Mehmet Akif Eroğlu, Secretary General of the Insurance Association of Turkey (TSB): “As of the 6th month of 2018, Turkish insurance market has contributed to the continuity of economic activities and protection of individuals by reaching 16 billion TL in paid compensations.”
According to the statistics by the Insurance Association of Turkey, the market has produced 28 million TL premiums during the first half of 2018. What is your assessment about the market’s first half performance?
As the second largest sector of financial markets after banking, insurance continues to be a strategic sector for Turkish economy with its critical functions and an asset size of 160 billion TL according to the results of the first six months of the year. Economic developments have been the driving force behind the development of insurance market in 2018, as in previous years. Driven by the recovery period since the end of 2016, Turkish economy grew over expectations by 7.4 percent in 2017; becoming the fastest growing economy among G20 countries. Growth in insurance premium volume progresses in parallel with the developments of our economy; however, last year’s sector-specific developments such as tariff in traffic insurance and risky policyholders’ pool in MTPL have shaped the trajectory of our market for this year.
From the beginning of 2018, fluctuations in foreign exchange rates and increase in the interest rates have made an impact on the premium production and financial results of the insurance market. Sharp increases in exchange rates make a negative impact on insurance lines that depend on equipment and spare parts imported from other countries, such as motor, traffic and health insurance. On the other hand, increasing interest rates and tightening precautions by the BRSA (Banking Regulation and Supervision Agency) are among the most important factors determining the course of life insurance. Moreover, higher-than-expected inflation rate increases insurance costs and causes pressure on market’s financial results. Although the current growth in financial revenues seem to make up for it to a certain degree, we are bound to see the negative impacts in the medium term.
Despite all these challenging economic developments during the first six months of the year, insurance market has insured a total sum of 107.2 trillion TL, which is 35 times higher than the Gross Domestic Product in 2017; therefore keeps playing a vital role in ensuring the continuity of investments. As of the 6th month of 2018, insurance market contributes to the sustainability of economic activities and protection of individuals by reaching 16 billion TL in paid compensations. Besides, the market shares the burden of our state via institutions such as TCIP (Turkish Natural Catastrophe Insurance Pool) and TARSİM (Agricultural Insurance Pool), disciplines financial initiatives by ensuring efficient risk management; while at the same time providing employment for approximately 200 thousand people, combined with the other related sectors it serves. With a fund size of 133 billion TL including the pension market, insurance makes new investments possible and supports economic growth. Therefore, it is not surprising to see strong insurance markets in countries with strong economies.
Funds supplied to the economy by the insurance market are especially channeled into the Treasury of the Republic of Turkey and Capital Market, and 85 percent of them are in Turkish Lira. Considering that at least 10 percent of pension funds must be invested in Real-Estate Investment Funds, Venture Capital Funds, and Infrastructure Investment Funds, as well as the fact that pension funds are long-term by their nature; insurance and pension market has a function of deepening and stabilizing the capital markets.
In 2018, insurance market has continued to carry out these critical functions, and continued to grow during the first six months in parallel to the growing economy; though by slightly losing pace with a rate of 5.2 percent. Within this framework, life insurance segment has reached a total premium volume of 3.8 billion TL, growing by 16.1 percent during the first six months of this year. Excluding the double-counted indirect premiums from the risky policyholders’ pool of motor vehicles compulsory third party liability insurance, in non life branches total premium production amounted to 22,9 billion TL, with a 15,3 percent rise compared to same period of the previous year. Thus overall, total premium production of the market has reached 26.7 billion TL with a growth of 15.4 percent over the same period of last year.
As for the life insurance, 16 percent of growth in written premiums compared to the same period of previous year has been parallel to the progress of consumer loans. Yet, there has been no real growth, neither in non-life nor in life insurance segment, due to the high inflation rate. As a segment dominated by credit life insurance, regulations on credits and overall credit volume are the major determiner of life insurance premium production. In this perspective, to increase the penetration of voluntary life insurance, which has a small share in premium volume in our country, it is significant to expand the use of products other than payment protection products, such as education insurance and savings products.
In 2017, insurance market was impacted by natural disasters. What precautions does the Association take in this area? Could you inform us about the attitude of insurance market about natural disasters?
