Insights May 217 Turkish Insurance Bulletin Our Turkish Insurance Bulletin keeps senior executives around the world up-to-date with the developments in the Turkish insurance market a market that remains a high-growth insurance market. In this bulletin, we share: The growth in life gross written premiums (GWP), non-life GWP and pension new contributions, as well as how the motor casco, motor third-party liability (MTPL), fire and natural disasters, and health branches performed The s of top 1 life, pensions and non-life players The latest updates on regulations Five-year CAGR for life insurance premiums was 23.8% (14.8% in real terms), which is a combination of stagnant or declining premium levels in 212, and 214, respectively with significantly higher growth in. Figure 1. Life insurance premium production GWP 6, Market statistics 5, 1,678 Life insurance premiums In, life premium production has shown a tremendous growth, 34.% (23.4% in real terms) compared to the previous year. We understand that the main driver was the growth on the credit-linked business due to the increase in the credit volumes. In particular, the production from the government-owned providers Ziraat Emeklilik, Halk Emeklilik and Vakıf Emeklilik increased 59.1%, outperforming the rest of the market, where the life production increased by 23.3% over the year. 4, 3, 2, 1, 577 695 565 593 793 662 75 761 787 782 855 972 91 815 761 795 981 92 934 945 1,115 1,146 1,99 211 212 213 214
Insights May 217 Figure 2. Private pensions change in aggregate contributions Private pension contributions* 1, 9, 8, 7, 3, 2,175 In, the private pension contributions decreased by 17.6% (24.% in real terms) compared to a high-growth previous year (36.5%). This is mainly due to economic and political turbulence throughout the year as well as the anticipation of upcoming auto-enrolment system towards the end of the year. 6, 1,447 5, 2,11 2,3 1,928 4, 1,225 1,699 1,8 1,916 3, 1,641 1,723 79 84 1,196 2, 711 984 1,827 79 1, 1,431 1,42 88 669 1,46 211 212 213 214 Figure 3. Non-life insurance premium production GWP 4, 35, 9,674 Five-year CAGR private pension contributions was 2.2% (11.5% in real terms). The growth rates were particularly higher since 213, when the state contribution system was introduced. The three-year CAGR was 8% (.5% in real terms), the impact of recent contraction is evident. Non-life insurance premiums The growth of the non-life industry has been substantially higher than inflation for many years. The five-year CAGR to was 19.6% (1.9% in real terms). From to, non-life premium production increased by 3.% (19.8% in real terms) compared to the previous year. MTPL business is the driving engine of this tremendous growth. As with previous years, the nonmotor branches grew at a consistent rate, whereas the motor branches grew more strongly after the real terms reductions in 214. 3, 25, 7,99 7,359 2, 15, 1, 5, 3,961 3,156 3,61 3,76 5,581 4,819 4,532 3,666 5,99 4,213 5,623 4,418 6,88 5,914 4,98 6,393 5,511 6,23 6,968 8,781 9,633 The growth of the non-life industry has been substantially higher than inflation for many years. The five-year CAGR to was 19.6% (1.9% in real terms). 211 212 213 214 2 willistowerswatson.com * The private pension contributions are calculated as the difference of aggregate contributions between 1/1/ and 31/12/. The published contributions are the total lifetime contributions paid by business in-force at the publication date (e.g., if a policy lapse after 1/1/ and before 31/12/, then its contributions are included in 1/1/ figure but not in 31/12// figure). As a result, the difference between two dates is not equal to the premium production written between these dates.
