Industry Attractiveness
The Latvian insurance industry, declined at a CAGR of -3.1%from 2008 to value LVL309.8 million (US$398.3 million) in 2012, primarily due to the global financial crisis of 2009. The industry continued to decline until 2010, before recovering in 2011. Rising foreign participation and growing exports led to recovery in Latvia’s economy; GDP at current prices rose from LVL20.5 billion (US$28.4 billion) in 2011 to LVL22.9 billion (US$30.4 billion) in 2013. This trend is expected to continue, positively impacting the insurance industry.
The life segment, despite being the smallest sector, was the only segment to register a positive CAGR of 6.8% between 2008 and 2012. Both the non-life and personal accident and health segments registered declining CAGRs of -3.8% and -6.4% respectively.
The life segment grew from LVL33.0 million (US$48.3 million) in 2008 to LVL42.9 million (US$55.2 million) in 2012, primarily contributed by the term life insurance category which registered a robust review-period CAGR of 30.7%. High tax benefits for individuals and businesses through these policies, along with the falling inflation rate, drove the segment’s growth during the review period.
The non-life segment, the largest in the industry, fell from LVL252.2 million (US$369.5 million) in 2008 to LVL216.3 million (US$278.0 million) in 2012. The fall was primarily due to motor insurance, the largest category in the segment, although the losses were substantially offset by robust growth in exports which benefitted the transit insurance sub-category. Exports as a percentage of GDP rose from 30.1% in 2008 to 49.5% in 2012. As a result, the written premium of the transit insurance sub-category grew at a CAGR of 55.5%, making marine, aviation and transit insurance the second-largest category in the Latvian non-life segment.
The highest fall in the insurance industry during this period was registered by the personal accident and health segment. The segment’s written premium fell from LVL65.9 million (US$96.5 million) in 2008 to LVL50.6 million (US$65.0 million) in 2012, due largely to reduced government spending on healthcare during the financial crisis. Consumer awareness of private health insurance in Latvia is generally low.
However, in November 2013, the Latvian government passed a law making health insurance compulsory from July 1, 2014. Thereafter, public healthcare will only be available to citizens who pay personal income tax, make voluntary contributions, or are insured by the state. This new system is anticipated to increase awareness of health insurance in the country, and support its growth over the coming years.
The favorable business environment in Latvia has brought many foreign companies in the industry. In the insurance industry alone, the number of foreign insurers increased from 11 in 2010 to 13 in 2012. Latvia’s joining of international organizations such as the World Trade Organization in 1999, and the EU and NATO in 2004, also contributed to the growth of business in the country. Negotiations are ongoing for Latvia to join the OECD, which will also widen Latvian business horizons.
With the recent formal accession to the eurozone on January 1, 2014, the Latvian business environment is expected to grow further, supplemented by the use of the single European currency and increasing regulatory frameworks under the European Central Bank (ECB) governance. This is anticipated to create increased awareness for business risks in different fields, thereby increasing demand for insurance in Latvia. Europe’s anticipated recovery from the eurozone crisis, along with the above-mentioned factors, are all expected to help the Latvian insurance industry to grow at a CAGR of 10.5% to value LVL510.1 million (US$711.6 million) by 2017.
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Segment Outlook
Despite adverse market conditions, the life segment registered a growth in written premium from LVL33.0 million (US$48.3 million) in 2008 to LVL42.9 million (US$55.2 million) in 2012, a CAGR of 6.8%. The life segment accounted for 13.9% of the insurance industry’s overall written premium in 2012.
The endowment category led the life segment with 62.5% of the segment’s total written premium in 2012, with a value of LVL26.8 million (US$34.5 million). The individual life category recorded written premium worth LVL14.7 million (US$19.0 million) in 2012.
The life segment is expected to adopt better practices as major foreign insurers such as Swedbank Life, SEB Life, Sampo Group’s Mandatum Life and SEB Life establish presences. Additionally, the merger of IF, Seesam and Ergo played a significant role in encouraging cross-border insurance, as a result of which Latvia received more than one-third of its life insurance premium from foreign countries in 2012.
Increased smartphone use is also expected to drive sales of insurance products, including life insurance. To retain customers and acquire new ones, insurers are developing Android and iPhone applications to make the insurance process as user-friendly as possible. BTA was the first Latvian company to launch a mobile app for Android and iPhone smartphones in 2012.
Latvia’s growing economy is anticipated to positively impact the life segment as private consumption, investments and exports increase. With the entry of Latvia to the eurozone in 2014, the European Bank for Reconstruction and Development is expected to work closely with Latvian government to bolster its economy and reduce undeclared earnings.
The segment is expected to benefit from an increase in disposable income and life expectancy, although falling employment and a declining population will limit growth in the segment. A strong public pension plan limits the growth of private pension plans, and the reduction in income tax rates is also expected to have a negative impact on the growth of life insurance, as policies for tax relief will be less popular among Latvia’s working population.
Customer segmentation and buying behaviour
Demand for life insurance products can vary due to different factors. Life insurers target customers on the basis of various factors, such as age group, gender and income level, and develop products and services for each segment.
People aged 40-65
In 2012, people aged 40-65 comprised the largest proportion of the total population at 34.4%. According to a survey by Swedbank in 2011, 43% of life insurance products, such as pension plans, endowment and general annuity products are purchased by people belonging to that age group. Life insurers in Latvia are providing products, such as accumulative life insurance, private pension insurance and annuity insurance to cater to needs of people in this age group. Ergo’s annuity insurance product is funded by the state’s scheme and acts as an old-age provision for policyholders and their family members, until the death of the policyholder.
