Industry Attractiveness
The gross written premium registered by the Bulgarian insurance industry declined at a compound annual growth rate (CAGR) of -3.0% between 2008 and 2012, as the Bulgarian economy was hit by the 2008 global financial crisis. Overall opportunities for insurers looking to enter Bulgaria are limited by the country’s declining population, which fell from 7.3 million in 2008 to 7.0 million in 2012, primarily due to emigration. A key problem facing the Bulgarian insurance industry is that consumer awareness of the benefits of insurance is comparatively low.
The 2008 global economic crisis depleted incomes in Bulgaria and resulted in reduced consumer investments in life insurance. The life segment recovered, but future growth will be gradual. The gross written premium registered by the country’s life segment is expected to increase from BGN243.9 million (US$160.2 million) in 2012 to BGN283.0 million (US$184.6 million) in 2017.
The industry is mainly driven by compulsory motor third-party liability insurance. Motor third-party liability insurance will see considerable growth primarily on account of a rise in the number of new vehicle registrations. The number of new motor vehicle registrations, for instance, increased at a CAGR of 10.1% between 2010 and 2012. The property insurance category may record considerable growth if European Union (EU) nations register strong recoveries, as Bulgaria is a relatively strong exporter. The overall gross written premium registered by the non-life segment is expected to rise from BGN1.3 billion (US$0.9 billion) in 2012 to BGN1.7 billion (US$1.1 billion) in 2017.
The growth prospects for Bulgaria’s health insurance category have been limited as Bulgarians are required by law to contribute a proportion of their monthly income to the National Health Insurance Fund. However, due to deterioration in the quality of public healthcare, Bulgarians have gradually increased their use of private healthcare. The outlook for health insurance will improve gradually as a result; the gross written premium registered by the personal accident and health segment is expected to increase from BGN63.2 million (US$41.6 million) in 2012 to BGN70.8 million (US$46.2 million) in 2017.
Premiums were ceded to just five reinsurers in 2012, which can be seen as both an obstacle and an opportunity for reinsurers contemplating an entry into the segment. The limited number of established companies in the segment could benefit new entrants, although the power wielded by these five reinsurers could make establishing a market share difficult.
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Segment Outlook
The life segment is the second-largest in the Bulgarian insurance industry, accounting for 15.2% of its gross written premium in 2012. Life insurance penetration decreased from 0.4% in 2008 to 0.3% in 2012 and is expected to remain at 0.3% in 2017. The gross written premium registered by the segment is expected to increase from BGN243.9 million (US$160.2 million) in 2012 to EUR283.0 million (US$184.6 million) in 2017, at a CAGR of 3.0%.
The short-term outlook for the life segment is made positive by the fact that since January 2013 a 10% tax has been imposed on the interest accruing on bank deposits, a highly popular savings instrument among Bulgarians. The tax rate is to be reduced to 8% in 2014. The tax rate is expected to make bank deposits less popular among Bulgarians and make some of them divert a proportion of their savings to life insurance products.
The long-term potential of the life segment is potentially adversely affected by a decline in the country’s population, primarily on account of emigration from the country due to lack of adequate employment opportunities. According to the Organization for Economic Co-operation and Development (OECD), emigration resulted in a 6% reduction in the overall population between 1992 and 2011. This amounted to a 10% reduction in the active population during this period. Apart from emigration, a further 6% reduction in the population during the same period was due to low fertility rates. Emigration is expected to increase due to Bulgarians being granted equivalent working rights as the local working population in eight EU countries from January 2014.
Another factor affecting the potential of the life segment in Bulgaria is a fragile economy, which was adversely impacted by the 2008 financial crisis. In total, 11.5% of Bulgarians have personal insurance. Following the financial crisis, several Bulgarians had been reluctant to channel their limited incomes towards life insurance. During the financial crisis, some Bulgarians were forced to cancel life policies.
The attractiveness of the Bulgarian life segment for insurers contemplating an entry into the market is further reduced by the concentrated nature of the segment, with the five leading life insurers accounting for 67.4% of the segment’s gross written premium in 2012.
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By GlobalDataDistribution Channels
The distribution network for life insurance products in Bulgaria primarily comprises agencies, brokers, direct marketing and bancassurance.