Insights May 217 Motor casco premiums Figure 4. Motor casco premium production GWP In, motor casco premium production increased by 11.2% (2.4% in real terms) compared to the previous year. In, this growth was 9.2% (.3% in real terms). Following several years of reducing claim frequency, the claim trends levelled out during the period. However, continued strengthening in competition in the branch meant that price increases were significantly below inflation. Penetration recovered somewhat from previous years as new car sales increased and the competitive prices encouraged customers to maintain policies for longer. The growth rate is lower than the five-year CAGR of 1.3% (2.3% in real terms). We expect this to continue in 217 as the competitive market continues to reduce margins on the product. However, prices may rise as the capability of insurers to price MTPL insurance is curtailed. 7, 6, 5, 4, 3, 2, 1, 1,51 886 987 863 1,283 1,42 1,188 1,2 1,597 1,328 1,445 1,292 1,162 1,183 1,321 1,255 1,382 1,215 1,22 1,281 1,763 1,363 1,588 1,456 MTPL premiums 211 212 213 214 MTPL has traditionally been the most volatile class of business, and this has continued with a vengeance in and. In, MTPL premium production increased by 35.4% (24.5% in real terms) compared to previous year. And in, the rise was 72.7% (59.2% in real terms). These changes are caused by substantial price increases, which are reactions to significant losses in the line of business as well as substantial inflationary pressures from increasing injury claim numbers and increasing damage claim costs, and shifting of competitive pressure onto the casco insurance product. We note that the prices for MTPL have reduced since their peak in mid-, and we expect them to decrease substantially in 217 due to the cap imposed on the product in April 217. We describe more detail on the changes in MTPL later in this article. The five-year CAGR was 34.2% (24.4% in real terms). The and increases contribute to the continuing feeling of volatility in the branch. Figure 5. MTPL premium production GWP 14, 12, 1, 8, 6, 4, 2, 1,437 1,814 1,171 1,311 1,188 81 961 1,48 1,33 713 97 772 1,227 1,222 679 835 211 212 213 214 2,615 1,827 1,658 1,387 3,396 2,995 3,548 2,992 3 Turkish Insurance Bulletin
Insights May 217 Figure 6. Health premium production GWP Health premiums 5, 4, 3, 2, 1, 526 347 428 699 211 573 386 465 813 212 647 439 57 88 213 789 537 598 1,6 214 924 613 725 1,174 1,193 71 894 1,429 In, health premium production increased by 23.% (13.3% in real terms) compared to previous year. In, the increase was 17.3% (7.8% in real terms). Both of these are somewhat higher than the five-year CAGR of 16.1% (7.7% in real terms), and we would hope this trend of faster growth will continue giving the relatively low penetration of health insurance. Of particular interest in terms of products is the growth of supplementary health products, which brings an efficient value proposition to customers compared to other lowcost products. The growth figures have been impressive in percentage terms, and supplementary health is also gaining some traction in volumes. In, the proportion of premiums written on supplementary health policies increased from 4.2% to 5.4%. This ratio excludes some hybrid product types, which are shown within the private health figures. Fire premiums Figure 7. Fire premium production GWP Fire increased by 9.9% (1.3% in real terms) compared to previous year. This brings the five-year CAGR to 15.9% (7.5% in real terms). 5, 4, 3, 994 1,79 1,266 914 1,451 995 Market share and ranks Among top 1 life insurance companies, Ziraat Emeklilik is still the market leader with 4.8% additive increase in market share. Anadolu Hayat Emeklilik now took over Allianz Yaşam. AvivaSA lost some and ranked 1th, three levels below last year, while Vakıf Emeklilik s ranked 7th gaining three levels compared to last year. 2, 67 482 814 527 669 763 89 888 1,57 1,11 Among top 1 private pension providers, the top five companies have been stable over some years. In terms of contribution production, the top 1 companies by asset size also rank in top 1. 1, 561 597 64 71 899 1,68 1,155 1,272 211 212 213 214 4 willistowerswatson.com
