2008 Reinsurance Market Position
Turkish reinsurance pricing increased substantially in the aftermath of the 1999 earthquake, although most reinsurers saw paybacks of their losses within two years. Competition for premium income and a consensus that the increase in pricing by reinsurers had created an attractive margin have led to major rate reductions since 2004.
The TCIP reinsurance program, which renews November 1, 2008, continues to be a key indicator of pricing movements at January 1, 2009 renewals. Unlike the rate increases of last year, the TCIP programme in 2008 saw a further decrease of about 10 percent.
Competition remains fierce, and prices in all catastrophe excess of loss programs experienced decreases of about 10 percent. Some programs even pushed for the 20 percent reductions that we saw two years ago. Consequently, several of the Continental European reinsurers which had come back to some programs at the last renewal have turned away this time. Nonetheless, we continue to see a renewed interest in Turkey from the Bermudian market.
Catastrophe coverage taken up directly by the insurance companies in 2008 has risen to around USD6.5 billion, inclusive of the catastrophe cover taken by the TCIP and Milli Re.
Milli Re, Turkey’s only reinsurer, has been awarded a new security rating of B++ by A.M. Best, an improvement on last year’s B+. Milli Re is continuing its successful strategy of accepting business from emerging markets up to predetermined limits. With the goal of balancing the company’s domestic acceptances with foreign business, this strategy was reinforced by the continuing strengthening of the Turkish Lira against hard currencies, which led to the minimization of currency translation losses. This result is also partly due to the elimination of the compulsory cessions to Milli Re, which was implemented last year. Despite this Milli Re was able to finish 2007 with an income of USD719 million, compared to USD607 million in 2006. The establishment of a Singapore office helped, as it gained Milli Re access to the burgeoning Asia/Pacific market. This is the first time Milli Re has opened a foreign branch.
Earthquake is the principal catastrophic peril that Turkey faces, because of a fault line running east to west across the northern part of the country. Technically, the North Anatolian Fault resembles the San Andreas Fault in the United States. The land surfaces are similar, as is the frequency of earthquakes. The only other catastrophe exposure in the country is localized storm and flooding.
Catastrophe Risk Evaluating and Standardizing Target Accumulation (CRESTA) divides Turkey into 15 zones. Zone 1 and Zone 3 are of the greatest interest to insurers and reinsurers, as they have both exposure to the fault line and substantial insured values. Of these two zones, Zone 1 is the more significant and is often used as the adjustable base in reinsurance contracts. The last major earthquake in Turkey struck Marmara and the surrounding region in 1999, resulting in more than 39,000 deaths and property damage of USD7 billion, of which approximately USD1 billion was insured.
Earthquake coverage is readily available in Turkey. Since 1993, cover for this peril has been subject to a government-imposed tariff, which includes a provision for maximum coverage at 80 percent (i.e., 20 percent co-insurance) and a policy deductible calculated as a percentage of the sum insured.
Generally, this deductible has been set at 5 percent, although in recent years, we have seen various options available from the insurance market ranging from 2 percent to 10 percent, with the appropriate differentiation in rating.
Following the 1999 earthquake, the Turkish government, with the cooperation of the World Bank, issued a law establishing a compulsory earthquake insurance scheme administered by the Turkish Catastrophe Insurance Pool (TCIP). The law requires coverage for private residences that fall within the scope of the legislation. The pool provides coverage up to a fixed limit of earthquake cover on buildings for all registered habitations, excluding rural areas and unauthorized construction after December 27, 1999.
In 2007, TCIP finished its third year under the management of Eureko Sigorta (previously named Garanti Sigorta), which has an initial five-year mandate. Eureko Sigorta has adopted an aggressive strategy to expand the number of policies sold, especially outside the three main CRESTA zones. It has created a new department to deal exclusively with the program and has invested in national advertising to raise the public awareness.
The latest data (from 2007) shows that the number of policies has increased by 2.5 percent to around 2,618,000, with 13,150,000 homes being insured. This is only a slight improvement on last year, even though Eureko Sigorta continues to reduce the lapse ratio. While the national average penetration rate is 20 percent, more than 30 percent of homes in the most disaster-prone area (Marmara) have TCIP policies.
A substantial excess of loss reinsurance program is placed in the international market to support TCIP. Original policies are retailed through the local insurance companies and agents, as authorized by the TCIP.
The insurance market continues to experience stiff competition. Tariff rates are still very high, while non-tariff rates in many classes are under pressure. However, the growth of the Turkish economy continues to accelerate more quickly than anywhere else in Western Europe. This has had a profound effect on the Turkish insurance industry. The country has adapted its legislation to conform to European law. A new draft insurance law passed last June, followed by at least 50 secondary acts of legislation. The key objective was to harmonize Turkish insurance law with the EU’s basic system of national law and regulation, addressing such issues as the licensing of insurance and reinsurance companies, minimum capital requirements with respect to branches, revocation of licences, tariff liberalization, liquidations, mergers and acquisitions, and minimum capital requirements with respect to branches.
Despite the new law’s improvements, though, there is some way to go before full harmonization with EU standards. The EU’s December 2007 progress report states it “is only partly with the acquis [the total body of EU law accumulated thus far], since certain basic principles of the EU insurance law are not respected. The freedom to set tariffs is restricted in the compulsory insurance sector and policy conditions are subject to approval by the treasury.”
The foreign investment trend in Turkey accelerated in 2007 and 2008. A larger number of foreign companies is acquiring state- and privately-owned Turkish businesses.
Since 2006, 11 companies have become foreign-owned. Seven new companies have been established. As a result, there are 24 companies that have at least 50 percent of their capital from foreign sources. In effect, foreign companies have doubled their share of the Turkish market - from 30 percent in 2005 to 60 percent at present. Turkey’s growth potential is proving more and more attractive; it has been stated that this could be as much as four times the EU average, with Turkey having less than 2 percent average premium-to-GDP ratio, compared to 8 percent for EU countries.
The companies that have entered the Turkish market are: Groupama, HDI Int, Ergo, Liberty Mutual, GEM Global Equities, Eurko, Mapfre, TBIH, Aviva, Abraaj Capital, Zurich Financial Services, AXA, and Aegeon.