Can Akın Çağlar, President of the Insurance Association of Turkey: “As in the rest of the world, climate change has increased risks and losses in our country. In the first half of 2017, we have processed 50,800 claims files and made 71.7 million TL payment per day.”

How does TSB evaluate the performance of Turkish insurance market for the first 3 quarters of 2017?
When we analyze the growth rates by the end of Quarter 3 of 2017, we see that the growth of non-life segment was impacted by the ‘price cap’ limit on MTPL premiums. Nevertheless, a significant growth was achieved in the life insurance branch. As a matter of fact, non-life premiums grew by 10 percent during the 9-month period of 2017 compared to the same period of 2016; whereas life insurance premiums grew by 49 percent. Overall premium growth of the market reached 15 percent, with a total premium volume of 32.2 billion TL. As a result of declining premiums following the ‘price cap’ limit on MTPL premiums which came into force as of 12 April 2017, this line has shrunk by 4 percent. During the first half of the year, asset size of our market increased by 24 percent and reached 138 billion TL.
49 percent growth in life insurance premiums is another considerable development for this term. We should underline that premium volume increased significantly in parallel with the restructuration of the duration of loans, as the life insurance line as it is mainly dominated by products related to personal loans.

In Individual Pension System (BES), total fund size of participants grew by 25 percent over the same period of previous year; reaching 64.6 billion TL. Including the government contribution, total size of the funds in the system reached to 74.1 billion TL. Auto-Enrollment System, which was introduced in the beginning of this year, brought 7.6 million employees and 1.4 billion TL fund-size in the system as of October 18.

We should emphasize that introduction of the Auto-Enrollment System as of January 2017 was one of the most important developments of this year. Thanks to this system, nearly 14 million employees younger than 45years old began to join in the private pension system. We regard this system as a significant first step towards the establishment of occupational pension funds in Turkey which is caharacterised as the second pillar in pension systems.
On the other hand, we also witnessed important growth in health insurance in recent years. Especially a growth of 177 percent in premiums written by complementary health insurance products over the same period of last year, resulted in 18.1 percent overall increase for the health insurance line. We expect this performance to continue for the complementary health insurance products for the coming years.

Can you inform us about the technical profitability of the insurance market? What are your profitability expectations for the end of 2017?
We see that so far in 2017, the market achieved a technical profit of 2 billion TL and a financial profit of 338 million TL, according to consolidated results. As for the breakdown of the profits achieved by lines of businesses, it is reported that technical profit reached 1.3 billion TL in non-life insurance business, 606 million TL in life assurances, and 110 million TL in private pensions. Net profit after tax amounts to 1.9 billion TL. On the other hand, we estimate that earthquake and extreme rains during July will impose a negative impact on the profitability of fire and land vehicles lines; and tariff and ‘price cap’ limits introduced for MTPL premiums in April will have a negative impact on the year-end profitability of companies operating in the non-life segment.

Initiation of Auto-Enrollment System made 2017 a very important year for the Individual Pension System. What are your thoughts on the size the system has reached so far and the recent results in Auto-Enrollment?
Auto-enrollment in Individual Pension System has been a reformative development for our system and one of the most important projects of our market in the recent years. After its initiation on 1 January 2017, Auto-Enrollment brought 7.6 million employees in the system as of October, and 3.5 million of them decided to stay in the system. Total funds in Auto-Enrollment has reached 1.4 billion TL. This means that a huge mass of employees joined in the system and a major amount of funds was accumulated in a very short period of time. We believe that this new and young system will improve further over time. If we look into the similar systems around the world, we see that auto-enrollment funds in occupational individual pension systems have become more popular in recent years and that they have provided long-term resources for the economy with the extra support of employer’s contribution. The fact that rate of exits from the system has reached 55 percent until the end of October, which made an overwhelming impression in public, indicates that the system requires a certain level of revisions. Therefore, our government has already prioritized the suggestions for revision in Auto-Enrollment among its agenda items. We believe that with those revisions, a higher number of employees will decide to stay in the system.

In addition, voluntary BES participation (or third-phase pension system as we call it) has reached 6.9 million people and 74.1 billion TL fund size (including state subsidy funds, 9.5 billion TL) as of October 20. Thanks to auto-enrollment, a great amount of people were introduced to BES. Undoubtedly, this is a significant and long-term gain towards instilling awareness of saving in individuals.

What does TSB think about the withdrawal rates in Auto-Enrollment? Are you conducting any studies to take precautions?
There are 3.5 million employees in the Auto-Enrollment system. Retention rate is around 45 percent as of October 2017. Gaining such a big number of participants in such a short period is a very significant development for the system. Considering that 6.9 million participants joined the system in 14 years, Auto-Enrollment’s performance of gaining 3.5 million participants in only 10 months is a major success. The government will be working towards increasing this number even higher. We believe that employer’s contribution is essential to decrease the withdrawal rates, and more importantly, to ensure the continuity of participants who decide to stay in the system. We think that the initiation of employer’s contribution will provide the necessary encouragement to accelerate savings.
Individual pension system is an important tool to increase the awareness of savings and retain the level of wealth during retirement, especially when we consider that our savings gap grows further with each passing day and retirement pensions do not suffice to protect people’s standards of living. It is also of vital important to provide long-term sources for the national economy.

