Pound for Poland

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Increased foreign investment following its addition to the European Union has jettisoned Poland into the top tier of emerging markets - and the new Eastern European heavyweight is offering further opportunities to overseas insurers. Mairi MacDonald investigates

The Polish insurance market has hauled itself out of a period of stagnation that beleaguered it during the early part of the decade, thanks to a flurry of foreign capital and a series of key legislative changes.

Since 1990, the market has changed with the introduction of insurance laws that put an end to the state-owned insurance company PZU's grip on the market. Although this company remains the dominant player, more than two-thirds of insurance companies operating in Poland today are fully or part-backed by foreign investment. According to the Polish Chamber of Insurance (PIU), 77% of total share capital in Polish insurance companies is made up of foreign capital.

The PIU's figures also reveal that Germany holds the largest share of the overall foreign investment in Polish insurers (36%) while Austria is the second biggest investor (24.7%). Furthermore, the expectation that Lloyd's will become a fully licensed operator in the country within the next few months is expected improve its competitiveness and put it on the map alongside other heavyweight developing economies, such as China and Brazil. Being second only to Austria as the largest insurance market in Central and Eastern Europe, Poland is also seen as a useful base to access the rest of the region.

The country's economic structure is understandably undergoing significant change as it shifts from an agriculturally focused exporter to one geared towards consumption and investment. With this changing focus in business terms, the insurance liability, directors' and officers' and malpractice areas all hold high potential for international specialists.

According to a Lloyd's report, Perspectives on Emerging Europe, insurance consciousness is rising in Poland as a result of expanded international trade and greater awareness of exposures. Therefore, insurance penetration and density levels are expected to increase correspondingly. Figures from the Polish Financial Supervision Authority, reveal that the non-life insurance market is now worth more than 18bn zloty (£4.2bn) in gross written premium, with by far the greatest market share held by PZU at 43.8%. This is followed by former state-owned insurer, Warta (10.1%), Ergp Hestia (8.1%), Allianz (7.6%), and HDI (4.7%). In 2006 the life sector overtook the non-life sector for the first time having seen rapid growth - and it is now worth more than 25bn zloty in GWP.

Growing middle class

In 2004, Poland joined the European Union and competition involving foreign companies looking for a foothold in the market has consequently been significantly ramped up. Although the non-life market has traditionally been dominated by motor insurance, recent growth has largely been driven by the property insurance market as the home-owning middle classes have grown in size. For example, this sector has accounted for most of the Lloyd's reinsurance interest in the region until now.

Among the country's compulsory insurance lines are motor third-party liability, agricultural third party liability and professional indemnity insurance, as well as farmers' property.

The Lloyd's report found that there is significant scope for "catch-up and high growth rates" in the foreseeable future because although Poland is one of the largest Central and Eastern European economies, it is also one of the least developed. Recent figures from the PIU - set up in 1990 - show that by the end of 2006 it counted 72 insurance companies among its members. This comprised 32 life insurers and 40 non-life insurers, including seven mutuals, seven branches of the foreign insurance companies and one general branch. These figures sit in stark contrast to those from 1993, when there were just seven life insurers and 23 non-life insurers in the country.

Since 2006, the Financial Supervision Authority has taken on the control of banking, insurance, pensions, capital market, electronic money institutions and complementary supervision as part of a legal act. The former regulatory bodies - the Securities and Exchange Committee and the Committee of Insurance and Pension Fund Supervising - were then liquidated. Furthermore, last year a new government was elected in Poland that placed considerable focus on building and strengthening the country's economic relationship with the rest of the EU.

Lloyd's impending arrival as a fully licensed player in the market has been welcomed as it should substantially raise the profile of the country in the international market and generate real growth - primarily by ramping up Poland's liability insurance market.

The UK's Financial Services Authority has notified the Polish regulator that Lloyd's wants to become established as a direct insurer and a full licence is expected to be granted in September. Enrico Bertagna, Lloyd's regional manager for Europe, says Poland was the most obvious choice for its first central European hub and is looking for it to serve as a springboard for the whole region.

Lloyd's' subscription model

Having worked through some of the early issues Lloyd's inevitably faces in applying for a licence in a foreign market - including explaining to the regulator and market how Lloyd's unique subscription model actually works - Mr Bertagna says he is confident final confirmation will be received in the next couple of months.

