company must meet certain conditions, which are:

  • to adopt the form of a company limited by shares
  • to publish financial statements annually which must be audited by a statutory Portuguese auditor, Revisor Official de Contas (ROC)
  • to provide the company share capital of at least Esc500m if the insurance is for guarantee or protection and assistance, Esc1.5bn if the insurance is for more than one of the mentioned areas or belongs to any other area within life or non-life insurance and Esc3bn for a composite
  • to provide the company a board of directors with no fewer than three members, with full power to manage the company.

    The minimum amount of share capital must be fully paid up in cash before the public deed of incorporation is executed and any amount above the minimum must be paid within six months.

    In addition, the granting of the authorisation will depend on the applicant demonstrating the technical means and financial resources to develop the insurance company, within the competitive insurance market.

    When acquiring a Portuguese company and after agreement on the purchase price having been reached with its owner, a foreign purchaser must apply for permission from the Bank of Portugal. The bank's authorisation will depend on such factors as the planned level of investment, the level of employment and the location of the company.

    A foreign acquiring company must submit to the bank, as part of the authorisation request, certain notarised documents indicating the acquiring company is a legally constituted entity in its country of origin. It will also be required to submit projected financial statements for the Portuguese company for a three-year period after the proposed date of purchase.

    The merits of each application will be assessed by the bank on a case-by-case basis. There are no restrictions on the percentage of shares the foreign company may acquire.

    The ISP has a number of other roles which include acting as a member of various bodies, at EU level (for example, the insurance committee, which advises the EU commission), at governmental level (for example, Organisation for Economic Commerce and Development – OECD) and at a non-governmental level (for example, the Association of Latin American Insurance Supervisors – ASSAL).

    The ISP also manages the Motor Vehicle Guarantee Fund, which pays compensation in the event of death/injury resulting from unknown drivers, drivers with no valid cover or in the event of insurer liquidation. The fund also pays for property damage where the driver is known but has no valid cover, subject to a Esc60,000 deductible, payable by the victim.

    Insurance law
    Portugal was second only to France in putting in place national legislation to implement the freedoms contained within EU insurance directives. 1994 was marked by profound alterations to insurance legislation. Particular relevance is attributed to decree law 102/94 dated April 20, 1994, which enacted the European Directives relating to the freedom of services, the supply of insurance products and the accounting presentation for insurance business, into Portuguese law.

    The incorporation of the third generation of insurance directives brought about two principal changes. Firstly, the recognition of the principles of supervision by the country of origin and the single licence concept. Secondly, the end of any upfront supervision of policies and tariffs, including the abolition of the prior deposit.

    The legislative changes made in 1994 were further extended in 1995 by decree law 178/95 which impacted in particular on transparency rules, requiring insurers to clearly express product costs, issue and renewal conditions and the rights and obligations of the client. The presentation of insurance accounts, as established by the plan of accounts for insurance companies, approved by norm 7/94 in 1994 and amended in 1995 by norm 14/95, introduced some broad changes to the composition of Portuguese insurance accounts. These modifications included the following:-

  • the balance sheet and profit and loss accounts ceased to reflect the division by class of business
  • certain valuation criteria changed – for example, valuation of investments in group and associated companies after recognising for unrealised gains and losses
  • the direct insurance/ceded reinsurance breakdown disappeared
  • costs were initially recorded according to their nature (for example, staff, independent services, taxes, depreciation) and then divided into financial costs (claims costs, operating costs - acquisition and administrative, and capital expenditure costs)
  • the heading “sundry accounts” was replaced by accruals and deferrals, thereby recognising the income and expenditure in the periods in which they were incurred
  • consolidated accounts were mandatory.

    Following these changes, the ISP issued several market norms which include:

  • regulating the conditions of access to, and the exercising of, insurance mediation
  • the supervision of non-life contracts and the recording of compulsory insurances
  • methods, rules and principles applicable to the calculation of technical provisions.

    In July 1998, a new decree, DL102/98, was approved. The new legislation strengthened the powers of the ISP, as well as implementing the EU Directive to reinforce prudential supervision, which was drafted following the collapse of the Bank of Credit and Commerce (BCCI) in 1991.

    The new decree also introduced measures limiting the level of debt an insurance company may hold (10% of equity capital) and widened the definition of debt beyond simply “bonds”.

