An unfinished growth story

In less than a decade Poland’s life insurance industry has
emerged as one of Europe’s big success stories with premium income
rising from PLN7 billion ($3.1 billion) in 2000 to PLN27.8 billion
in 2007, a CAGR of 21.8 percent. Not only did this strong growth
result in Poland becoming the largest life insurance market in
Central and Eastern Europe but put it in a position to challenge
far more mature markets such as Austria and Norway in terms of
size.

For Poland’s insurance industry this success in many respects
returns it to the importance it enjoyed prior to the outbreak of
World War II in 1939. At that stage according to industry body the
Polish Chamber of Insurance (PCI) the country boasted were 38
mutual and 72 private life and general insurers. Only two, General
Mutual Insurance and Warta, survived the war and the post-war
transformation of the political and economic system. General Mutual
became the state-owned PZU and the only domestic life and general
insurer. Warta was engaged in foreign currency related insurance
and reinsurance.

Though the first move to end the monopolistic situation in Poland’s
insurance market came in 1984 this was limited to creating
additional state-controlled companies of which only one, a life
insurer, was established. In 1989 a major step forward was taken
when all restraints on ownership of insurers was removed. However,
at that stage Poland had no regulatory infrastructure in place and
as a result, noted the PCI, foreign insurers showed scant interest
in Poland’s market.

Progress only came with Poland’s move to become a member of the
European Union (EU) which brought with it the need to implement
regulation in keeping with EU standards. The first step was the
introduction of the Act on Insurance Activity in 1990 which among
many reforms separated life and general insurance regulation and
laid down business conduct rules.

Regulatory progress had the desired result and in November 1990 US
insurer American International Group announced that it was to
become the first foreign insurer in half a century to enter
Poland’s life insurance market. The new insurer Amplico Life was
launched the following year. In 1990 Poland’s then two life
insurers reported total premium income of $52 million.

Further legislation

Over the next several years further legislation governing the
insurance industry was introduced, resulting in regulatory
directives of the European Commission being met in January 2004.
Poland became a full EU member in May 2004.

By 2004 development of Poland’s life insurance market was already
well advanced, the number of life insurers having already reached
21 by 1997 and a peak of 36 in 2003. The attraction for foreign
insurers was the rapid uptake of insurance and pensions products in
a market where penetration levels were extremely low. For example,
in 2000 total premium income of PLN7 billion represented only 1.21
percent of GDP and average premiums per capita stood at $49.60,
according to reinsurer Swiss Re.

By 2006 life insurance premiums, spurred on by accelerating
economic growth, reached PLN21.1 billion and represented 1.71
percent of GDP while average premiums per capita had increased to
$152.20. According to Netherlands bancassurer ING, average monthly
remuneration in Poland increased from €489 per worker at the end of
2000 to €711 at the end of 2007.

However, while growth was impressive Poland market penetration
still lags well behind Western European countries where in 2006
average penetration equaled 5.6 percent of GDP with levels ranging
from a low of 2.8 percent in Austria to a high of 13.11 percent in
the UK.

A combination of rising GDP and increased penetration appears
likely to continue driving premium income growth at a robust pace
for a number of years. According to Poland’s Central Statistical
Office the country’s real GDP growth increased from a low of 1.1
percent in 2001 and reached 6 percent in 2006 and 6.5 percent in
2007.

While Poland’s more restrictive monetary policy and a general
global economic slowdown are likely to dampen GDP growth,
indications are that the country’s economy will continue to grow at
a solid pace. According to Poland’s Ministry of Finance GDP growth
in the first quarter of 2008 was about 6 percent while forecasts of
Poland’s GDP growth range between 5 percent and 5.3 percent for
2008 as a whole and between 4 percent and 4.5 percent for
2009.

However, it is not only strong premium growth that has attracted
foreign insurers to Poland. The country’s life insurance market has
proved highly profitable as well. According to the PCI average
return on shareholders’ equity (ROE) in the life insurance sector
increased from 22.5 percent in 2004, to 32 percent in 2005 and 35.5
percent in 2006. The life insurance industry’s total net profit in
2006 increased by 29.3 percent compared with 2005 to PLN2.94
billion.

General insurance also produced a high average ROE: 16 percent in
2004, to 22.5 percent in 2005 and 24 percent in 2006. Total profit
of the 34 general insurers in 2006 was PLN3.81 billion, up 28.5
percent compared with 2006, on total premium income of PLN16.46
billion.