People aged 20-40
People aged between 20-40 years constituted 30.0% of the country’s total population in 2012. According to a Swedbank survey of 2011, 47% of life insurance products were purchased by people belonging to the 30-40 years age group, and 18% were purchased by people between the age group of 25-30 years for purposes such as loan repayments and fulfillment of other credit obligations. Ergo Life, Ergo Fund and MetLife Life Plus are some of the programs introduced by life insurers to attract people falling in this age group. The government of Latvia has also made life insurance mandatory for international students in Latvia, and insurers are expected to develop new products for this category over the forecast period.
Targeting people according to gender
In Latvia, most buyers of life insurance policies belong to the 30-50 years age group. However, there is a marked difference in reasons to purchase between the genders. According to the Swedbank survey, people in Latvia generally bought insurance policies for two main reasons: to support their families and to repay loans. Latvians buying insurance for the first reason tended to be in the 40-50 years age group, while those buying for the second reason were more likely to be in the 30-40 years age group.
Almost 57% of Latvians who opted for insurance policies in 2011, in order to provide family support, comprised of male, and the remaining 43% were females. Endowment insurance, on the other hand was the most popular policies introduced by life insurers during the review period to target both the gender groups. The endowment insurance accounted for the largest gross written premium of 62.5% of the life insurance segment in 2012.
Targeting high net worth individuals (HNWIs)
HNWIs are a key group for life insurers. Mandatum Life has set up a wealth management team that exclusively caters to needs of HNWIs and ultra-HNWIs.
Distribution Channels
Latvian life insurers distribute their products through various channels, such as agencies, direct marketing, brokers, bancassurance and e-commerce.
Due to their wide reach, agencies emerged as the leading distribution channel for Latvian life insurers when compared to other Baltic countries such as Lithuania and Estonia. The life segment registered 44.0% of the total written premium new business through this channel in 2012. The value of new business written premium generated through the channel increased from LVL4.0 million (US$5.9 million) in 2008 to LVL7.0 million (US$9.1 million) in 2012, at a CAGR of 15.0%. It is projected to decrease to 38.5% in 2017 due to the rising popularity of the direct marketing, bancassurance and e-commerce channels in the country.
Considering the popularity of agencies, life insurance companies are working with agents to cater to a larger customer base. For instance, Mandatum Life Insurance Company started distributing products through insurance agents in Latvia in 2013.
Direct marketing was the second-most-preferred distribution channel in Latvia between 2008 and 2012, after agents. Life insurers preferred this channel because of the low costs associated with it. Another significant driver for direct marketing is that it facilitates direct interaction with customers and gives a better understanding of their needs, thereby helping in customer retention. Latvian life insurers are developing different direct marketing teams to sell their products: Mandatum Life Insurance Company has specific Money and Life, and Wealth Management teams to meet the various needs of HNWI customers. As these teams work specifically for the affluent Latvian population, relationship building and retention are of paramount significance. Wealth management solutions for a customer are developed on the basis of their choice and use of unit-linked insurance products.
The life segment received a new business written premium valued at LVL3.9 million (US$5.0 million) in 2012 through this direct marketing, 24.1% new business of the total written premium. Life insurers are expected to focus on direct marketing, which will attract 30.5% of the total new business written premium in 2017.
According to the law on Activities of Insurance and Reinsurance Intermediaries, only brokers are permitted to advice customers. Brokers perform a dual role in the Latvian insurance industry, acting as consultants for customers, and forming a significant proportion of the overall distribution channel. Brokers have emerged as a key life insurance distribution channel in Latvia, and accounted for 17.1% of the total gross written premium with LVL2.7 million (US$3.5 million) in 2012. The contribution in terms of new business gross written premium from this channel is expected to increase from LVL2.7 million (US$3.5 million) in 2012 to LVL3.4 million (US$4.8 million) in 2017, at CAGR of 4.5%.
Bancassurance was introduced in Europe in 1989. It grew rapidly and established itself as the main distribution channel in all European countries. In Latvia, bancassurance also recorded strong growth and contributed a significant amount of the life segment’s new business written premium. The channel’s cost-effective nature and easy access to a large customer base paved the way for channel growth, and Latvian life insurers are coordinating with banks to market products.
In December 2012, Ergo Life Insurance Company signed into a five-year partnership with Nordea Bank to distribute life products in the Baltic States, including Latvia. Mandatum Life Insurance Company distributed its products primarily through direct marketing until 2011. However, in 2012, the company entered into a new bancassurance agreement with Danske Bank. Citadele Insurance markets its life products through the Citadele Bank network. The bancassurance channel collected new business written premium valued LVL1.1 million (US$1.5 million) in 2012. It is projected to increase further to reach LVL1.6 million (US$2.3 million) in 2017.
The rise in the number of internet users has facilitated the growth of e-commerce as a distribution channel. The contribution of gross written premiums from e-commerce increased from LVL0.10 million (US$0.14 million) in 2008 to LVL0.16 million (US$0.21 million) in 2012, at a CAGR of 13.7%. This channel accounted for 1.0% of the total life segment’s new business written premiums in 2012 and is expected to increase to 1.4% in 2017.
Other distribution channels also played significant roles in terms of attracting new business written premium, which valued LVL1.1 million (US$1.4 million) in 2012, at a recorded CAGR of 19.3%. The value is projected to increase to LVL1.6 million (US$2.3 million) in 2017, after recording a CAGR of 8.5%.
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