Kategori: English Posts

Today, on one of the economy channels; when they were discussing the Istanbul Stock Exchange performance, in contrast to many other sectors,

 •They mentioned that the insurance sector shares were negatively separating and thus falling.

 As an insurer, I was upset.

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 Right after this, Mr. Erdem Başcı, the President of the Central Bank, mentioned in his speech;

 •They were about to finalize the sharing of credit ratings of customers with other institutions.

 Again, as an insurer, I was happy with this news.

Because, I know that the credit rating information is used very effectively in motor insurance pricing in many countries, especially the USA.

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The market is producing technical loss in motor insurance.

According to the 9-month results, the market has a technical loss of;

•102.145.406 TL in motor own damage,

•651.783.926 TL in MTPL.

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I am observing a lot of positive development for the compensation of these losses. For example, I know that the risk selection and modelling of companies is based more and more on “detailed data”.

In order to see how these efforts are reflected in product prices, from the data of Turkish Insurance Association, I tried to extract the quarterly development of average prices (*) in motor own damage and MTPL between 2008 and 2012.

(*Average Price= Independent Quarter Premium/Number of Policies)

Result: Average premium in Motor Own Damage and MTPL is increasing.

Banks, when transferring the right to use their distribution channel in non-life insurance to an insurance company, can reach more efficient results if they work through a panel in which at least three insurance companies are present in motor own damage insurance.

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The non-life premium production was TL 11.958.051.653 in Turkish Insurance Sector as at end of September 2012.

TL 1.691.490.959 (14.5%) was produced through banks.

Source: TSB Statistics.

 In the meantime, while the motor own damage premium production under the branch “Land Vehicles” was TL 3.250.782.577, the share of banks in this LoB was limited to 8.15% at TL 265.050.951.

Whereas had they reached 14.15% in this branch too, they would have produced TL 460.000.000.

The average commission in this branch amounts to 15%.

This means that the banks lost at least TL 3 million in commission only in the first 9 months of this year.

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It seems that banks can not reach the same sales success as other distribution channels of the insurance sector in the motor own damage branch, which constitutes 27.5% of the market.

Why?

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Insurance companies price casco policies based on their own statistical pools and past track record. Even though many criteria is included in this pricing, all companies take the past loss/premium ratio in their own statistical data as the base.

Hence, companies offer very different prices to vehicles and customers.

Casco is the most well known and price sensitive insurance product. The customer always want to get a quote from more than one company and purchase the cheapest.

Banks, on the other hand, offer the “casco price” of only the insurance company with which they have an exclusivity agreement.

As a result, while they are producing 14.15% of the total production, they remain limitied to 8.15% of casco production.

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Starting especially from 2007 onwards, many banks have sold their non-life insurance subsidiaries or the right to use their distribution channels. Very high figures were reached in terms of selling price.

· While it became an important gain to “work exclusively with the most efficient bank distribution channels in terms of personal and small business segments” from the perspective of new investors or insurance companies who own distribution channels,
· It was also equally important from banks to get a considerable upfront payment for the agreement period.

Besides, the banks continued to get commission payments for the insurance sales during the exclusivity period.

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The only variable that does not work right in this formula is the “casco branch” due to the reasons I summarized above.

Recently, the Istanbul Stock Exchange Index is rallying toward a record with the expectation of a possible “country rating upgrade”.

But, how would the upgrading of the country credit rating to “Investment Grade” effect the players of the Turkish Insurance Market?

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In 2003, one of my friends, who owned one of the nice butique hotels of Urgup, was asking 2 million USD to sell his hotel. In 2012, the price was10 million USD for the same hotel.

The hotel was the same hotel, the revenue (in terms of USD) was more or less at a similar level.

Difference;

• There are more liquidity and more buyers in the market.

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It is a certainty that more money will flow to Turkey in the case of a possible rating upgrade. It is also certain that cheaper funds will be available for new companies to be established in the country, but the foreign investment will flow more to the already established businesses.

While the existence and the number of these companies in the country is known, how will the increase in demand to acquire or investment in these companies effect the market?

