The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2017 / 2018

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Talking Turkey

Charlie Thomas

Think of Turkey, and you probably think of a beautiful, but challenged country, built on the remains of the Ottoman Empire. A charming mix of East and West, you might picture the Blue Mosque of Istanbul, smell the intoxicating aroma of smoking barbeques from the ocakbasi restaurants and imagine the bright colours of the whirling dervishes of Konya.

Romantic images aside, musings on Turkey may also prompt recollections of recent news stories detailing President Recep Tayyip Erdogan's decision to announce another state of emergency, allowing his cabinet to issue sweeping decrees without parliamentary oversight.

Or reports of the tourist industry - so important for the country's economy - which is still struggling to get back to its former glory a year after Turkey shot down a Russian jet near its border with Syria.

Times are troubled too for the Turkish insurance industry. Dogged by underwriting losses for years, driven by a high number of claims in the dominant motor third party liability (MTPL) business, the outlook remains negative.

There are a few bright spots, however, with increasing demand in certain lines of business and a maturing small and medium-sized enterprise (SME) market.

But as with all emerging markets, Turkey isn't for the faint-hearted, or those with short-term horizons.

State of the market
According to data from AM Best, as of the first quarter of 2017 there were 38 non-life companies, 22 life companies and two reinsurers operating in the country.

The three largest direct insurers by premium volume are Allianz, Anadolu and Axa, which collectively have a non-life market share of 38.9 percent.

The market is largely foreign-owned, with 26 of the 38 non-life carriers and 18 of the life carriers owned by foreign (re)insurers.

Of the 10 largest insurers by premium, eight have foreign involvement in their capital structure, and just two are purely owned by Turkish insurers, Anadolu (which is 57 percent owned by the country's main reinsurer Milli Re) and Ziraat. Combined, their market share is 16.4 percent.

Burcu Ayten, manager for local treaty acceptances at Milli Re, comments: "It's quite a competitive market in Turkey and a unique industry compared to other countries. The most important characteristic is that only 12 percent of the market is dedicated to life insurance.

"Of the non-life market, around 54 percent is in motor, which has historically suffered high loss ratios as insurers had difficulty in getting adequate premiums."

The most recent information from the Turkish Treasury's insurance sector report, published in 2015, shows the largest segment by premium is land vehicles liability at 24 percent, followed by land vehicles insurance at 18 percent.

Fire and natural catastrophes rank third with 14 percent of premiums. This includes earthquake cover - supposedly a compulsory cover in Turkey but one which has a surprisingly low level of penetration.

Non-life gross written premiums reached $9.7bn as of 2016, according to data from Fitch Ratings, with insurance penetration estimated at just 1.4 percent in spite of a high number of compulsory insurances in the country.

Data from Lloyd's estimates some 24 different types of compulsory cover, including MTPL, professional indemnity for insurance brokers, medical malpractice for doctors and dentists and earthquake cover for private dwellings.

Despite the compulsory nature of these coverages, some 56 percent of houses and 23 percent of vehicles remain uninsured, according to AM Best.

"Enforceability is not quite there, although it is moving in the right direction," according to Mahesh Mistry, director at the ratings agency.

"There is an encouraging take-up of more products, but people need to be educated on the awareness and benefits of insurance. Wealth is also an issue in some of these countries."

Servet Gürkan, JLT Turkey's chairman and CEO, said in a 2016/2017 market outlook that there are three main reasons for the lack of penetration. First, insurance is not seen as a priority for most people; second, there is limited understanding about the benefits of insurance; and finally, a number of mandatory non-life covers in the case of bank borrowing for property purchases are not renewed once the debt is repaid.

"The low non-life penetration and density in Turkey point to an untapped opportunity for [the] future, as countries with similar socio-economic profile have comparatively higher penetration," he said.

However, there's no escaping the fact that profitability remains a challenge in Turkey.

Profitability challenges
Total net profit for the non-life market in Turkey reached $310.7mn in 2016, according to Fitch, up from a $163mn loss the year before.

The sector posted a combined ratio of 102 percent in 2016, an 11 percentage point improvement on the prior year, although recent interventions from the Turkish government in the MTPL market are likely to make that worse in 2017.