The Association worked in close cooperation and act in collobaration with the regulatory authorities before the initiation of the Auto Enrollment. We examined the international examples, developed model alternatives that can be be implemented in our country and presente them to the authority. The most important element of occupational auto-enrollment system is the employer’s contribution. In our alternatives, we had suggested to initiate the system with employer’s contribution with a method that would not place extra burdens on employers. We still suggest the same thing. We believe in the importance of establishing a sustainable system with a model that will not increase the burdens of employers. On the other hand, our researches reveal that there is a serious lack of information and disinformation about the system. Auto-Enrollment system was designed and introduced in a very short period of time. For this reason, it could not be promoted sufficiently. As the Association, we are working and cooperating closely with all stakeholders to develop a communication strategy that will promote the system better.

Can you please inform us about TSB’s fields of work for 2017 and projects that have been carried out during the year?
Our most important priority is to make sure that our market takes its rightful place in our economy and realize its true potential. While Turkey’s economy is the 17th largest economy in the world, its insurance market can only rank 38. We expect insurance market to create the required assets and produce the necessary amount of premiums to reach at least number 17 in the ranking. We have a dynamic and growing market. But growth is not enough on its own; we should also increase penetration rate. Life and non-life segments in total get a share of 1.6 percent from GDP. The ultimate goal of our works is to enlarge our position in production, and to create the infrastructure of a strong insurance market that will provide the coverage required by our society and economy by keeping up with the changing world and taking precautions against new potential risks and threats. We aim to achieve that both by conducting technical studies on a line-by-line basis and in close coordination with the authorities and all related parties, and by way of multi-directional studies such as developing our strategy, making insurance visible through communications and raising awareness of our citizens.

Our Association always emphasizes the importance of insurance and that it is a foul-weather friend in all communication channels. The entire market worked with great effort to compensate for the losses of earthquake, flood and hail events of this past summer as soon as possible. In addition to the compensation of losses, our Association works intensely for raising awareness in all levels of our society and providing information to individuals and institutions. We believe that it is our mission to create awareness in people to the fact that insurance is not expensive and that they can buy serious coverages with small budgets. If we want to increase the level of insurance awareness, we think that we should first increase the level of financial literacy. We believe it would be beneficial in this regard to include financial literacy and insurance related subjects in the curriculums of primary, secondary and high schools.

The Association works for developing structural solutions to existing chronic problems of our market; while trying to take a series of actions in order to contribute to the deepening of our market and enhancing its penetration rate. In this respect, we have taken necessary actions as the Insurance Association of Turkey to reduce the number of traffic accidents in cooperation with all related parties, as we consider it the most important problem of MTPL insurance impacting all our non-life companies. We are working with General Directorate of Security Affairs, General Directorate of Highways, Federation of All Bus Companies (TOF), Undersecretariat of Treasury, other non-governmental organizations; and, in particular, with the support of the Ministry of Internal Affairs. We also try to be in close contact with the insurance departments of the Supreme Court and Academy of Justice to make sure that insurance matters find the required importance. As a market that works hand-in-hand with statistics, we have initiated a project to increase the data quality and patterns. We are designing an insurance rating project, which will calculate the rating of policyholder, just like a credit rating. In addition to these efforts about current items on the market’s agenda, we continue to work for improving the insurance business and increasing its depth and significance inside the economy; which is our primary objective.

In this respect, our target is to increase the share of insurance and pension markets in financial sector higher than its current share of 4 percent. In short, we aim to increase insurance production and penetration in our country, and enrich the insurance business with diversified products that will address the requirements brought by a developing economy, technology and changing life standards in a market that is currently dominated by compulsory lines such as MTPL in non-life and credit-linked life insurance products in the life segment.

Moreover, there are some other developments that can accelerate the growth of our market regarding insurance products which have a very low penetration rate but are critical for the continuity of economic activities; such as popularization of credit insurance, and ensuring that indemnity insurance is used with the same function as letters of guarantee used in the banking industry. As in all other sectors, we are continuing to work on technological advancements, in terms of digital transformation in all fields (from sales to operations and customer relations), and its impacts on our market. We are working with the technical committees within our Association on the digitalization of insurance processes and the suggestions for the necessary regulatory infrastructure to achieve that goal.

In the coming term, we will also be focusing on interest-free finance system and participation insurance. The legislative infrastructure of this system is being established. Participation insurance is very important to provide coverage for citizens who abstain from insurance due to religious sensitivities through insurance products that comply with Islamic finance standards; thus enhancing the comprehensiveness of insurance in our country.