Insights May 217 Figure 8. Top 1 life companies by Company () production production 1 Ziraat Hayat ve Emeklilik 1,71 21.3% 619 16.5% 2 Anadolu Hayat Emeklilik 51 1.% 42 1.7% 3 Allianz Yaşam ve Emeklilik 452 9.% 433 11.6% 4 Garanti Emeklilik ve Hayat 41 8.2% 329 8.8% 5 Halk Hayat ve Emeklilik 395 7.9% 316 8.4% 6 Metlife Emeklilik ve Hayat 35 7.% 232 6.2% 7 Vakıf Emeklilik 312 6.2% 182 4.9% 8 Cigna Finans Emeklilik ve Hayat 274 5.4% 218 5.8% 9 Aegon Emeklilik ve Hayat 272 5.4% 196 5.2% 1 AvivaSA Emeklilik ve Hayat 265 5.3% 218 5.8% Top 1 companies 4,32 85.6% 3,144 83.9% Total life companies 5,26 3,747 Figure 9. Top 1 private pension companies by Company () 31/12/ AuM 31/12/ AuM 1 Avivasa Emeklilik ve Hayat 11,792 19.4% 8,34 19.3% 2 Anadolu Hayat Emeklilik 11,366 18.7% 7,951 18.5% 3 Garanti Emeklilik ve Hayat 9,529 15.7% 6,795 15.8% 4 Allianz Yaşam ve Emeklilik 8,141 13.4% 6,198 14.4% 5 Vakıf Emeklilik 4,766 7.8% 3,212 7.5% 6 Ziraat Hayat ve Emeklilik 2,375 3.9% 1,752 4.1% 7 NN Hayat ve Emeklilik 2,345 3.9% 1,513 3.5% 8 Halk Hayat ve Emeklilik 2,282 3.8% 1,357 3.2% 9 Allianz Hayat ve Emeklilik 2,49 3.4% 1,37 3.% 1 BNP Paribas Cardif Emeklilik 1,735 2.9% 1,246 2.9% Top 1 companies 56,379 92.7% 39,635 92.2% Total pensions companies 6,848 42,985 Changes to motor premium volumes have driven many of the changes in the top 1 non-life companies. In particular, Allianz and Sompo Japan grew their s, while AXA and Aksigorta both reduced shares between 214 and. Further down the table, we see both Güneş Sigorta and Groupama Sigorta reducing. Overall, the concentration of the market within the top 1 insurers reduced from 74.4% in to 73.7% in, this is of interest since this proportion typically has increased year-on-year due to consolidations and growth of the larger insurers. Whether the trend will continue into 217 is a question; we are seeing new entrants appearing in the market with significant motor appetite which may further dilute s of existing players who are unwilling or unable to compete for motor insurance share. However, we also expect that M&A activity might recommence as reserving questions begin to be answered and capital concerns unwind. 5 Turkish Insurance Bulletin
Insights May 217 Figure 1. Top 1 non-life companies by Company () production production 1 Allianz Sigorta 5,775 16.5% 4,51 15.2% 2 Anadolu Sigorta 4,484 12.8% 3,611 13.5% 3 Axa Sigorta 3,562 1.2% 3,66 11.5% 4 Mapfre Sigorta 2,795 8.% 2,111 7.9% 5 Sompo Japan Sigorta 2,236 6.4% 1,63 4.% 6 Aksigorta 1,896 5.4% 1,622 6.1% 7 Güneş Sigorta 1,373 3.9% 1,288 4.8% 8 Ziraat Sigorta 1,338 3.8% 932 3.5% 9 Eureko Sigorta 1,235 3.5% 1,3 3.8% 1 Groupama Sigorta 1,151 3.3% 1,115 4.2% Top 1 companies 25,845 73.7% 19,861 74.4% Total non-life companies 35,53 26,78 Regulatory update Introduction of the auto-enrolment system After a year of industry-wide discussions and the publication of auto-enrolment regulations on 17 December (with number 29921), the system was launched on 1 January 217. We have seen tremendous effort put in by all providers, who finalised all of their preparations, fulfilled the requirements and launched their products in such a limited time frame. The following list covers the main features of the system as well as potential upsides and downsides for each feature: The auto-enrolment system is a voluntary second-pillar pension system targeting all employees up to age 45, working for either private companies or the government institutions. The system will be implemented in phases over a period of three years, larger employers will enter the system first. All the companies are required to provide an autoenrolment plan for their employees. It is automatic to enter to the system, encouraging participants to consider saving towards retirement. There is an opt-out period of two months, which may not be long enough for participants to develop saving habits. There is no requirement for employer contributions to the system. Employer contributions often form a strong incentive to enter the system and stay in. The participants are re-enrolled to system in every two years. This would have a positive impact and allow the employees reconsider their circumstances on a regular basis. The monthly contribution amount is 3% of the participants salaries as a minimum, and the participants have a right to increase this amount. We think this level could be viewed as high for minimum wage earners and could trigger opt-outs. There is a 25% state contribution and an additional state contribution of 1 TL, a valuable incentive, especially for minimum wage earners. While the 25% state contribution is appetising for new joiners who do not have a private pension plan, it does not provide any incentive for current private pension participants. The only charge applicable to auto-enrolment plans is the fund management charge, and it is limited with the maximum annual level of.85% of the total funds. Furthermore, we understand that the charges are also pressurised down by the strong competition, especially for the larger groups. The participants are allowed up to three months of premium holiday after they apply for it. However, they have a right to reappy and extend this period for another three months. Whilst the limitation will have a positive impact on the collection rates, it could also trigger additional opt-outs and lapses. 6 willistowerswatson.com