    The regulator's supervisory powers were enhanced through its ability to impose tougher sanctions and heavier fines on offending companies. The regulator may also enforce refinancing arrangements and appoint a government representative to sit on the board of directors of any insurance company.

    Financial reporting
    Information available to the public is as follows:

  • Financial statements (under accounting presentation rules details of values by line of business may be provided in the notes to the accounts rather than as part of the financial statements)
  • analysis of fixed assets
  • schedule of valuation of investments – shares and debentures.

    Annual reporting
    Companies are required by law to submit detailed financial information to the ISP before the end of March in the year following the calendar year in which the business was generated. In addition, companies are required to file their tax return with the fiscal authorities by the end of June in the year following the calendar year to which such returns relate.

    Quarterly reporting
    Trial balances referring to the quarter must be sent to the Portuguese Insurance Institute in the first fifteen days following the end of the quarter to which they relate.

    Monthly reporting
    By the end of the month following that to which the information relates, each company must submit to the Insurance Institute the following details:

  • premiums written/received
  • commissions
  • number of contracts
  • losses incurred
  • investments in shares and debentures
  • investments in fixed assets.

    Portugal covers an area of 34,317 square miles and has a population of approximately 10 million inhabitants. The capital city, Lisbon, is the national insurance centre and has a population of 2 million. The national currency is the Escudo (Esc), but with the move to economic and monetary union adopted by 11 EU countries in January 1999 (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands and Spain) the currency will become the Euro (e) in January 2002. The agreed central rate is Esc 200.49 = *1.

    In October 1999, Portugal's socialist government, led by António Guterres, retained power in the general election, but failed to return an outright majority. The ruling Socialist Party (PS) was first elected in November 1995, thereby ending ten years of single-party rule by the centre-right Social Democrat Party (SDP).

    The ratings on the Republic of Portugal are supported by:

  • The sovereign's improving fiscal position in recent years, reflected by the decline in the general government deficit to 1.4% of GDP and the reduction in the general government debt-to-GDP ratio to 54.1% in 2000, from 3.9% and 62.8%, respectively, in 1996. The 2000-2004 Stability and Growth Pact Programme targets further declines in the fiscal deficit to achieve a fiscal balance by 2004, as well as a debt-to-GDP ratio below 50%. In 2001, the general government deficit is targeted at 1.1% of GDP, and the general government debt-to-GDP ratio at 53.4%.
  • Remarkable progress in structural reforms in recent years, as demonstrated by a far-reaching privatisation programme and ongoing deregulation and liberalisation in labour and product markets. These reforms have supported average real GDP growth of 3.6% annually between 1996 and 2000, higher than the EU average of 2.5%. As a result, GDP per capita (evaluated at purchasing power parity) has risen to 74% of the EU average in 2000, compared with 64.4% at the beginning of the 1990s.

    The ratings are constrained by:

  • The need to implement long-term fiscal reforms, notably in health care and the public wage bill. The decline in the general government deficit has largely relied on buoyant revenues and declining interest payments. At the same time, however, primary expenditures have increased as a share of GDP, mainly reflecting inadequate expenditure control and the lack of spending restructuring.
  • The challenge of making further progress in deregulating and modernising the economy.

    Standard & Poor's forecasts real GDP growth in Portugal of about 2.4% in 2001 and 2002, a decrease from 3.2% in 2000. The economic slowdown, particularly in domestic demand, will largely reflect the recovery of Portuguese savings following years of fast credit expansion and rising indebtedness levels. Continued efforts from both the public and private sector to improve education and workforce skills, and upgrade infrastructure and technology standards remain key factors for raising productivity levels and supporting continued real economic convergence with EU partners.

    The outlook reflects Standard & Poor's opinion that a further narrowing of the gap in credit worthiness between Portugal and its higher-rated EU partners would require greater reform of public finances and improved competitiveness.

    Further fiscal consolidation remains key to an improvement in Portugal's ratings. Last year's pension reforms and the recent measures approved by the Portuguese government to cut down and restructure current primary expenditures should strengthen Portugal's fiscal position and support the long-term sustainability of public finances. Conversely, any significant weakening of Portugal's fiscal performance, or further delays in implementing these reforms, could result in downward rating pressure.

    Portugal insurance analyst contacts:
    Tristan Whittingham London 020 7847 7086
    Laura Santori London 020 7847 7062

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