Cleared for take-off: Strong growth potential continues to attract foreign providers

As a relatively small market in a rapidly growing economy, the insurance sector in Turkey has significant room for expansion. Indeed, the large number of foreign players that have entered the market over the past decade signals opportunities for growth. While low pricing has been a challenge – particularly in the non-life segment – underwriting practices are improving and core profits are expected to rise. Distribution channels are also shifting, as banks look to expand from their traditional stronghold of life cover into non-life. While life insurance is not expected to grow significantly, private pensions – which are typically offered by the same firms that sell life policies – have expanded substantially in their nine years of existence and are likely to continue in this direction.

MARKET SIZE & SHARES: According to the Association of Insurance and Reinsurance Companies of Turkey (TSRŞB), gross written premiums in 2011 amounted to TL17.2bn (€7.3bn), compared to TL14.1bn (€6bn) in 2010. This is equivalent to growth in nominal terms of 21.5%, or 10% in real terms.

The association has calculated premium growth in dollar terms between 2006 and 2010, showing an increase every year except 2009. That dip is not surprising, given that insurance premiums in Turkey typically correlate with GDP, which fell by 4.8% in 2009.

Despite the upward trend in premiums, Turkey remains relatively under-penetrated, with premiums equivalent to just 1.3% of GDP in 2010, compared to 8.7% and 3% in developed and developing countries, respectively, according to Swiss Re. “Awareness can only be created through a consolidated effort between the industry, the association and the regulator. If they work well together, with campaigns and educational programmes, awareness of insurance will rise,” Alexander Ankel, the CEO of Allianz Turkey, told OBG.

The Turkish market is split into three categories: non-life, life and pension. While insurers are allowed to offer both life and pension products, they are required to establish a separate entity for selling non-life policies. As of November 2011, there were 64 licensed insurers: 39 non-life, 11 life-only and 14 combined life and pension. Life policies accounted for 15.6% of premiums in 2011. In non-life the largest product lines were motor (compulsory third-party liability and motor own-damage combined accounted for 46.7% of non-life premiums), followed by fire (15.9%), health (13.8%) and other property damage (10.2%).

The largest non-life providers by premiums as of December 2011 were Axa Sigorta (13.8%), Anadolu Sigorta (13.3%), Aksigorta (7.9%), Allianz Sigorta (7.8%) and Yapı Kredi Sigorta (6.7%). On the life side, the major underwriters were Ziraat Hayat ve Emeklilik (30%), Anadolu Hayat ve Emeklilik (12.9%), Garanti Emeklilik (9%), Halk Hayat ve Emeklilik (6.8%) and Yapı Kredi Emeklilik (6.4%). Most of the larger domestic insurers are part of major financial services holding companies that are typically anchored by a bank. Indeed, the six largest lenders in Turkey (Ziraat, ş /Anadolu, Garanti, Akbank, Yapı Kredi and Halkbank) are well-represented among these providers.

FOREIGN ENTRY: Over the past decade – and particularly since 2007 – foreign players have made major inroads, especially in non-life. Analysis by the sector’s regulator, the Insurance Supervision Board of the Treasury, shows that the number of insurance firms with foreign partners increased from 14 in 2002 to 44 in 2010, the last year covered by the study. Similarly, the number with foreign partners holding more than 50% of the company grew from eight to 37 over the same period. This increase in foreign penetration can also be seen in the presence of major global players like Axa, Allianz, Groupama, Ergo, Eureko and Mapfre among the top 10 non-life insurers. These companies combined accounted for 41% of premiums in this segment in 2011. Moreover, this figure does not take into consideration sizeable foreign-ownership stakes in both Güne ş Sigorta and Aksigorta.

GAINING A FOOTHOLD: For foreign insurers looking to enter the Turkish market, perhaps the easiest route is to acquire an existing local company. Axa, the largest non-life insurer in Turkey, initially came to the country in 1999 through a joint venture with local partner OYAK, the army pension fund, and it later bought out OYAK’s 50% share in the business for $525m. Groupama, the seventh-largest player in the non-life segment, first entered the market in 1991 by buying a 30% share in Güne ş Sigorta, which at present is the sixth-largest insurer in non-life. Groupama then acquired Ba ş ak Sigorta in 2006, followed by the purchase of Güven Sigorta in 2008, with these two entities merged under the Groupama brand and management in 2010. Similarly, Dutch insurer Eureko, the ninth-largest insurance company in non-life, bought 80% of Garanti’s non-life business in 2007, purchasing the remaining shares in 2011. On the life and pension side, AvivaSA, a top 10 provider of life insurance and the second-largest player in the pension segment, was formed in 2007 as a merger between Aviva Hayat ve Emeklilik, part of UK-based insurer Aviva International, and AK Emeklilik, part of Aksigorta under Sabancı Holding.