As unusual weather events and natural disasters occurring all around the world in recent years due to climate change and global warming increase in number and frequency, their impact on society and economy continues to expand accordingly. Floods, landslides and hails that have increased as a result of climate change prove that possessions need to be protected. Natural disasters make a negative impact on every course of our lives, from agriculture and stockbreeding, to vehicles, houses and offices. For instance, insurance market had to pay 500 million TL for the losses caused by floods and hails occured in July 2017. Despite the growing impacts of natural disasters on our lives, one of every two businesses lack fire insurance, three out of every four houses lack property insurance, three out of every four vehicles lack motor insurance, and one of every two houses lack earthquake insurance. In a sense, insurance means social solidarity; and we must protect our citizens to a greater extent by increasing the insurance awareness and insurance rates against all these risks. The Association is working on a communication plan that will increase awareness especially by using social media more effectively. Moreover, we are planning to cooperate with universities and local administrations in order to prevent losses occurring due to climate changes and to increase the awareness in our society.
2017 witnessed many regulatory amendments. Do you believe those amendments are useful, especially those in Motor Third Party Liability (MTPL)? What do you think about the market’s expectations for free tariff?
MTPL continues to remain on top of market’s agenda; considering the facts that MTPL accounts for nearly 43 percent of non-life segment, and MTPL for 27 percent concerning 20 million vehicle owners. The most important regulatory amendment about MTPL in 2017 was the establishment of Risky Policyholders’ Pool by the Regulation Amending Regulation on Tariff Application Principles on Motor Vehicles Compulsory Third Party Liability Insurance, which was published on the Official Gazette Issue No. 26582 as of 14.07.2017. However, due to the long statute of limitations and judicial process of liability insurance, it would only be possible to make healthy assessments about the results of this pool in the coming years.
Activities of our Association primarily focus on solving the structural problems of MTPL, and aim to minimize the number of conflicts between insurance companies and beneficiaries. At this point, we finalized our work on bringing standardization to the “calculation method of compensation for loss of support and permanent disability”, and submitted it to regulatory authorities. After this standard is applied, we expect a considerable decrease in the number of conflicts and estimate that the ambiguity of compensation amounts will be overcome. In this way, the market will make faster payments to the victims of traffic accidents, without needing to share commissions with intermediaries.
Markets open for free competition are for the benefit of the consumers in any case. In addition to compensating for losses, insurance can also be a preventive tool through its deterrent influences. For example, deterring influences of high premiums for accident-prone drivers with, contribute to road safety and help prevent traffic accidents. Thus, we see the new Pool system as a temporary solution towards transition to the free tariff system.
Private Pension System has reached a fund size of 86 billion TL and 7 million participants in figures. To what extent do you assume the BES will grow by the end of the year? We observe a deceleration in the number of voluntary BES participants. What are the reasons for this deceleration?
As of 7 September 2018, Private Pension System (BES) has reached a fund size of 86 billion TL, including state contribution funds, and 7 million participants. By the end of this year, we expect the fund size to exceed 90 billion TL together with state contribution funds, and the number of participants to go over 7.1 million.
We have observed a notable slowdown; i.e a decrease in the rise of the number of new participants joining in the third pillar, voluntary pension plans, for the last two years. Since 2016, the net number of participants has decreased by 50 percent. The most important reason beneath under this slowdown is the auto enrollment process. Growth in the number of participants started to decrease sharply as of 2016, when auto enrollment system came into the picture. This slowdown is partly due to the saturation of the third pillar; but more importantly, employees within the scope of auto enrollment do not prefer to enter into third pillar pension plans and some of them even decide to terminate their existing pension plans. In my opinion, it is crucial to maintain the size of third pillar pension system and keep encouraging employees over 45 (who are not included in the scope of auto-enrollment), farmers and housewives to participate in BES plans. Plus, enabling people younger than 18 to participate in pension plans will make a positive contribution to the acceleration of BES system.
Auto-enrollment has reached a fund size of 3.6 billion TL and 5,2 million employees. Could you briefly inform us about the performance of auto-enrollment system?
Auto-enrollment in private pension system was launched in 1 January 2017. It is a tremendeous project initiated to support the social security system of our country, as a tool to introduce 14 million employees to the BES by 2019. Auto-enrollment was designed to start with large scale companies and institutions employing 1.000 or more people, and gradually include companies and institutions that have fewer employees. During the first phase, 834 companies and 3.2 million employees were included in the system. The second phase, which began in April 2017, brought 38 thousand companies and institutions with 250 to 999 employees and 6.4 million people working in private sector or public institutions in the system. The scale narrowed a bit during the third phase in July 2017, down to 10 thousand companies that employ 100 to 249 people and mostly operate in textile, ready-made clothing, transportation, education, construction, food, and manufacturing industries. At the end of the first year, 49 thousand companies and institutions and nearly 11.4 million employees were introduced to the auto-enrollment system.
By the end of the first year of auto-enrollment, rate of continuity was 40 percent, number of participants who decided to stay in the system to save for retirement was 3.5 million, and total fund size was 1.8 billion TL. Workplaces with 50 to 99 employees joined the system as of January 2018, and offices with 10 to 49 employees joined as of July 2018.
