Although insurance penetration in the Czech Republic is lower than the European Union average, it grew steadily until the eurozone debt crisis in 2011. In addition to the financial crisis, the normally relatively stable Czech economy was affected recently by several natural disasters.
In 2012, the Czech insurance industry was the second largest in Central and Eastern Europe after Poland’s, with total gross written premium of CZK144.2 billion (US$7.6 billion) in 2013. Non-life insurance was the largest segment in 2013, accounting for 48.8% of this, while the life, and personal accident and health segments accounted for 39.6% and 11.6%, respectively. While non-life remained largely stagnant, the life and personal accident and health segments grew at a CAGR of 3.9% and 7.5%, respectively, in 2009-2013. The life segment benefited from the strong performance of the individual life insurance category, which accounted for 35.4% of overall life insurance written premium in 2013.
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The gross written premium of the life insurance segment is forecast to increase from CZK62.1 billion (US$3.2 billion) in 2013 to CZK74.1 billion (US$3.7 billion) in 2018. The total number of life insurance policies sold is expected to reach 7.7 million in 2018.
Contributing factors to this growth are the ongoing economic recovery, rising incomes, the expansion of the middle class, the steady development of rural areas, growing awareness of life insurance products, and the increase in life expectancy.
The occurrence of natural disasters results in a high demand for property and casualty insurance compared to other insurance products. Non-life will also benefit from the expansion of the automobile, real estate and construction industries. Meanwhile, rising healthcare expenditures and improving awareness of the benefits of private health insurance will drive the growth of personal accident and health insurance, while tax incentives promote retirement saving. On the supply side, the introduction of new products (such as unit-linked life insurance and microinsurance), and the emergence of bancassurance enabled the insurance industry to offer attractive products and services.
Additionally, the increase in internet users led insurers to develop online applications. Companies such as ?eská Poji?ovna and Kooperativa launched online applications for smartphone users.
The Czech insurance industry is regulated by the government, the Czech National Bank (CNB) and the European Commission (EC). The regulatory environment changed with the introduction of the Insurance Act 277/2009, as well as the influence of EU directives and Czech law – aimed to improve the protection of customers. By January 2016, insurance regulators plan to implement Solvency II.
In 2012, 51 insurers were active in the country, with the industry being dominated by major insurers from neighbouring European countries. Due to the competitiveness of the market, Czech insurers mainly compete on price.
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By GlobalDataChallenges
Demographic factors, the economic slowdown, and the regulatory environment posed the main challenges for the insurance industry.
The population of Czech Republic declined from 10.22 million in 2008 to 10.18 million in 2012, a trend that is expected to continue.
The unemployment rate grew from 4.4% in 2008 to 7.0% in 2012 as a result of the global financial crisis and the eurozone debt crisis. They also had an impact on disposable incomes. In 2012, the gross national disposable income stood at CZK9.3 billion (US$180.0 billion) – after decreasing at a CAGR of 1.4% during 2008-2012. Moreover, GDP at constant prices decreased from US$151.7 billion in 2008 to US$149.3 billion in 2012, at a CAGR of -0.5%.
While the economy came out of recession in the second half of 2013 and growth is expected for 2014, regulators are planning to implement Solvency II by January 2016. Adoption of Solvency II is expected to encourage qualitative changes in insurance companies’ risk management strategies. It will introduce new capital requirements for insurers, which will increase their solvency margins.
Revamped pension system
The Czech pension system was based on two pillars until the end of 2012. Pay-as-you-go (PAYG) constituted the first pillar; mandatory payment from the pension insurance by person and employer generated the resources to pay out the state pension. Additionally, the voluntary state pension represented the third pillar which comprised a state contribution, employer contribution and possible tax breaks.
On 1 January 2013, the pension reform came into effect, which applied changes to the mandatory first pillar, transformed the third pillar and introduced a new voluntary second pillar. The objective of the reform was to induce a savings responsibility in the population to safeguard their retirement savings. Entry to the second pillar will be voluntary, and participants of the PAYG system can join the second pillar before reaching the age of 35. Part of the mandatory contribution made to the PAYG system will get redirected to the second pillar upon joining it. Once joined, nobody can leave the system.
The third pillar will have supplementary schemes with the state contribution. Unlike the second pillar, Czechs can join and exit at any time. People can join the third pillar after reaching the age of 18.
The pension reform is expected to provide significant business opportunities to life insurers, as, after reaching retirement age, the participants of the second and third pillar will receive the payment from life insurers that are licensed to provide pension insurance in the country.
Life insurers have started responding to the pension reform. For example, Kooperativa launched a simplified product to serve the purpose of savings relating to the pension, called Penze S Garanci (‘pension with a guarantee’).
Product evolution
The life segment has gradually evolved from risk protection products to investment-related products. Unit-linked insurance products have steadily grown in popularity, and constituted the key growth driver for the segment. These products attract customers through a combination of life insurance cover and an investment element that offers higher returns than normal deposit rates. Contribution of unit-linked insurance products, in terms of gross written premium, increased from 45.3% in 2009 to 59.4% in 2013, and is projected to reach 62.8% in 2018.