The value of the companies will increase quickly despite the fact that there will not be any changes in their operations. A company with a market value of 1 million TL will be worth 5 million TL or 10 million TL shortly with the increasing demand and liquidity.

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The increase in value will not be limited to those companies; it will spread to all sectors, goods and services, and will continue until a new and higher demand/supply balance.

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The negative consequences regarding rating upgrade mentioned below should be considered alongside the positive expectations that is created these days in the financial markets.

In Brazil, following the credit rating upgrade, the interest rates seemed attractive to investors and the Direct Foreign Investment increased to 66.7 billion USD in 2011 from 48.5 billion USD in 2010. (*)

With the quick increase in foreign investment, the Brezilian currency appreciated against USD, resulting in a decrease in the competitive advantage of this country (in exports and production), and as a result, the Brezilian Government felt the necessity to impose new taxes as a protection against the negative consequences of increased cash flow.

(*)Source: CIA The World Factbook.

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Wıth the upgrade of the country credit rating, short term effects on the insurance industry can be expected as follows;

• The increase in insurable value of goods & services will primarily increase premiums and consequently claims costs,
• Values of companies in the insurance market (insurance companies, brokers, agencies) will also increase,
• More companies will find new buyers,
• Despite increase in personal wealth of some individuals, the purchasing power of the new value created at the higher price level will weaken.

In my opinion, the worst case for companies and individual could be to be in full liqudity  instead of all other kind of investment in such an upgrade.

When we look at the financial results of the non-life insurance sector, we see that although there are growth rates that make the counterparts at the developed economies jealous, the technical losses are becoming unbearable for the companies, especially in motor LoB’s.
 
Even companies which used to profit in these LoB’s in the past and are generally seen as role models by other companies have announced losses in motor third party liability.
 
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When we read the interviews of the executives, we understand that the losses are distribution channel specific and most companies are in a continuous search for a bank channel.
 
On the other hand, when we look at the market, we see that the larger bank channels are occupied and the remaining ones are either small or medium sized. Independent than their size we always hear that multiple companies compete to use these channels.
 
Then, how are those companies that don’t have a bank channel (or has one that is insufficient for their needs) supposed to find a cure for their un-profitability problem?
 
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My idea is that most of the companies in the market have already started their preparations. They are working to start selling “direct” through the internet. Direct channels will enter our lives very soon. This is because, in the current situation, the insurance companies do not seem to have any other solution.
 
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What should the agencies, which amount to 16.000, do about these developments?

They should keep pace with the change, and switch to use of high technology with higher capitals. They should stop losing time in their fight for commission with the insurance companies, start consolidating, join their forces (in terms of capital and know-how), and focus on the retail customer segment which is not yet sufficiently saturated. They should target a “tech-intensive” structure instead of a “labor-intensive” structure to achieve this.
 
While the situation of the insurance companies becomes inextricable, the fact that the agencies continue to look into the future with the old strategies will only lead to a loss of time.
 
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The insurance company executives don’t have room to maneuver anymore. Tomorrow, if not today, we will find ourselves in a new insurance market with radical solutions.
 

I noticed a news story in a newspaper dated August 15, 2012.

One of the new regulations (it is a draft now) regarding consumer protection that will become effective in 2013 is that “the banks will not force customers to make insurance a requirement for car and housing loans”.

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When issuing a car or a housing loan, banks that act as agency to one or more insurance companies ask or require their customers for:

• a motor own damage policy for car loans,
• a TCIP and fire insurance policy for housing loans,
• and a personal accident or life insurance policy for the credit customer,

with the condition that the bank itself is the beneficiary.

Although when you look from the outside, it looks as if the banks force customers for insurance with the main objective of obtaining fee income, the underlying purpose is to protect the loan and the customer. The worldwide practice is also the same.

From my own experience, I have seen many customers and/or their heirs benefiting from these insurance policies.

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I would like to extend this topic a little further.

Home Insurance (TCIP and Fire) Policies: It is well-known fact that our country, especially the Marmara Region is a high-risk earthquake region. It is also a fact that the mid-class citizens mainly finance their home acquisitions through bank loans.