With the auto-enrollment system, 106 thousand private companies and public institutions were included in the pension system by the end of June 2018. At the end of August, 5,2 million employees continues to stay in the system, which has reached a fund size of 3.6 billion TL. Despite the high withdrawal rates, auto-enrollment system increased the number of people saving in BES up to 12 million, which means that it has made a huge contribution to expand the system within general public.
However, the fact that withdrawal rate has reached as high as 63 percent in auto-enrollment signals to the basic deficiencies in system’s design. The system needs a radical revision; and we have shared our recommendations with the regulatory authority in this respect. We expect new amendments to the auto-enrollment system during the new structuring process.
Opt –out rates in auto-enrollment were especially striking in its initial phase. We know that the Association conducted a research on this topic. How do you evaluate the results of your research?
As a result of our research, we have seen that the most famous characteristic of the system was the state-contribution funds equaling 25 percent of participants’ contributions. We also found out that financial requirements of employees constituted the number one reason for them to opt-out. That’s why we have recommended the regulators that the continuity of 25 percent state contribution funds is a critical success factor, and that employees should be able to collateralize their funds in the system for loan applications in order to prevent or minimize the opt outs due to financial needs. On the other hand, we believe that making an analysis solely focusing on the opt - out rates will do injustice to the gains of auto-enrollment. Opt - out rates are very similar to each other in every phase, which remains around 50 percent. Average rate of opt – out for all phases is 52 percent. Employees should stay in the system for long term, and enhancing continuity rates is of vital importance to increase both individual and national savings. But we must underline that over 5 million employees participated in the system in less than 2 years, which is a very significant gain for a system that was launched in a very short period of time. As you may remember, the amendment on auto-enrollment was approved by the Parliament in August 2016, and was launched as of January 2017. All preparations were completed within only 4 months. We did not have enough time to explain and communicate the new system to the public. We see that other countries were successful in auto-enrollment after both employers and employees were educated about the system along a long period of preparation; they put particular emphasis on promotion and communication of the system.
Another significant factor is employer’s contribution. In those countries where auto enrolment systems are deemed to be succesful, we see that they enforce employers make matching contributions into their employees auto enrollment accounts. And naturally, this affects continuity rates positively. We have shared our policy suggestions regarding the introduction of employers’ contribution with the regulatory authority. Our suggestion includes the transfer of a part of severance pay or unemployment fund to auto-enrollment, without creating an extra labor cost for employers. We believe that this can result in a model that will neither put an additional burden on public economy nor financially challenge the employers. Considering all these facts, we can say that 53 percent withdrawal rate is not very high for auto-enrollment, as it is not incompatible with market expectations under these circumstances.
On the other hand, when we examine the progress of BES – or in other words third step of the private pension system – since its foundation in 2003, we see that auto-enrollment has largely contributed to the popularization of the system in very a short period of time. In the 14 years that passed until the initiation of auto-enrollment, BES brought 7 million participants in the system; while auto-enrollment brought nearly 4.4 million participants in only 1,5 years. BES collected 20 billion TL in savings in between 2003 and 2013; whereas savings have quadrupled in size as of July 2018, reaching 90 billion TL with the contribution of auto-enrollment.
That’s why we expect auto-enrollment to play a crucial role in expanding the reach of pension system. However, as I have mentioned earlier, we certainly need a revision in the system to decrease opt - out rates. In this context, besides making proper promotion and communication of the system, we should consider it a priority policy to reach the desired targets of auto-enrollment and create savings for retirement by making it obligatory to stay in the system for a certain period of time and/or turning it into a model were employers also make contributions.
Could you inform us about the new activities, targets and project of the Insurance Association of Turkey?
It is not a misstatement to say that basic function of insurance is to compensate for losses. However, as a concept, insurance necessitates a function to prevent or minimize risks before they occur. In this respect, our Association aims to focus on preventive insurance activities by controlling the risk factors before they occur, in addition to our traditional activities in increasing the insurance awareness of our society. In accordance with this target, we regularly share information messages on our social media accounts towards encouraging people to take necessary precautions; while emphasizing the role and functions of insurance in our daily lives through all our communication channels, social media and digital publications in particular. We aim to use social media more efficiently in order to increase insurance awareness in people. Moreover, we are also working on preventive insurance, enhancing insurance consciousness, and increasing penetration rates via our communication and strategy committees inside the Association, which also focus on triggering market adaptation and transformation according to the short and middle term impacts of latest insurance developments on our market and creating awareness in this respect. Our target is to make sure that all stakeholders of our market will be ready for the new term of digitalization and industry 4.0 which are making an impact on all sectors, for new trends and socio-cultural changes brought by the changing generation.