Rise of the internet
To cater to the growing and changing demand for insurance products, insurers are introducing mobile applications to attract and gain market share across all insurance categories. In 2012, the total number of internet subscribers was 7.6 million (74.7% of the total population). In 2011, Kooperativa launched the KOOP application for smartphone users. KOOP provides emergency call numbers, offers advice on what to do in case of an accident, and allows claims to be reported over the phone and arrange for vehicle recovery.
FDI to drive demand
As per the CNB, FDI inflow amounted to CZK99.0 billion (US$ 5.1 billion) in 2012. Between January 2003 and May 2012, the FDI market displayed a total of 1,546 investment projects from 1,123 companies. The automotive industry was the leading sector with 12% of the total. FDI inflow is expected to create employment and boost disposable incomes, which will create opportunities for the life segment.
Distribution channels
Agencies and direct marketing covered most of the market, with a combined 87.2% share in terms of gross written premium new business in 2013. The Czech Republic’s main life insurance providers include ?eská Poji?ovna and Allianz Poji?ovna, which work closely with leading multi-level marketing networks such as OVB Allfinanz, ZFP Akademie, AWD, and Fincentrum. These life insurers generated most of their business through agencies. A direct sales network of insurance agents and insurance brokers is the primary sales channel for ERGO.
Due to low costs, life insurers preferred distributing through direct marketing channels. This is primarily a business-to-business-to-client (B2B2C) model, which facilitates direct interaction with the customers and yields a better understanding of their needs, thereby boosting customer retention. Direct marketing emerged as the second largest distribution channel with a share value of 30.9%.
Bancassurance – the third largest distribution channel – is becoming increasingly popular, if at a slow pace. Its share grew from 5.6% in 2009 to 5.8% in 2013, and is expected to reach 6.1% by 2018. ?eská Poji?ovna and Poji?ovna ?eské signed distribution agreements with ?eská spo?itelna, the largest bank in the Czech Republic (with more than 5.3 million customers and approximately 658 branches). Other major insurers such as CSOB Pojit’ovna and Komer?ní Poji?ovna also market their products through major banks, such as Komer?ní banka and ?eskoslovenská obchodní banka.
Brokers accounted for 3.3% of the total. ?eská Poji?ovna operated with 420 insurance brokers in 2012 to distribute its products, and Kooperativa actively works with insurance brokers in the segment of commercial and industrial risk insurance.
Czechs also use the internet or telephone to purchase individual life insurance and supplementary pension schemes. Major life insurers such as Kooperativa are focusing on increasing online sales and expanding their electronic communication networks. The channel’s market share was still very low, however, reaching 1.4%, and forecast to reach 1.7% in 2018.
The other distribution channels primarily consist of telemarketing, call centres and shopping malls, which collectively accounted for 2.2%.
Porter’s Five Forces Analysis
Bargaining Power of Supplier: Medium to High
The bargaining power of suppliers is assessed as medium to high. Most of the leading insurance companies are financed by banks and parent companies, giving them access to capital. However, following regulatory changes, the need for capital will increase substantially. Suppliers of capital have high negotiating power, as only limited sources of finance are available in the country.
To reduce exposure to risk, life insurers also require reinsurers. Only one of these operates in the Czech insurance industry, although it has low bargaining power. The direct insurers share risk among themselves or by ceding reinsurance premium to foreign reinsurers.
Bargaining Power of Buyer: Low to Medium
Buyers have a low to medium bargaining power, as the impact of losing an individual customer is marginal. Larger corporate buyers, however, have a higher bargaining power. To retain these high-margin corporate buyers, insurers provide significant discounts, reducing their negotiating power. Corporate buyer bargaining power is also low, due to the high costs associated with switching life insurers. However, customers tend not to be particularly loyal to one specific company and are willing to shop around. Online comparison sites are increasing the buyers’ power.
Barriers to Entry: Medium
Czech life insurers have medium barriers to entry. The minimum capital requirement for insurers is determined on the basis of the products they are authorized to sell. Czech life insurance and pension providers must have a minimum paid-up capital of CZK120 million (US$6.1 million), which is expected to increase post-Solvency II. Buyers are often reluctant to accept new brands, making it difficult for new entrants, although the Czech life segment is open to foreign competition, and mergers and acquisitions. Insurers from other EU countries can sell products in the Czech Republic by establishing branches, or temporarily provide services through a registered office. Insurers from non-EU countries may only operate in the Czech Republic through branches, and also require a special permit granted by the CNB.
Intensity of Rivalry: Low to Medium
The intensity of rivalry among Czech life insurers is assessed as low to medium. The life segment is highly concentrated, with the top-10 companies accounting for 89.4% of the gross written premium in 2012. The remaining 10.6% was distributed among smaller players. Major life insurers are focusing on developing their existing sales channels and new product developments, obtaining new licenses and further increasing their market share. The growing number of foreign competitors, either from EU or non-EU countries entering the market, is also set to intensify the competition.
Threat of Substitutes: Low
The threat of substitutes is low. Most life insurance products (primarily pension-related) offer tax benefits and risk coverage, and are usually positioned as both investments and retirement planning products. Life insurance products have been used as long-term investment vehicles in the country, and for products such as term insurance, no direct substitute is available.