Banks take a mortgage on these properties as collateral.

Although I hope it will never take place, in the case of a large scale earthquake, the damages to these properties will first and foremost cause damage to the credit customer.

He or she may no longer be able to reside in the house. It will be extremely difficult to cope with such losses. In fact, if he or she had sufficient financial means, the usage of a housing loan would not be necessary in the first place.

Because of the damage to the property, the bank will also lose its main collateral, and will have to look for other assets of the customers for the repayment; the customer who is already distressed due to the damage will risk losing other existing financial or physical assets.

Therefore, both TCIP (up to a certain limit) and home (fire) policies should accompany housing loans.

Telling banks not to require a customer for insurance will, in the end, cause the customer’s loan to become unsecures, which will sooner or later harm the economy as well.

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Motor Own Damage Policies: Like home policies, the bank utilizes a loan for the customer up to a certain percentage of his or her vehicle’s value.

In the absence of an insurance policy, the client, who needed a loan to buy the vehicle, will be the one who sustains the highest amount of damage in the case of an accident.

In case he or she fails to make the repayments of the loan while forcing his or her financial means to get the vehicle repaid, the loan will be subject to default procedures by the bank.

Especially if there is an injury or death involved with the accident, not only the customer but even the heirs will be negatively affected.

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Personal Accident or Life Policies: Who will benefit the most from the customer buying a life policy in all personal loans? (housing, car or general purpose)

Naturally, the customer and his or her heirs.

I have seen many examples where the heirs of a customer who was dead or injured, benefit from the claim payments of insurance policies in situations where they would otherwise not be able to pay by their own means.

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It could be argued that these policies could be sold by other distribution channels other than banks.

Surely, this is possible.

However, at that stage the banks start to have difficulties in tracking these policies:

• Is it renewed?
• Is the coverage frozen because the premiums are not paid?
•  Is the policy cancelled?

If these problems can somehow be solved, there is no problem. However, if these policies are to be sold in any case, why not by banks?

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In my opinion, banks are currently the healthiest and most efficient retail insurance distribution channel.

The above concerns should be taken into account when attempting to change the best performing system that not only protects the interests of the customer but also protects those of the heirs of the customer, the collaterals of the banks and the national assets of the country.

Maybe one of the most important gains of working at a broker company after many years of experience in insurance companies, I can say, is “having the opportunity to have a closer look at the Turkish insurance customer, which could not be seen from the window of the insurance company”.

We used to think, when working for insurance companies, that customers did not know insurance principles, and that they did not read their policies or that they only read when they had a claim.

However, the insurance customer in Turkey is quite deliberate; they read the policies and the clauses, and they compare products. They ask questions.

For example, despite there are approximately 4 million motor own damage (kasko) policies, that the word “kasko” was searched 6 million times a year in Google shows us something.

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We also observed this when we worked at a distribution channel: “Insurance companies look at their customers, but they don’t see them.” They make assumptions about what the customer wants. They don’t learn what they really want, and they don’t show any effort to find out. They don’t exchange opinions with the customers.

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Why could this be?

• Perhaps, as an industry as a whole, the customer segments that we had direct contact was limited because of the fact that we were working mainly with corporate and commercial segment customers.
• Maybe, it was difficult to get to know the customers because we were trying to manage the retail business through distribution channels.

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Whatever the reason, when we look at the result, the reality that the insurance companies do not touch and feel the customer does not change.

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What could be done?

• In my opinion, companies could enter the processes with the perspective of the customer and find out and improve those processes where the customer becomes unhappy, leaves the company, etc.
• More channels for mutual communication could be formed which listens to what the customer says.
• IT and organization can be re-formed with a customer oriented focus.

Those who have higher value added will continue to make profits. And insurance companies will continue to make losses…

For a while, there has been gossip about my appointment to different insurance companies as an executive; I felt the need to make a clarification when it finally became news.

