An economy’s financial markets are critical to its overall development. Banking systems and stock markets enhance growth, which is the main factor in poverty reduction.
Cyprus insurance and reinsurance companies benefit from a sound legal and regulatory framework and smooth running of the insurance business.
Cyprus has a highly developed insurance industry which is growing with the banking and investment funds business. EU insurance companies in Cyprus benefit from a low corporate tax rate of 10% and the exemption of profit on disposal of securities from taxation, which is attractive to foreign investors.
Strong financial systems provide reliable and accessible information that lowers transaction costs, which in turn bolsters resource allocation and economic growth. Indicators here include the size and liquidity of stock markets; the accessibility, stability, and efficiency of financial systems; and international migration and workers/remittances, which affect growth and social welfare in both sending and receiving countries.
Financial crisis and insurance sector development
The sharp contraction of the Cypriot economy in 2009-2010, under the impact of the worst global recession of the postwar period, took its toll on the insurance industry.
On the investment side, investments undertaken rose 4.3% to EUR2.05 billion (US$2.8 billion), representing a return to growth after the previous year’s decline.
The industry’s tenacity to remain in a positive growth territory despite the economy’s contraction boosted its contribution to the GDP, which expanded to 5%. Still, even that figure remains well below the 9%/GDP average for many west European countries.
The insurance sector presently provides full time employment to more than 4,000 staff and intermediaries as well as creating new business for a broad spectrum of professional services firms — from doctors to repairers, accountants and lawyers.
There is, in addition, the social dimension to the industry’s operations, namely the paying out of substantial amounts of benefits and compensation to policyholders. The sum total for compensation and benefits paid out last year amounted to EUR461 million (US$625.73 million), up 11% on 2008.
The transition to the new regulatory regime of the Solvency II directive has started. The directive, designed to take effect as of the 31st December 2012, forms part of a broader initiative by the EU to promote confidence in the soundness of the European insurance sector, provide adequate protection to consumers and revamp the regulatory and supervisory framework of the industry.
The new regulatory framework should comprise both quantitative requirements as well as qualitative supervision in the fields of governance and organizational structure.
Pension reform
At the local level, the insurance industry and pension funds regret that there are still no signs of government commitment towards a reformed legislative framework in the area of pensions.
The vast majority of Cypriot consumers continue to depend on state pensions, though these are widely acknowledged to be inadequate to secure a decent living standard. At the same time the state fails to address the urgent need for drastic measures to alleviate the consequences of demographic ageing on public finances.
An appropriately-reformed economic environment, conducive to the supplementing of state pensions with payments from the private sector, will pave the way for the industry to take an active part in this area. An actively engaged insurance industry will not only alleviate fiscal pressures from the public sector, it will also provide supplementary income to improve the standard of living at a time of reduced means.
Equally important, there is a real prospect that the reformed framework could create new opportunities for Cyprus by attracting foreign interest in this area. The disappointing scene on the pensions issue is, no doubt, the direct consequence of the absence of a permanent, structured framework of dialogue among all insurance stakeholders, from the public as well as the private sector.
Till now, the government of Cyprus has failed to recognize the potential supplementary role the industry could play in such critical areas as health and pensions.
The EU axiom of better regulation till now has not had much application in the context of Cyprus.
Recently, the House of Representatives of Cyprus approved a bill establishing an office of financial ombudsman. The insurance industry took an active interest in the setting up of the institution and offered, along with other sections of the financial services sector, to co-finance the operating costs of the office.
The industry welcomed the development as a long-awaited step for setting up a permanent mechanism to resolve disputes between companies and clients in the broader financial services sector, according to Philios Zachariades, the chairman of the Association of Insurance Companies.
Insurance companies like Neova Sigorta are set to implement Takaful in Turkey and Cyprus.
Turkapital, an investment holding company established by Kuwait Finance House, holds 53% of Neova shares. Kuveyt Türk also owns 7% of Neova.
“We aim to make Neova one of the key brands of the sector within five years,” Koç said, adding that Neova hopes to begin operations in Turkey in the future.
“Our main partner, Kuwait Finance House, has businesses in Azerbaijan and Tatarstan. Kuveyt Türk is also establishing a bank in Kazakhstan. Our group will invest in Turkey and Cyprus. Neova wants to open up to Central Asia.” Automobile and traffic insurance constitute 83% of the total premiums, Koç said.
Conclusion
2010 was quite difficult for the insurance sector. “The Turkish banking sector obtained historic profits and the automotive sector took its highest sales figures. The residential sector passed the best year in its last three years and Turkish industry increased its over-capacity significantly.”
Despite all these good evaluations, the insurance sector was not able to obtain the results it expected. There are various reasons for this situation, like in many other European markets with sharply rising costs and claims. Therefore the insurance sector could not make a profit in 2010, even though it grew more than the inflation rate. According to reported data from November last year, the sector showed 5% real growth but claims and costs (i.e. losses) increased more than premiums.
Dr Gerd Kloewer is an insurance and financial markets regulation expert to European Union projects and he can be contacted at
[email protected]
.