Insights May 217 After the opt-out period, the participants are still free to exit from the system without any additional penalty, and their fund amount including the vested state contribution will be paid. The auto-enrolment system could follow a lapse experience pattern similar to the private pensions system, following closely the similar vesting rules. On one hand, it is possible to expect better persistency as the sales pressure is reduced by the opt-out rules. On the other hand, lapse experience might worsen as the income levels go down. The experience for providers in the early stages of the system (to April 217) is that the average opt-out experience vary from 5% to 8% for the first set of companies (i.e., the companies with 1+ employees). We understand that the experience is worse for groups with participants who already have employer-sponsored or individual private pension plans. We also hear that the experience is better for the groups without many participants with private pension plans. This could be interpreted as a good indication that the auto-enrolment system is increasing pension penetration rather than cannibalising the existing private pensions business. No matter what the future experience of the auto-enrolment system will be, it will be crucial for the pension providers to retain the participants in their portfolios. There is still a significant gap between the current persistency rates observed for the current private pensions systems and where the companies would like them to be. It will be similar, or even harder, to maintain the auto-enrolment participants in the system. We recommend companies focus some of their effort on new and more effective methods to support their retention programmes. MTPL price controls As has been discussed in last year s issue, the compulsory motor liability insurance product has been the most significant contributor to volatility and premium increases in the last couple of years. The product has been consistently loss-making over the last five years. There were a variety of changes to claim experience, companies reactions and interpretation of that experience (including reserves), and changes to the competitive pressures in the line of business. During the period, several companies significantly reduced numbers of policies written in an attempt to rebalance portfolios towards more stable lines. The result was substantial premium increase during and the first half of, and premiums for many policies more than doubled in this time, resulting in significant reaction from the public, the press and the government. On 28 October, the regulator started applying a cap for most of the vehicle types except automobiles and motorcycles. Some other results, in particular the update to the general conditions and passing of the amended insurance law (number 674 at 26 April ), have been covered in our previous bulletin. However, in addition to these reactions during, the Turkish competition board instigated an investigation into the pricing practises of insurers, and the government began to take action against insurers whose pricing was shown to be excessive and introduced caps in premiums for a number of high-risk segments. Partly due to this, partly due to the now increased pricing level and partly due to new entrants with higher appetites, price competition began to enter the market again during the latter half of, resulting in decreases in prices of around 1% from their peak. In real terms, these price reductions were significant since claim inflation continues apace due to the effects of increasing injuries and currencydriven inflation described earlier. We note that a similar stagnation in pricing occurred in 213 and 214, leading to continuation of the underpricing of the product. On 1 April 217, a regulation was applied that brought in additional caps for all segments of business (by circular numbered 217/1). In particular, the regulation covered: Caps for all of the vehicle groups, differing by city (+6% for Istanbul, up to 5% for some cities) and No Claims Discount levels, which are more generous at 15%-3%- 45% (but with no extension on the number of no claim discount levels). Allowance for inflation in the caps, which will increase 1% monthly. Sales channels commissions cannot be under 1%. This regulation won t work retrospectively, and the ability for a customer to cancel their product has been curtailed to reduce the potential of a lapse shock in the market. The regulation will be in force until at least the end of 217. Additionally, the regulation is likely to have a very significant impact on the performance of the MTPL product. At the time of writing, it has been one week since its inception, and therefore its impact is difficult to predict. Our early estimates suggest that the impact of the cap without compensatory adjustments will be approximately a 2% drop in premiums, on average. Because the cap will disproportionally benefit the higher risk policies, we believe it is not unlikely that some lower risk policyholders will observe price increases in compensation. In addition, some of the recent competitive appetite for the line of business as a whole may be dampened. In the initial days following the implementation of the cap there have been reports of companies having systems issues and challenges in implementing the regulatory requirements, including IT challenges and system outages. 7 Turkish Insurance Bulletin