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Sigorta Dükkanım Sigorta ve Reasürans Brokerlik A.Ş. has been in contact with investors to obtain funds for growth. We have seen in our renewed business plans that two executive managers has become too expensive for the company at this stage. Therefore, I resigned from my position as CEO as at June 30, 2012. Aycan BUL is going to resume this position following the approval of the Treasury. However, I resume my responsibilities in the company’s Board of Directors.

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This leaving issue has been brought together with some empty positions in the market and turned into incorrect news. Let alone being appointed, I have not had any talks with any insurance company about any position so far.

I had the opportunity to review the 2012 first quarter financial reports of Turkish Insurance Sector.

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There are 60 operational life and non-life insurance companies in Turkey. Of these:

•  35 companies operate in non-life,
•   9 companies operate in life, and,
•  16 companies operate in life + pension LoB’s.

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The overall sector has made a profit as at end of the first quarter (as bottom line figure). Of the 60 operating companies, 34 have recorded a profit in their balance sheets.

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When we look at the total bottom line figures;

•  The ratio of net profit to total equity in non-life companies: 4.3 %0 (four point three per thousand)
•  The ratio of net profit to total equity in life companies: 3% (three percent)
•  The ratio of net profit to total equity in life + non-life companies: 1.6% (one point six pecent)

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I tried to figure out what the common characteristics of the profitable companies could be. As far as I know, 20 of the 34 profit-making companies own bank distribution channels. The companies which recorded a first quarter profit and turned the overall sector profitability to positive, other than a few exceptions, are these companies.

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Has owning a bank distribution channel become a must for the sector companies to be profitable?

Are the other existing distribution channels too expensive?

Should the sector search for other alternative distribution channels to make profit?

Yesterday, I had a meeting with a top executive of a financial company who works at a group that owns several financial companies, including an insurance company.

First, we talked about the insurance industry Globally and in Turkey. Later, the talk came to their own insurance company. He did not like the performance of the group insurance company. He made comments such as “Ours don’t have a definite strategy, they write any risk they can find, all they case about is market share these days, etc”.

Suddeny I remembered what I lived through in the past. I don’t know why, but I have never seen a group employee that liked, but more importantly admire, their group insurance company.

I have to confess that I was never happy either with the performance of our own insurance company back in the days when I was a banker.

Later, I became an executive of that insurance company. As a group having been transferred from the bank, we worked very hard, but after 3-5 years, I heard from other finance executives of the group that the performance of the insurance company was not admired.

After us, new bankers came to the management again. But the insurance company could not be able to get the admiration of others.

I experienced similar issues in the next Group I worked for.

Happily, those un-admired insurance companies of groups were started to be sold at prices beyond expectations starting from 2007 that those who did not admire hopefully received an important message.

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According to a research I read regarding “happy marriages”, admiration is far more important that all the other factors (love, respect, politeness, etc.) in a successful marriage.

TSRSB has announced the 2012 February results. The non-life market is growing by 16.22%

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The motor own damage and motor third party liability portfolio, which has been experiencing profitability problems for years, is also moving in itself. The motor portfolio is being consolidated under the top 4 companies.

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While the share of the top 4 companies (Axa, Anadolu, Ak and Güneş) in Motor Third Party Liability was 49.48% in February 2011,

In February 2012, the share of the top 4 companies (Axa, Anadolu, Ak and Groupama) has increased to 52.89%.

This means that more than half of the total production comes from the top 4 companies.

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When we look at the weight of the top 2 companies, Axa and Anadolu, in the same line of business;

– While it was 37% in February 2011,

– Their total share increased to 39.87% in February 2012.

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The total production of the top 4 companies ((Anadolu, Axa, Ak and Allianz);

– While their share was 50.88% in February 2011,

– Their share increased to 54.13% in February 2012.

The total share of the top 2 companies, Anadolu and Axa, increased from 31.77% to 36.73% in the same period.

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What do you think? Is the motor lines in the market going to be consolidated under the top 4, or perhaps the top 2 companies in the near future?

Then, can we say “the competition will be dense for motor lines at the top, and for non-motor lines at lower ranks?”