Lloyd's is currently in the process of setting up its Warsaw office, which should be ready by the time the licence is granted. The appointment of Witold Janusz in April was another important step as he is already well-known in the local market and was considered a strong figurehead for the new operation. Mr Janusz, who joins Lloyd's from HDI-Gerling, will act as its country representative, working on business development and looking after Lloyd's relationships with the local regulatory authorities.

Mr Bertagna says it is too early to say what level of premiums Lloyd's can expect in Poland, but adds: "There's a lot of potential for the Lloyd's market in Poland to offer the sorts of sophisticated insurance it does very well.

"The Polish economy itself is becoming increasingly complex and there have been numerous developments recently, especially in professional indemnity, liability, directors' and officers' and errors and omissions.

"Polish companies need more cover in these areas as they are also becoming more sophisticated. Property is a very competitive area, for example, and we're looking at catastrophe and marine."

Lloyd's current involvement in the market is in the form of reinsurance and cross-border cover, but becoming fully licensed will see its market build relationships with local brokers and intermediaries.

Mr Bertagna reveals that Lloyd's has also just applied for a licence in Austria but says that it will probably take a couple of months for the local regulator to come back with any objections. It is also considering whether to make an application to apply for a licence in the Czech Republic.

The dominant presence of PZU in the market, as well as the smaller Warta, is unlikely to affect Lloyd's as it will not compete in the same arena. Mr Bertagna explains: "PZU is still controlled by the state and is the dominant insurer. However, we are not planning to compete with the local businesses that mainly do motor as it's an area where Lloyd's can add little value. We would rather concentrate on what Lloyd's is good at."

Lloyd's is just the latest in a line of new entrants to the market from abroad. PIU figures show that de-monopolisation has led to the country's top five companies losing control of the overall market; they now hold 53% of the overall GWP, compared to 93% in 1993.

The importance of brokers

Broker penetration, however, remains low in Poland due to a tradition of companies having their own direct sales staff. But, according to Lloyd's, brokers play a significant role in commercial insurance and approximately 900 brokers are registered in the country.

In October another liability expert, London broker Howden, demonstrated its regard for the importance of the region by appointing Vlada Barratt as business development manager for Central and Eastern Europe. At the time, Howden chief executive officer Tim Coles alluded to the opportunities created through the rapid economic and social change in the country: "Poland is one of the fastest growing economies in the region and yet there is little expertise in liability insurance. There are significant opportunities for specialist brokers." (Postonline, 30 October 2007)

Commercial Union Poland - which along with Norwich Union in the UK and Ireland's Hibernian will be phased out in the next two years in favour of the umbrella brand 'Aviva' - also entered the direct motor insurance market in Poland during the final quarter of 2007. This was in response to the country's growth in car ownership, reflecting the growing disposable incomes of many Poles. According to Aviva, 43% of the population now owns cars while the motor insurance market - currently worth £1.9bn - is expected to double within the next 10 years.

Despite a market dominated by two local players and already competitive motor sector, the comparatively low levels of sophisticated liability product penetration mean international firms are hoping for high returns by entering the market. In short, they are expecting a lot for their zloty.

The Insurance Guarantee Fund

The Insurance Guarantee Fund is somewhat akin to the UK's Financial Services Compensation Scheme, by operating as a backstop to life insurance and four types of compulsory non-life insurance: motor third-party liability, farmers' TPL, professional TPL and farm buildings.

The IGF was set up following the 1990 Act on Insurance Activity that obliged drivers to buy motor insurance. The 1990 Act also led to the formation of the Insurance Protection Fund to settle claims of insured people against insolvency of life and certain classes of non-life insurers. In 1995, the IGF assumed responsibility of the IPF.

The IGF's functions include payment of compensation to policyholders, claimants and beneficiaries of an insurer bankruptcy declaration or compulsory wind-up. Since 1991, this has applied to life insurance and the classes of non-life mentioned above. Professional TPL came under the remit of the fund in 2004.

The IGF also secures continuation of certain policies by facilitating portfolio transfer. The preventative function consists of granting a repayable loan to TPL insurers taking over the portfolio of the undertaking in question. This was introduced in 2004 and applies only to motor and farmers' TPL.

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