RECENT ENTRIES: More recently, in February 2011 Belgium-based insurer Ageas disclosed that it would buy a 31% stake in Aksigorta, acquiring half of Sabancı’s stake for $220m, a deal that was completed in July 2011. Ageas paid a 53% premium over the price of Aksigorta’s publicly traded shares, but analysts noted that the insurer is a major player in a growing market and that its advantages include a distribution deal with Akbank, the fourth-largest bank in Turkey. Sabancı and Ageas announced in November 2011 that the two partners would acquire additional publicly traded shares over a period of 12 months. While the exact number of shares was not revealed, the parties did say that they would each acquire an equivalent amount and the combined total would not exceed 10% of the total number of shares outstanding. With Aksigorta having lined up a foreign partner, that leaves Yapı Kredi and Anadolu as the two remaining domestically held companies in the top five non-life insurers. While ş bank is unlikely to sell Anadolu, Yapı Kredi could be a target for acquisition. In January 2012, local press reported that Zurich Insurance had offered to buy Yapı Kredi, although the insurer’s parent company denied that there was any sale process under way.

Other major acquisitions in 2011 included MetLife’s purchase of Deniz Emeklilik, the life insurance and pension subsidiary of DenizBank, from Dexia, the bank’s owner, for €162m. MetLife was already present in the Turkish market but was a relatively small player, accounting for 2% of non-life and less than 1% of life premiums in 2011. As part of the deal the parties signed a 15-year exclusive agreement for the distribution of Metlife’s life, pension, personal accident and unemployment insurance products through DenizBank. Also in 2011, DenizBank signed an exclusive agreement with AXA to distribute and sell the latter’s non-life products through the bank’s branches.

Acquisition is not the only way to enter the market, with several companies acquiring licences to operate in Turkey in recent years. US-based insurer Cigna opened a local office in 2011, announcing that it would offer life, supplemental health and accident insurance through partnerships and via direct channels such as the internet. This followed a 2010 licence granted to Euler Hermes Sigorta, which provides credit insurance. In 2009, two insurance firms, Neova (owned by Kuwait Finance House) and London-based ACE European Group were licensed by the authorities. Neova announced in 2011 that it plans to offer takaful, or sharia-compliant insurance, in the future.

DISTRIBUTION: There are four distribution channels in the Turkish insurance sector: agents, banks, brokers and the companies themselves. For life policies, banks are by far the largest distributor, accounting for 75.3% of premiums in 2011, followed by agents (13.7%), companies (10.5%) and brokers (under 1%). Banks are an important source of business because they typically sell credit life insurance policies to their borrowers. According to Burak Sayın, the group manager of research and development at Yapı Kredi Emeklilik, credit life accounts for 64% of life premiums, drives the market and is the key to future growth in the segment. Moreover, even if they are not the direct source of business, the banks can share leads with their partner insurance companies if the two entities are part of a larger financial services holding company.

AGENTS: The picture in the non-life segment is different, with agents as the largest distributors, accounting for 67.4% of premiums in 2011, followed by banks (13.6%), brokers (11.4%) and companies (7.7%). There are currently nearly 17,000 agents in Turkey, and the vast majority of them deal with multiple insurers. Moreover, customers in this segment typically have a close relationship with their agent rather than the ultimate insurer. Agents often “own the clients”, and if the agent is unhappy with his commission from the insurance company, he can move the business.

Agents hold a strong position in non-life but this may be changing, with banks and brokers likely to take share from agents in the coming years, according to Fahri Altıngöz, the assistant general manager at Aksigorta. He told OBG that banks are investing heavily in insurance sales, and that their share of non-life premiums should continue to grow. Brokers are also increasing their presence. “In the past there were perhaps 15 brokers but now there are almost 100,” said Altıngöz, adding that he expects brokers’ share of the market to grow to 15-20%. While many believe agents will ultimately lose out to the banks, the former are not sitting idle in the meantime. Agent representatives have “put pressure on the Treasury to limit the banking sector’s activity in the insurance market”, according to a January 2011 report in local newspaper Hurriyet Daily News. The TSRŞB and the Turkish Banks Association have objected to changes proposed by the agents, with the insurers arguing that banks have been instrumental in expanding the sector.

GROWTH POTENTIAL: According to Mehmet Kalkavan, the deputy secretary-general of the TSRŞB, two major areas of growth in the non-life segment are health and agriculture insurance. Only 2.3m people in Turkey currently have health cover – around 3% of the population – and Kalkavan expects this to increase to 8m. Legal changes are also in the works that could create opportunities for firms to sell complementary health insurance products that would supplement basic coverage provided by the government.