Bulgarian life insurers are heavily dependent upon agencies, which accounted for 47% of the total new business gross written premium collected in 2012. For instance, DZI Insurance Plc, the parent company of DZI Life Insurance, had 26 main agencies and 27 agencies in 2013. However, the value of new business gross written premium collected through the channel decreased from BGN31.3 million (US$23.4 million) in 2008 to BGN30.9 million (US$20.3 million) in 2012, at a CAGR of -0.4%. This value is projected to reach BGN32.8 million (US$21.4 million) in 2017, representative of a CAGR of 1.2%. The number of new policies sold by agencies increased from 31,053 in 2008 to 40,298 in 2012. This number is further expected to increase to 43,819 in 2017.
The value of new business gross written premium collected through the brokers channel decreased from BGN15.1 million (US$11.3 million) in 2008 to BGN14.4 million (US$9.5 million) in 2012, at a CAGR of 1.2%. This is expected to increase at a CAGR of 2.3%, registering a new business gross written premium of BGN16.1 million (US$10.5 million) in 2017. The number of new policies sold through brokers increased from 15,012 in 2008 to 18,802 in 2012. The number is expected to increase further to 21,469 in 2017. According to the Financial Services Commission, the 10 leading brokers in the country in terms of premium collected were: SDI Group Ltd, I&G Insurance Brokers Ltd, UBB – Insurance Broker Ltd, Eurolife Bulgaria, Velmar Brokers Ltd, Raiffeisen Insurance Broker EOOD, Broker INS Ltd, Marsh, General Brokers JSC and UniCredit Insurance Broker EOOD. The respective market shares of the three leading brokers ? Insurance Broker Ltd, Eurolife Bulgaria and Velmar Brokers Ltd ? were 6.4%, 5.8% and 3.9% in 2012.
Direct marketing comprises a company’s offices and distance selling methods such as e-mail, direct mail and phone contact. The value of new business gross written premium collected through the channel decreased from BGN7.2 million (US$5.4 million) in 2008 to BGN12.8 million (US$8.4 million) in 2012, at a CAGR of 15.5%.
Direct marketing accounted for 19.5% of the new business gross written premium in 2012. This share is expected to increased to 22.0% in 2017, registering new business gross written premium of BGN16.1 million (US$10.5 million) in the same year. The number of new policies sold through direct marketing increased from 7,144 in 2008 to 16,734 in 2012. The number is expected to increase further to 20,372 in 2017.
Bancassurance accounted for a 10.3% share in 2012. Written premium through bancassurance is expected to record a CAGR of 1.2%, reducing its share to 9.8% in 2017. A prime example of bancassurance in Bulgaria is the collaboration between CIBANK and DZI, both being constituents of the KBC Group. This channel is primarily aimed at retail customers and SMEs. In 2010, DZI and CIBank launched a financial product called Progress which combined the features of a bank deposit with a unit-linked policy.
There are four types of bancassurance arrangement prevalent in Bulgaria. Under the first type, exclusive distribution agreements are entered into between a bank and a life insurer. For instance, Raiffeisenbank has entered into an exclusive distribution agreement with Uniqa Life Insurance. Under the second type, a bank distributes the life products of more than one insurer. For instance, Unicreditbank has entered into distribution agreements with Allianz Life Insurance and Generali Life Insurance. Under the third type, an insurer is collectively owned by a bank and an insurer. For instance, United Bulgarian Bank Met Life is jointly owned by United Bulgaria Bank and Alico, a MetLife Inc. company. Under the fourth type, a bank completely owns an insurance company. For instance, BNP Paribas Cardif is a fully owned subsidiary of BNP Paribas.
Porter’s Five Forces Analysis
Bargaining power of supplier: Low
Capital providers such as banks and other financial institutions are the main suppliers to life insurance companies. Several foreign insurers operate in the life segment, such as Allianz, MetLife, Interamerican, Groupama and Generali. These insurers do not require the support of local banks as they have large foreign capital bases. Therefore the bargaining power of suppliers is assessed as low.
Bargaining power of buyer: High
The bargaining power of buyers is assessed as high. Fundamentally, there are too many life insurers in the market targeting a declining base of customers.
Barriers to entry: Low
There are no barriers to entry in the life segment, as evidenced by the strong presence of foreign insurers in the country. However, the long-term potential is low primarily due to a declining population and a fragile economy. Viability is also low as the segment is concentrated, with the five leading life insurers accounting for 67.4% of the gross written premium in 2012.
Intensity of Rivalry: High
The intensity of rivalry is high among insurers operating in Bulgaria’s life insurance segment as a relatively small customer base is being targeted by 16 life insurers.
Threat of substitutes: Medium
In terms of investment, bank deposits eclipse life insurance products in terms of popularity because of the higher returns they offer. However, the popularity of bank deposits is being temporarily subdued by the tax on interest. There are no other direct substitutes for life insurance products.
