Insurance business still insecure
Natural disaster claims after the record flooding on the river Danube are expected to give reinsurers the leverage to push through price increases next year.
The day I interviewed Yann Ménétrier, CEO of Groupama Garancia Biztosító, water levels on the Danube peaked in Budapest at 8.91 meters, beating the previous record of 8.6 meters in 2006. As if that were not enough, a violent thunderstorm suddenly broke. Lightning started flashing and thunder crashing, accompanied by heavy rain. A perfect setting to discuss the impact of natural disasters on the insurance market, then.
Q: How do the record floods effects Groupama?
A: It is too early to tell. It will of course have a huge impact on the non-life business, where Groupama is the third largest insurer in household insurance and the first in agricultural business. As the flood covers a big area we are still waiting for the claim notifications to arrive. We are currently estimating flooding impact using our nat-cat (natural catastrophes) model.
After such disasters, the cost of reinsurance increases. Considering this year’s events, we will probably increase tariffs in 2014. The insurers will start making their calculations in mid-September, at the earliest, based on the claims they receive. The tariff increases are expected to be determined about a month later. After the floods in 2010, reinsurance tariffs rose by 15-20%.
Q: Are you satisfied with Groupama’s performance last year?
A: Last year was one of the worst years for the insurance market, marked by a record decline of 6.5% globally. In the Hungarian market Groupama Garancia maintained its third place position with an 11% market share. In the life and non-life segments, the market share was 10.5% and 11.6%, respectively. Due to the introduction of the special bank tax, which was replaced by the general insurance tax in 2013, we launched a cost cutting program two years ago. As a result, administrative costs dropped by more than 5%. With better-than-expected financial income, net profit reached more than HUF 4.5 billion, representing a ROE of more than 18%. This compares to a 14% average ROE for the entire insurance market. Our tax burden reached HUF 3.5 bln, the same as the year before, as it is based on 2009 income every year with only some slight fine-tuning.
Q: What were the main developments this year thus far?
A: The main problem in Hungary’s business and economic environment is the uncertainty and the huge number of legal changes. In 2012, Hungary returned to recession for the second time in three years, which is still hurting the insurance business. At the same time, we see the government introducing lots of new tax measures in order to exit the excessive deficit procedure to have access to EU financing. Inflation fell under the 3% target for the first time in years in February. However, the public debt is still too high and the currency is volatile and we are also worried about the decline in industrial output and investments. If the country is unable to produce food, cars and flats we will have nothing to insure.
This trend is confirmed by the insurance market’s performance in the first quarter of 2013, as the non-life market decreased by a huge 3.8%. I see many insurers passing part of the new general insurance tax on to their customers. Without the new tax, non-life would have decreased probably by around 5-6%. This does not come as a surprise, as the country is not creating new value, the number of new registered cars as well as new apartment authorizations is decreasing.
In this market, Groupama’s non-life revenues dropped by only 1.5 %. On the upside, in terms of the number of contracts, the MTPL (Mandatory Motor Third Party Liability) portfolio increased by 5-6% in the first quarter, as now we sell lower-premium products to new, less risky customer segments. Thus, although premium revenues are lower, we expect fewer claims.
Q: What about the life segment?
A: The life segment in general performed better in the first three months. The sector’s premium revenues rose by 6.6%. Due to the FX exchange-rate limit repayment program, household debt decreased and the financial situation of households is slowly improving. But because of the economic uncertainties, households still prefer to save rather than spend.
Groupama’s premium revenues in the life segment rose by 11%, at a rate almost twice as high as that of the market. Because of the early repayment scheme, the base was very low and, as the central bank’s base rate cuts made deposits less attractive, customers invested more in life insurance products.
Q: The latest report by the Hungarian Insurers’ Association (MABISz) shows that the Hungarian Post Life Zrt surpassed Groupama as the third biggest player in the life segment. Is this something that worries you?
A: That may be due to seasonal effects. We have to take into account several things, such as for instance campaign timing. Therefore, I believe that the yearly market share will be a more reliable measure.
It is true that Magyar Posta could significantly increase its market share in the single-premium segment by offering fixed yields at a very short duration. We are not willing to provide such yields because we think it is too risky and unprofitable for such a period. In regular premiums, however, our performance was much better than that of the market.
In unit-linked single premiums we are first in terms of technical provisions, which is at least as important as gross return premiums for me. If the provision change is positive at the end of the year, it means that you are making customers more loyal and you are developing the business. If the provision is decreasing, you have to start worrying and do something about it because it indicates that your customers are investing their money somewhere else.
Q: Because of financial difficulties, the Groupama Group sold its Spanish and UK units last year. What’s next? Hungary maybe?
A: The group’s financial stability is now restored; its solvency ratio reached 179% at the end of last year thanks to a large-scale restructuring program including layoffs and subsidiary disposals. There are no plans to sell the Hungarian unit, as it is a relatively recent investment made in 2008. In addition, it is a profit-making business with a stable market share with a strategic partnership with the number one retail bank in Hungary.
Yann Ménétrier, a qualified agronomist engineer, joined Groupama in 1988 as deputy CEO of Groupama Toulouse. In 2006, he was appointed director of Groupama’s non-life business, after leading the group’s bank, Groupama Banque, for three years. Ménétrier became the CEO of the Hungarian subsidiary in July 2008, as the company needed an experienced leader to manage the merger of Groupama Biztosító and OTP Garancia.
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