Within this framework, our projects and goals include activities on the impacts of new technologies on insurance, insurtech, transferring all processes from sales to operation into the electronic environment, monitoring new technologies closely and adapting them into Turkish insurance market and our legislation.
Moreover, we continue to support activities of public authorities to decrease the number and frequency of traffic accidents and to ensure road and traffic safety, as a bleeding wound of our country for a long time. One of our top priorities is to create an action plan that is applicable to the circumstance of our country and decrease the number of deaths in traffic accidents by analyzing the successful examples from other countries in terms of reducing the frequency and number of traffic accidents. In parallel to the economic growth of our country, automotive industry continues to grow; increasing the number of vehicles in traffic with each passing year. However, as this development rate is not counterbalanced with a similar increase in traffic awareness; we have failed to reach the targeted reduction in traffic accidents despite the infrastructural investments and continuous surveillance. Traffic remains to be a major issue for our country.
Besides organizing campaigns to increase awareness about traffic and road safety; we believe that it is important to implement an efficient penalty mechanism and rehabilitating precautions for drivers who are frequently engaged in accidents. We have also shared a recommendation for a regulatory amendment to establish a structure where accident-prone drivers face sanctions like DUI cases, such as the suspension of driver’s license, trainings and psychological examinations. Plus, we still think that demerit points of drivers and period and reasons for the suspension of their driver’s license should be share with insurance companies; thus helping insurance companies consider the penalty record of drivers while determining their premium rates.
Our Association continues to work towards clarifying the liabilities imposed on our sector by the Personal Data Protection Law, which was promulgated in 2016; and ensuring the compliance of business processes to its stipulations.
Our Association places special emphasis on the improvement of complementary health insurance, as a product that helps insurance market reach out to a segment of our society that cannot afford to buy standard health insurance, eases the burden of social security system on financing healthcare, supports public authorities by preventing unregistered cash-payouts and helping our government charge necessary taxes on those payments, and enables companies to issue customized policies in accordance with the principles of individuals. Therefore, we continue to work towards bringing a special discount for health insurance from the basis of Income Tax and Corporation Income Tax, establishing a more advantageous structure for group policies that will favor both employers and employees, ensuring restricted access to the MEDULA system for risk analysis and receiving authorizations in parallel with the SSI (Social Security Institution), differentiating services in city, university and public hospitals by integrating them into the complementary health insurance system.
Ministry of Treasury and Finance and Insurance Association of Turkey are conducting a joint two-phased project to form a basis for the decision on the transition of Turkish insurance market to International Financial Reporting Standards 17 (IFRS 17) and Turkish Financial Reporting Standards 9 / Financial Instruments 9 (TFRS 9). The first phase of the project has been finalized, and is currently subjected to the assessment of the Ministry. Following the approval for transition, the second phase will be initiated to reshape the relevant legislation.
How will recent economic developments and foreign exchange rates impact insurance and pension markets?
There are significant items in the insurance market that will immediately be impacted by exchange rate increase such as share of imports in the cost of medical equipment and vehicle spare parts, and the fact that raw materials of domestic production have to be imported. Our sector’s input costs other than equipment and raw materials will gradually increase following the reflection of exchange rate increase on the inflation rate. In this period, most of the policies that are currently subjected to claims were issued before the exchange rate increases. Especially the ratio of premiums received from these policies to the compensation of losses will be lower than the earlier estimations.
Current economic conjuncture and extraordinary increase in foreign exchange rates have once again emphasized the importance of supporting domestic production. As of the end of 2017, financial losses covered in MTPL was 4.5 billion TL; 60 percent of which went to spare part costs. Approximately 80 percent of spare parts used in our market are imported. As a result, imported spare parts cost the insurance market 2.1 billion TL at the end of 2017. According to the analysis which compared August 2018 exchange rates of the Central Bank to those of 2017 year-end, exchange rates are observed to have increased by 54 percent on average, which resulted in 26 percent increase in the cost of spare parts alone. On the other hand, automotive companies increased their labor costs due to the exchange rate increases. Combined with this increase, total increase in the cost of spare parts will reach 30 – 35 percent range. In order to reduce the impacts of exchange rate risks and costs, it is crucial to provide necessary support for the production of equal spare parts used in hood, bumper, mudguard, and illumination group inside our country. Last year, this group of parts accounted for 60 percent of the 5.9 billion TL paid by insurance market for spare part costs. This will also make a contribution to the reduction of current account deficit. To summarize, we must encourage and support domestic and national spare-part production to reduce our dependence on foreign sources. This will also pave the way for exporting them to neighboring regions with the scale and competition advantage we can reach.