photo: Martin Janoško
Over the last 10 years, Slovaks have begun to develop new attitudes towards insurance and have become aware of taking responsibilty for insuring themselves; something that helps insurance companies grow.
The Slovak Spectator spoke to Radúz Motáň of auditing firm Ernst & Young May 5 about the current situation, competition on and future of the domestic insurance market.
The Slovak Spectator (TSS): What are the differences between people's feelings towards insurance these days and under Communism?
Radúz Motáň (RM): During the Communist regime, people didn't tend to buy insurance because they knew that the state would take care of them. After this system collapsed, people started to realise that there were some property risks. But still, they cared about who would cover the cost of repairing their crashed car rather than what would happen in 30 years or so when they retired.
Now, with the arrival of foreign insurance companies that are trying to make people think about their futures, people realise that their pensions are not growing as much as they would like them to, and that for this reason they themselves have to take care of the growth of their pensions. So, since 1989, there has been a shift in Slovaks' thinking towards the need for further, especially personal insurance [additional health, pension and other types of insurance selected and paid for by the person insured].
TSS: What kind of competition exists between domestic and foreign insurance companies in Slovakia?
RM: More than half of the insurance market is occupied by foreign insurance companies. Their big advantage is that they have some new products which Slovak insurance companies don't offer. These products match people's needs and are equal to products provided by insurance companies abroad; they also have had very good marketing support.
Slovak insurance companies have already understood that they must come up with similar products to be as successful as their foreign competitors. But the name of a strong and well-known foreign insurance company adds weight to the sales of their products.
However, foreign insurance companies know that in the first few years in Slovakia they won't be successful. It takes a certain amount of time to build a position on the market, and that's why foreign insurance companies usually have long-term goals. In comparison with Slovak insurance companies, their investment in Slovakia is not their only investment in the world.
In order to build this strong position on the market, foreign companies invest a lot of money into massive marketing campaigns. Slovak insurance companies cannot do this. They have to make a profit immediately, otherwise they don't survive.
TSS: What are these new products that you said were being offered by foreign insurance companies and rival traditional products offered by domestic insurance firms?
RM: One of them is capital insurance - an insurance where the risk of the insurance is borne by the insured. It is a favourite type of insurance abroad.
In traditional insurance, an insurance company guarantees a certain interest rate for the person insured. This money he or she gets, for example, in 30 years.
With capital insurance it is vice versa. An insured person puts in some money and an insurance company valorises it. It does not guarantee anything, but if it makes a profit most of that goes to the insured party. The insurance company takes only a small portion of this profit to cover the costs of their investment. Demand for this insurance has been growing and insurance companies offering this product get more clients.
There is a big potential for growth here because foreign insurance companies offering this product can invest money on foreign markets and make a profit for those who want to risk and invest.
TSS: Don't you have the feeling that Slovaks trust domestic companies such as Slovenská poisťovňa rather than big foreign insurance companies that do not have such a long tradition in Slovakia?
RM: We can divide people in this country into two categories - people in Bratislava and other big towns and people in small towns and the countryside. People in towns like Bratislava tend to go for foreign insurance companies because they see that they offer newer products with higher quality. However, not many foreign insurance companies have offices in the countryside, where Slovenská poisťovňa has been active for ages.
Many times, people tend to compare prices of foreign and domestic products. In financial services like insuring, however, it is difficult to compare these prices. Insurance is almost never identical and one cannot really compare whether insurance bought from a foreign company is more expensive than that bought from a domestic one. Insurance is variable depending on age, whether a person smokes or not and so many things that it's difficult to decide based on the price.
TSS: What's the future of Slovenská poisťovňa?
RM: Slovenská poisťovňa still has the strongest position on the market in both personal insurance and property insurance.
However, its market is decreasing and will continue decreasing. All it can influence in future is the speed of this decrease. Despite the fact that SP has already lost its dominance on the market it will always be strong, not just because of obligatory car insurance but also because many traditional insurance categories have been a stronghold of SP for a long time. Many insurance policies were bought several years ago and people constantly renew them.
Another thing is that SP has been used for political purposes many times. When basic capital was increased at IRB [Investičná a rozvojová banka] it was paid by SP [in 1999]. This increased SP's cost by several billion crowns and reflected on its profit - key for people when they choose their insurance company.
SP's future depends on whether it will be used for political purposes to rescue some companies and banks or whether it will be effectively privatised or managed, bearing in mind its commercial, not political, goals.
TSS: Do you think that the penetration of foreign companies here is sufficient?
RM: As regards personal insurance I think it's enough. In the past, Slovak insurance companies competed only with SP, but now they have to compete with effective products provided by foreign insurance companies.
As regards competition in the area of property insurance, foreign insurance companies create healthy competition for domestic firms.
TSS: What type of insurance earns well for insurance companies?
RM: Many people now buy personal insurance because they realise the need to save. That's why we can see a big boom in foreign insurance companies here. In the past, personal insurance penetration was low. But when foreign companies came and filled in a gap with suitable personal insurance that many people were looking for, they started to make a profit.
TSS: How do Slovak people approach insurance in comparison with other countries?
RM: The share of insurance on GDP shows that Slovakia is followed by South American and Asian countries and of course preceded by western countries.
In western countries people know that they are the ones who have to take care of themselves, whether it's health, savings and pensions.
In the US, for example, people send each other to court so often that they need law protection insurance. Our pensions are very low. If people overseas didn't have extra pension insurance they wouldn't have as high a pension as they are used to. So, it is mainly responsibility for oneself, one's actions and one's own property that is the difference between Slovaks and citizens of foreign countries when it comes to insurance.
TSS: Is there anything that can considerably improve the situation on the Slovak insurance market?
RM: The future is in state hands. In Slovakia the state still guarantees pensions and no government has yet created a legislative framework forcing people to save. In western countries, the state takes some portion of one's salary and puts it into social funds, but people can at least say what they want it to be invested in.
The less a government takes care of the future of its citizens and the more it supports them when they take care of themselves, with tax incentives or so on, the more independent people will be in investing and the more developed the insurance sector will be.
TSS: How important for the insurance market is legislation supporting development of the capital market?
RM: It is very important, because it dictates how insurance companies can invest. Insurance companies have reserves and they have to increase the value of these reserves. Financial sources in personal insurance are long-term. These sources are the basis of the capital market, which offers several ways of valorisation.
The capital market is where companies looking for long-term capital and insurance companies trying to invest this capital meet.
TSS: What does the capital market have to do for insurance companies to get long term money?
RM: The question is who should be first. Maybe insurance companies should come first and offer their sources. Then companies would compete in offering better economic packages to attract insurance companies.
TSS: When do you think this might happen?
RM: Concerning a drop in interest rates, conditions are very good. Nowadays, insurance companies cannot make high profits because they buy bonds from the government and invest them into banks. One can get 8% interest for five year bonds. Two years ago it was more than 20%.
Now, with a drop in interest rates they can earn only a small amount of money investing into state bonds and are forced to invest their money somewhere else. But they have to think and analyse before they choose companies they invest into, not just sit back and rely on high interest rates. At the end of the day, this will be good because it will force insurance companies - one of the only sources of long-term money in Slovakia - to invest into the suffering business sector and help it revive.
TSS: What legislation concerning the capital market has to be approved to realise this?
RM: Insurance legislation allows an insurance company to invest on the capital market. The Law on Collective Investment exists as well and there is also a Law on the Stock Exchange. The Bankruptcy Law has to be approved to clean up the business sector.
I think that reality has always been worse than the legislative framework, which might not be perfect, but offers more than is being used.