Different companies have taken different approaches, including encouraging distributors to bundle MTPL products with other coverages or upselling coverages. It is not clear whether these approaches will be successful in the long term, since the base incentive of 1% may result in a smaller focus from distributors on the bonus incentives. It is possible that insurers will use the opportunity to review their distribution channels and renegotiate contracts with distributers. Although it is early days, we understand that companies are reviewing their strategic position in the Turkish market. The moves from the government to reduce claim costs and clarify calculation methods are undoubtedly positive, but increasing inflationary pressure, continued increasing litigiousness and the price controls mean that more changes to the law to increase certainty, speed up claim processes and ensure a greater proportion of payments go to the victims may be needed to ensure the long-term health of the market. The fact that the price control is only in place until the end of 217 will be seen as a large positive for companies considering their position. Companies for whom MTPL is not a major line of business may be considering the necessity of MTPL within their product portfolio and also have a decision to make about whether they want to enter this market. Because the cap requires that, for a proportion of the market, the companies need to have competitive prices, it may be that companies underwrite business for which they have limited experience which may cause concerns about capital adequacy and profitability of the whole business. In this case, it is possible that a number of smaller insurers who do not focus on MTPL may hand back licences and form partnerships with MTPL insurers to provide the motor portion of package products. Such partnerships have historically been rare in the Turkish market and of course will rely upon a partner interested in taking on the motor portfolios. Supplementary health insurance Supplementary health insurance has grown significantly in last two years, fro7m premium production in to TL26m in and TL11m during the first quarter of 217. As of March 217, it has a 6.2% share within the health branch. On 1 August, the regulator allowed private pension companies to sell health insurance business (by circular numbered /3). We believe this is a useful amendment to fuel additional growth for the supplementary health insurance products, which could be sold in conjunction with auto-enrolment business. Solvency II The regulator is considering converging to a Solvency II-style regulatory framework within the next five years, and currently planning a strategy roadmap for this. Current capital requirements are based on Solvency I and a riskbased capital calculation. Typically, for life companies, the Solvency I calculation provides the higher requirement; for non-life companies, the risk-based capital approach typically provides the higher requirement. Life insurance companies tend to be overcapitalized. With upcoming Solvency II regulation, the Solvency ratios are expected to reduce to an extent, but no major Solvency issues are anticipated. The MTPL reserving issues also bring along capital adequacy issues on the non-life side, which is part of the rationale for the reserving phasing- and discountingapproach outlined above and adopted by the Turkish Treasury. About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 4, employees serving more than 14 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com. Willis Towers Watson Danışmanlık Limited Şirketi Astoria İş Merkezi Büyükdere Cad. No:127 A Kule Kat:4 Şişli / İstanbul Tel: +9 212 337 21 turkey@willistowerswatson.com The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice. To unsubscribe, email eu.unsubscribe@willistowerswatson.com with the publication name as the subject and include your name, title and company address. willistowerswatson.com/social-media Copyright 217 Willis Towers Watson. All rights reserved. WTW-EU-17-RES-743 willistowerswatson.com