Indications are that 2007 was also a successful year in terms of
profitability in a market that saw life insurance premium income
increase by 37.7 percent compared with 2006. Indicatively, Poland’s
second largest life insurer Commercial Union Poland (CUP), a unit
of UK insurer Aviva, reported a net profit of PLN449 million, up
6.9 percent compared with 2006.

Based on CUP’s year end equity capital of PLN1.136 billion ROE was
39.5 percent in 2007, up from 38.1 percent in 2006. CUP’s total
premium income in 2007 increased by 28 percent to PLN3.14 billion.
Aviva has announced that CUP’s name will shortly be changed to
Aviva Poland to conform with its global brand name standardisation
strategy.

In late-2007 Aviva moved to further strengthen its position in
Poland when it entered into an exclusive 15 year bancassurance
partnership Polish bank Bank Zachodni (BZ) that includes the
establishment of 50:50 joint venture life and general insurance
companies. The new venture will provide Aviva with access to BZ’s
1.4 million customers through its network of over 400 branches
across Poland. CUP, which ranks as Poland’s market leader for
individual life products and unit-linked insurance, distributes
principally through its direct sales force of 3,000 tied
agents. 

 Aviva’s alliance with BZ highlights the growing importance of
the bancassurance distribution channel in Poland. According to the
PCI, in the individual life sector banks accounted for 29.8 percent
of new premium income in 2006, up from 22.6 percent in 2005.
Individual premium income accounted for 53 percent of total life
insurance premium income in 2006, up from 49 percent in 2005.

Bancassurance is also of growing importance in the group business
segment. Though traditionally insurers’ tied agents have accounted
for the bulk of new group business their share fell from 63 percent
in 2005 to 52 percent in 2006 while the share of bank sales
increased from 7 percent to 11 percent. In total Polish life
insurers had 18,471 tied agents at the end of 2006.

The year 2006 saw a substantial increase in the demand for unit
linked products which accounted for 46 percent of new premium
income, up from 20 percent in 2005. This came at the expense of
life insurance protection products which accounted for 46 percent
of new premium income in 2006, down from 63 percent in 2005. The
third most important products in 2006 were health and accident
policies and accounted for 14.4 percent of new premium income.
Annuity products represented a mere 0.3 percent of new premium
income in 2006.

Pensions reform

For insurers a major growth opportunity came in 1999 with the
radical reform of Poland’s pension system. Until then, the entire
pension burden was borne by the state, an untenable situation that
according to international economic body the Organisation for
Economic Co-operation and Development (OECD) would have resulted in
public old age payments increasing from 5.8 percent of GDP in 1998
to 11.4 percent in 2050.

Under the new system people born before 1 January 1949 remained in
the old public system. Those born between 1 January 1949 and 31
December were allowed to choose between the old state and the new
systems that encompass mandatory individual accounts known as
OPFs.

The total contribution rate for OPFs is 19.52 percent of an
employee’s taxable income, with paid half each by employers and
employees. Of the total contribution rate, 12.22 percent goes into
a public scheme (9.76 percent is paid by the employer and 2.46
percent by the worker). The remaining 7.3 percent is credited to a
private individual account scheme and is paid entirely by the
employee. Self-employed individuals must also participate but may
pay a lower rate of contributions.

The first OPF benefits, which have a minimum determined by final
pre-retirement income, are due for payment in 2009 and will paid
out as annuities for which the institutional structure will be
established in 2008. The OECD estimated in 2006 12.4 million people
were members of OPFs.

Also introduced in 1999 were voluntary defined contribution
occupational pension plans known as PPEs. Contributions by
employers to PPEs of up to 7 percent of an employee’s salary are
tax-exempt as are investment income and benefits. Additional
contributions by employees are, however, taxable. In 2004 personal
voluntary schemes known as IKEs were introduced to which both
employer and employee may contribute on the same basis as
PPEs.

The scope for growth in Poland’s pension market is significant.
Indicative of its potential, according to the OECD contributions to
OPFs, PPEs and IKEs in 2006 amounted to 1.5 percent of Poland’s
GDP, which stood at about $340 billion that year. Though this
contribution rate was higher than countries such as Portugal, Spain
and Norway, it was well below levels in, for example, Denmark (6
percent) and Switzerland (8.1 percent).

Poland’s GDP per capita is also way below that of most European
countries and as ING noted in a recent investor presentation
“leaves ample room for future catch up.” For insurers this
represents significant opportunity and leaves no doubt as to why
Poland is ranked by many as a key market in their growth
strategies.