MNB: Insurance, Pension and Capital Market Players Remain Stable Amid Risks

Analysis

Gábor Laki, director of the Capital Market and Market Supervision Directorate, speaking at the MNB press conference.

The National Bank of Hungary (MNB) has published its latest report on the prudential, consumer protection and market supervision of the insurance, pension and capital market sectors.

The MNB gave a press conference on June 12 to present its report, which covers the period from January 1-December 31, 2022 and provides an overview of the main trends, risks and challenges facing these sectors.

The press conference was led by GergĹ‘ Szeniczey, executive director of the MNB responsible for prudential, consumer protection and market supervision of capital markets and insurers; Gábor Laki, director of the Capital Market and Market Supervision Directorate; and Koppány Nagy, director of the Insurance and Pension Supervision Directorate. The moderator was István Binder, supervisory spokesperson of the MNB.

According to the report, the premium income of the insurance sector in 2022 grew by 7.4% to HUF 1.428 trillion, reaching HUF 1.546 tln if the earned premiums of branches are included. This growth was mainly due to the dynamic 12.7% increase in non-life premiums and to Casco (compulsory motor liability insurance), and household andbusiness property insurance.

Life insurance premiums, meanwhile, grew by only 1% (mainly due to the decline in single-premium products). Overall, the number of contracts grew by only 1.1%, with life insurance contracting by 1.5%, according to the report.

“The insurance sector showed strong resilience and growth in 2022, despite the pandemic-related challenges. We expect this trend to continue in 2023, as we see increasing demand for health insurance, property insurance and liability insurance products,” said Laki of the Capital Market and Market Supervision Directorate.

“Including branches, the insurance sector closed the year with a premium income of more than HUF 1.5 trillion, and although premium income is growing dynamically, it is not keeping pace with GDP trends, falling short of the vision outlined earlier by the central bank, and penetration is declining,” added Nagy, of the Insurance and Pension Supervision Directorate.

Drought and Taxes

According to the central bank, at the end of 2022, sectoral capital adequacy stood at 172%, more than one and a half times the regulatory level. Profit after tax fell to 43% of the previous year, mainly due to the effects of drought and additional taxes, but most institutions remained profitable.

The return on equity was 9.5%, half of the previous year’s level, but a sign of stability in the sector and just below the target set by the MNB. Risks to the insurers’ business model include inflation, which is already declining this year, asset depreciation and tax changes. The claims ratio for agricultural insurance also points to risks.

The report also highlighted some of the main challenges and risks facing the insurance sector, such as the low interest rate environment, the digital transformation, climate change and cyber threats.

Szeniczey said that the MNB closely monitored these developments and took measures to ensure the stability and sustainability of the sector. For example, he mentioned that the MNB issued a recommendation in June 2022 for insurers to apply a prudent dividend policy in light of the pandemic uncertainties.

“We advised insurers to retain their profits or use them for strengthening their capital buffers rather than distributing them to shareholders,” he said. Szeniczey added that the MNB conducted a comprehensive stress test of insurers in October 2022, which confirmed the sector could withstand severe shocks without breaching the solvency requirements.

“The stress test showed that, even under extreme scenarios, such as a prolonged pandemic, a sharp rise in interest rates or a major natural disaster, none of the insurers would fall below the minimum capital requirement,” the executive director said.

Voluntary Funds Stable

The MNB points out that, despite the risks, voluntary funds also remained stable. As a result of the depreciation of the sector’s portfolio, the balance of individual accounts in voluntary pension funds fell by more than HUF 100 bln last year to HUF 1.598 tln. This was also influenced by member payments being 31.9% higher last year than in 2021, mainly due to lump-sum pension benefits and withdrawals.

The report notes that although the sector ended 2022 with a negative return, the positive trend that started in Q4 last year continued in Q1 2023. In 2022, member contributions credited to the funded reserve increased to HUF 117 bln; however, while the risk of outflows is not expected to decrease in the short term, the rising cost of living may reduce the long-term propensity to save. Although the operating result of voluntary pension funds turned into a loss last year, the sector-level reserves are adequate.

“The pension fund sector performed well in terms of asset growth and returns in 2022, but we also see room for improvement in diversification and risk management. We encourage pension funds to invest more in alternative asset classes, such as real estate, infrastructure or private equity,” Laki told journalists.

Consolidation continued in financial intermediation and insurance intermediaries, with a reduction in the number of natural persons operating in the former market in particular. The number and value of contracts brokered increased compared with a year earlier, the prospectus said.

The balance sheet total of non-bank group financial companies grew by 15% last year, with the corporate sector remaining the primary clientele. The increase in the amount due from customers in 2022 was mainly down to money lending and financial leasing, while work-out activity stagnated.

The receivables portfolio remains highly concentrated, with 15% of institutions holding 86% of total receivables. Despite an increase in equity, the sector’s ability to generate profits declined, partly due to the appearance of the extra profits taxin 2022, the MNB says.

“The capital market sector demonstrated stability and dynamism in 2022, with both investment funds and investment service providers increasing their assets and income. We welcome the growing participation of retail investors in the capital market, but we also urge them to be cautious and well-informed about the risks and opportunities,” concluded Laki.

This article was first published in the Budapest Business Journal print issue of June 16, 2023.

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