Turkish insurance market has made large sums of payment due to climate change and natural disasters. Could you share your opinions about the importance of insurance against climate change and natural disasters?
As in the rest of the world, climate change has increased risks and losses in our country. During 2016, Turkish insurance market processed 44,400 files and paid 62.6 million TL as compensation for losses, on a daily basis. In the first half of 2017, these numbers climbed up to 50,800 files and 71.7 million TL payment per day. Insurance market plays a highly significant role in increasing the risk awareness because of its expertise gained through comprehensive researches and long years of experience. Insurance companies also help increase the awareness about risks occurring due to natural disasters and climate change, and therefore ensures that necessary precautions are taken. They price their premiums depending on risks, inform their clients about required precautions, create awareness and help them minimize their losses. In this regard, we should aim to increase the insurance penetration and provide insurance protection for more of our citizens in cooperation with all the related parties.

How do you evaluate the potential impacts of climate change and natural disasters on the insurance market for the coming years?
Climate change which has been defined as an important risk by leading insurers and reinsurers for more than 20 years, is a global problem. It is impossible to prevent the impacts of climate change. The ongoing rise of global warming is expected to cause more frequent and more violent natural disasters around the world. Consequently, it is not hard to estimate that the losses to be compensated by the insurance market will also increase. Up until 1990s, losses caused by natural disasters were relatively small; however storms and heavy precipitation losses have taken their toll on the market since 1990.

In 2015, insured losses caused by natural disasters amounted to 37 billion USD, but increased to 46 billion USD in 2016. Likewise, insured losses incurred due to climate change reached 40 billion USD during 2016. In the first half of this year, insured losses incurred due to natural disasters reached 22 billion USD, 17 billion USD of which was incurred due to disasters that occurred in the USA. Earthquakes, storms, floods and fires caused serious losses; and 11 thousand people have lost their lives due to disasters in 2016.

We clearly see that the frequency of the disaster occurrences such as floods, hail, storm/tornado have also increased in our country as a direct result of climate change. These risks impact most insurance lines; with higher costs for fire, engineering, land vehicles and agricultural insurance lines. We estimate that this impact will be felt more severely in the highly populated coastal regions depending on the increasing water levels, floods and storms/tornados. In the 21st century, temperature is 6 degrees above the average because of global warming. Temperature increase has begun to influence health insurance directly, causing higher number of hospital visits and baby deaths due to premature births. Likewise, agricultural insurance line is directly impacted, as the global warming causes drought and decreases productivity.

In the last 10 years, we have witnessed two major losses in our country due to climate change. First one is the loss caused by ‘Ayamama River Event’. Insurance companies had to pay 475 million USD as compensation for the losses of this event. The second major loss was caused by the intense rain, hail and storm events last July in Marmara Region. These events caused insurance market to pay more than 500 million TL.

Compared to the global scale, what are the better and worse parts of Turkish insurance and pension markets? 
Compared to European countries, our market has really lower rates both in terms of its share in the economy and the share individuals allocate for insurance in their budgets. In 2016, share of premium production stood at 6.7 percent in Europe, while it was only 1.6 percent in Turkey. According to the same results, premium per capita was 1,620 USD in Europe and 165 USD in Turkey. In short, despite getting closer to European averages in non-life segment, we can say that Turkey has a long way to go in terms of life insurance. The same goes for BES as well. Private pension funds account for 123.6 percent of the GDP in OECD countries, but its share is as low as 2.1 percent in Turkey.

It is of vital importance to raise awareness of individuals if we want to increase the insurance rates in our country. We must make sure that people no longer wait for bad things to happen to realize that they actually need insurance. In this respect, our Association emphasizes the significance of insurance on every platform and underlines that it is a foul-weather friend. Our market worked tirelessly to compensate for the losses caused by earthquake, flood and hail events that occurred this summer as rapidly as possible. In addition to making payments for losses, our Association also puts a considerable effort in raising awareness in all segments of our society and inform both individuals and institutions. We regard it our primary duty to make people understand that insurance is not an expensive product, and that it is possible to by serious coverages with small budgets. If we want to increase the level of insurance awareness, we think that we should first increase the level of financial literacy. We believe it would be beneficial in this regard to include financial literacy and insurance related subjects in the curriculums of primary, secondary and high schools.

Do you think there are any regulationsto be revised or amended for the insurance market?

In recent years, our market has gone through comprehensive and significant legislative amendments. With the latest amendment in traffic insurance premiums, which is of particular concern for the public and has seriously challenged our insurance companies, a clarity was provided for companies in calculating their liabilities. We expect court verdicts to follow suit. Therefore, we believe that the work to be completed for general conditions will result in consistency for all implementations.  

As to the individual pension system, a revision for automatic enrollment is on the agenda. We expect new revisions to make sure that participants stay in the system for longer terms will be announced in the near future.