While agricultural insurance has existed in Turkey since the 1950s, the system was overhauled in 2005, resulting in a new programme that has been in place since 2006. The primary features of this system are an agricultural insurance pool, cooperation between the public and private sectors, 50% government subsidies for premiums and a management entity for the pool that is joint-owned by the insurance companies offering agricultural coverage. At present only 3-4% of farmers participate in this voluntary programme, but efforts to educate farmers about the benefits of insurance could increase penetration in this market.

PRIVATISATION: The privatisation of state-owned enterprises may also present opportunities for the country’s insurers, Tarik Serpil, a senior vice-president in the risk management practice of Marsh, one of Turkey’s largest brokers, told OBG. Since the late 1990s the government has privatised some of the country’s existing power plants and granted licences to the private sector for new power plants.

While the government does not buy insurance as a general rule, private sector players are often required to do so by their creditors. Naturally this has had a significant impact on the insurance industry. The same is true in the transport sector, with new highways, bridges and tunnels being built and managed by the private sector. This will initially result in new underwriting opportunities during the construction phase, followed by property damage, fire and liability coverage once operations begin.

PROFITABILITY: Until 2008 a high-interest-rate environment reduced the need for insurers to focus on proper risk assessment, with yields on investments more than compensating for underwriting losses. In general, Turkey’s insurance companies prefer to hold their assets in government bonds and treasury bills, which have historically provided high returns and are essentially zero-risk. However, in more recent years, as interest rates have come down, losses from core operations are starting to take a toll on the sector.

Pricing has yet to fully adjust, with negative technical profit ratios in major product lines such as motor third-party liability (-10%) and health (-4%) for the first half of 2011, according to the TSRŞB. Kalkavan told OBG there is intense competition in these areas, with insurers lowering premiums to maintain their market share because they believe pricing will go up in future. This may already be starting to happen, with motor third-party liability prices starting to rise industry-wide since the third quarter of 2011. Health insurance prices have also started to harden, according to Serpil, who expects that underwriting practices will begin to improve across the non-life segment in 2012 and 2013. Moreover, product differentiation is possible in health cover, for example based on services, unlike in other more commoditised segments like motor third-party liability insurance.

REGULATORY CHANGES: In 2007 the legal structure for the insurance sector was entirely overhauled, resulting in a stronger industry and paving the way for increased entry by foreign insurers. The new law made for some significant changes in the operations of insurance companies, particularly with respect to the calculation of technical reserves and capital requirements. While no major regulatory changes have been implemented since, the sector has been working towards the implementation of the Solvency II capital adequacy regime as part of Turkey’s EU harmonisation process. The current solvency rules resemble those of the Solvency I framework that is in place in the EU, although the Treasury has added some risk-based capital adequacy requirements that are similar to those found in Solvency II.

As part of its efforts to transition to Solvency II, the Treasury carried out the Quantitative Impact Study 4, a Solvency II test scheme that had previously been used by the European Commission, with 10 insurers participating. The results, announced in September 2010, indicated that non-life insurers would need to increase capital by about 10% to meet the requirements of Solvency II, but it was difficult to draw any conclusions regarding the potential impact on life insurers. Subsequently the Treasury mandated that all insurance firms carry out the Quantitative Impact Study 5, a process that began in December 2010, but results have not been made public. The Treasury has not set a deadline for the implementation of Solvency II, but it is expected to occur in 2014 or 2015.

PENSIONS: While private pensions are a relatively new phenomenon in Turkey – having only been introduced in 2003 – they have grown substantially since then. Total assets under management by pension companies amounted to TL14.3bn (€6.1bn) as of the end of 2011. The largest players in the pension segment at year-end 2011 were Anadolu Hayat ve Emeklilik (21%), AvivaSA (21%), Garanti Emeklilik (16%), Yapı Kredi Hayat ve Emeklilik (16%) and Vakıf Hayat ve Emeklilik (6%), by assets under management.

The market for pension funds is expected to continue to grow, but there are two key challenges. First, there is the issue of persistence, with customers tending to drop out, despite the fact that they are penalised for doing so (see analysis). Second, people have hestitated to enrol in the programme, despite such financial advantages such as tax breaks. However, in April 2011 the government announced changes that will make the benefits of paying in more obvious to users, including an automatic percentage contribution by the state to pension account holders, which should make the programme more attractive to consumers.

OUTLOOK: As income levels in Turkey continue to rise, it is expected that insurance penetration will increase, as people have more disposable income and property to protect. Limited insurance activity to date means that there is plenty of room for expansion, as would be expected given the large number of foreign insurers that have entered in recent years.

According to Altıngöz, the industry is expecting premiums to rise at a compound annual growth rate of 17% between 2012 and 2023. This bodes well for the sector and for the companies that choose to invest in this area of the Turkish economy in the future.