As mentioned above, MTPL loss ratios had been horrific for a number of years, driven in part by lax laws which allowed long, drawn-out litigations.

This was partly mitigated in 2016 through an amendment to the country's highway traffic law, which made it mandatory for claims to be filed with insurers first, instead of filing a suit directly in court. The government also introduced a standardised compensation calculation method to eliminate costs through expert witness damage assessments.

Carriers also began ramping up their premiums in the second half of 2015 in response to the rising claims, which helped to bring combined ratios down.

As Milli Re's Ayten explains: "In 2015, the combined ratio for MTPL was around 165 percent, but by 2016 that had fallen to 112 percent."

Premiums have continued to increase since then as insurers returned to the market. However, this has been stymied in recent months after the Turkish government's decision in April this year to introduce a temporary cap on rate increases.

"This is the hottest subject in the Turkish insurance market. It's been done in the interest of the policyholder, with the view that insurers should be more careful with their underwriting capabilities," says Tarik Serpil, head of corporate risk and broking in Turkey for Willis Towers Watson.

However, as many sources told this publication, rates are still some way off being adequate, meaning underwriters now face losing money in MTPL in the future.

Fitch Ratings agrees with their hypothesis. In a special report released in May this year, Fitch surmised that the government's cap on MTPL rates would result in a reduction of around 30 percent in average MTPL premiums. This would mean a deterioration in the combined ratio for the line to 154 percent from the current 108 percent.

As MTPL accounts for some 43 percent of non-life insurance premiums in the country, this could cause the sector's combined ratio to rise to 116 percent from 102 percent.

Bright spots
Away from MTPL, there are some opportunities in other lines that are witnessing steady growth.

General liability, while still a small part of the market, constituting around 2.7 percent of the non-life segment according to JLT, is growing. Between 2014 and 2015, the line achieved premium growth of 10 percent, the broker says, driven by a 22 percent uplift in medical malpractice and a 16 percent increase in employers' liability.

Given the increasing levels of investment in private healthcare, med-mal looks a "ripe area for growth", Serpil says, although he warns that experts have predicted potential problems in the medium and long term arising from insufficient pricing.

Milli Re's Ayten agrees, saying: "We're hoping insurers will start to focus on liability insurances in order to prevent it from becoming a big headache for themselves in the mid-term. In 2016 there wasn't really a real-term increase in the amount of liability premium being written."

Trade credit has also seen an uptick in interest due to the weakening Turkish economy and the increasing number of insolvencies.

SMEs in particular are vulnerable to the economic and foreign exchange headwinds. According to analysis by Coface, Turkey saw a consistent build-up of delayed payments in 2014 and 2015 - a trend which is widely expected to continue.

The fact that the government has recently approved the use of credit insurance policies as security is also expected to boost the sale of trade credit policies.

Not everyone is convinced, however. "The big three [Coface, Atradius and Euler Hermes] are involved in Turkey," says Serpil. "However, they suffered some major losses last year, therefore we've seen a bit of a slowdown, with premiums shrinking by 20-25 percent."

Somewhat surprisingly, the ongoing political tensions and unrest haven't had any sort of impact on the political risk/political violence market, according to several market sources.

"There has been no meaningful change in either rate or demand. It's a soft market, and while the perception of risk is increasing in this country, that hasn't translated into levels of premium," explains Serpil.

However, AM Best's Mistry believes the market is "pushed" in Turkey, and that there is an opportunity for players to add riders to existing covers, although carriers are probably less likely to cover government buildings as these exposures are deemed to be higher risk.

The outlook for the wider economy in Turkey is also uncertain, with increasing inflationary pressures from a poorly performing currency, political unrest and a struggling emerging market economy all coming to bear.

Interestingly, the phrase, "talking turkey" has changed in meaning over the past few centuries, moving from meaning an agreeable conversation - likely generated from pleasant family conversations around Thanksgiving dinners - to meaning a frank discussion, getting down to serious business.

It seems that the latter application is best suited here for any underwriters considering the merits of Turkish business. Hard questions need to be asked about the immediate future of the market, particularly if the Turkish Treasury's recent actions do result in a worsening of conditions.

This article was published as part of issue Summer 2017

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