MTPL liberalisation

Boštjan Vovk, Deputy Director and Head of Department of

Supervision

Insurance Supervision Agency

MTPL MARKETS AND THE REGION

Introduction

Mandatory MTPL basics

First introduced in

1918 in Denmark

Matter of Public

interest

Highly regulated

INSURANCE COVERAGE

Green card system

Protection of the victims

Experience in the Region

AUSTRIA

•deregulation in 1980s

SLOVENIA

•deregulation in 1997

CROATIA

•deregulation in 2013

Other markets are regulated

• (ATM)

The Region

Diversity of Situations (2015)

Insurance Penetration (P&C)

• from less than 100 EUR to 700 EUR

Insurance Density

• from less than 1,5% to 3,5%

Shares of MTPL in P&C GWP

• from 15% to more than 60%

MTPL combined ratios (S&P 2016)

• from 85% to more than 130%

MTPL Market in Moldova

• about 50%

• about 73%

• just short of 1%

• less than 20 EUR

Insurance Penetration

(P&C)

Insurance Density

Shares of MTPL in

P&C GWP

MTPL loss ratio in

2016

THE CHALLENGE

MTPL Insurance Market Liberalisation:

• Why,

• What,

• When and

• How

…TO REGULATE or

not to REGULATE…

The contents of the insurance agreement are regulated

Premiums may or may not be regulated

EU position: competition

• (i.e. deregulation of MTPL premiums)

Case for Regulation

This line of business is in

public interest

All the vehicles must

be insured

If coverage is regulated, premium

should also be regulated

Political decision

What is Regulation of

MTPL Market?

SAME PRODUCT?

(price, conditions, benefits,…)

CONTROL OVER PRICE?

CONTROL OVER CLAIMS

PAYMENT?

LEVEL PLAYGROUND!

adequacy of technical

provisions and assets covering

technical provisions

Competetition

Deregulation works only if it is replaced by competition.

Questions:

What is a competitive advantage in the MTPL market?

Does competitive market need regulation?

What kind of regulation?

Sustainability

Regulator must ensure that markets operate on sustainable levels. How?

No single answer, but the toolkit is proposed:

• that can point to problems;

• that can help structure the debate;

• that can lead to solution.

The Toolkit

In development as joint IAIS/IAA

project

Already used in the supervisory

capacity building programme

sponsored by ADB

Applied on MTPL liberalisation

example

THE ANALYSIS

MTPL Insurance Market Liberalisation:

• Prerequisites,

• Obstacles and

• Pitfalls

Case of too LOW premiums (1)

REGULATED PREMIUM:

•Extremely bad result

•MTPL premium as a macro economical tool

•Cherry picking by new entrants

•Poor technical provisions

Case of too LOW premiums (2)

• Agreement to make business sustainable

• Gaining actuarial expertise

• Role of the supervisor

TRANSITION:

• Good technical result

• Healthy competition based on segmentation

• Good level of technical provisions

LIBERALISATION:

Typical pre-liberalisation

State of Insurance Market

Low insurance penetration and density

Inadequate pricing/reserving expertise

•On industry level

•At supervisory authority level

Regulated commission levels

Motor insurance accounts for the

significant share of insurance market

... and contributes significant share of

technical result

Prerequisites for the Functioning of Insurance

Market

Adequate level of expertise on both levels

• Industry

• Supervisory authority

Transparent “technical

premium” levels

Adequate data acqusition & processing

systems in place

Adequate level of reserving

Solid solvency position of most participating insurance companies

• ... if properly reserved

Obstacles

• Actuarial

• Supervisory/regulatoryLack of expertise

Lack of proper IT support

• High concentration

• Generally undeveloped market (share of motor too high)Market ill structured

Solvency levels low/financially unsound qualified shareholders

Pitfalls

Race for market share/liquidity

at any cost

Convergence towards highly concentrated

market

Reduced claims settlement standards

Major solvency problems

Decreased reputation of

insurance sector

Stagnating development of

insurance sector

THE LIBERALISATION PROCESS

MTPL Insurance Market Liberalisation:

• Apply the toolkit

• Locate the problems

• Propose the solutions

Analyse the situation

Prudential actuarial risk assessment

Actuarial capability assessment

Business Risk assessment

Supervisory Risk assessment

Product Risk assessment

Provider Risk assessment

Supervisor capability assessment

Consumer capability assessment

Marketplace Risk assessment

The building block

Apply the Tool

Prudential actuarial risk assessment

Actuarial capability assessment

Business Risk assessment

Supervisory Risk assessment

Product Risk assessment

Provider Risk assessment

Supervisor capability assessment

Consumer capability assessment

Marketplace Risk assessment

Input to Overall assessment

Risk Appetite

The Process (1)

Chose appropriate risk heat map(s)

Set a risk appetite

Apply the process and assess the components of

prudential risk to generate a

summary risk assessment

Apply judgment to asses if the

process outcome is adequate and

adjust it if appropriate

The Process (2)

Compare risk assessment with risk

appetite

Consider recommendations for adjustments to

reduce the prudential risk

assessment to within the risk appetite

Apply judgment to asses if the process

outcome is adequate and adjust it if

appropriate

Provide a recommendation

and proposed adjustments with

supporting reasons

Steps to take (in this order)

Build-up (outsource/leverage) expertise

Improve reserving standardsRemove commissioning

regulation

Introduce transparency/Improve

reporting

Audit data acqusition & processing

Check/test

•actual profitability of MTPL

•solvency positions

•market structure (concentration, share of motor)

•financial strength of qualified shareholders

Liberalise MTPL at increased reporting depth/frequency

Normalize reporting frequency

Thank you!