past decade, Lithuania’s life insurance industry has flourished,
sustaining a growth pace few others have matched. But for now what
had promised to be an ongoing growth story has been severely
checked by economic problems, both global and specific to
Lithuania.
What it lacks in size
Lithuania, a country with a population of only 3.7 million, has
made up for in the dynamic growth of both its economy and insurance
industry. But the road to prosperity has been a tough one for the
Baltic country, which in 1990 became the first Soviet Union state
to declare independence.
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Lithuania faced stiff opposition from the Soviet Union, and it
was only in 1993 that it withdrew its troops from Lithuanian soil.
In common with all former Soviet states, Lithuania went through a
painful period of adjustment as it converted to a free economy.
Symptoms of the adjustment included an inflation rate that exceeded
1,000 percent in 1992 and a massive 44 percent fall in real GDP
between 1991and1994, according to Gitanas Nauseda, associate
professor of economics at Vilnius University and an adviser to
Lithuania’s largest commercial bank, SEB Vilniaus Bankas.
However, just as inflation began subsiding Lithuania’s banking
industry was faced with a crisis in 1995 following the collapse of
domestic companies that had traded heavily in metals with Russia.
This in turn led to the collapse of many Lithuanian banks and a
loss of consumer confidence in the financial system, noted
Nauseda.
He continued that the Lithuanian government acted decisively by
bolstering bank supervision, creating a deposit insurance system
and easing conditions for foreign banks to enter the Lithuanian
market.
However, just as confidence was returning Lithuania’s economic
progress was again dealt a severe blow by the Asian financial
crisis in 1997 and even more so by the Russian financial crisis in
1998.
The result, said Nauseda, was an economy in danger of “falling
into a deep chasm.” The solution was to orientate Lithuania’s
foreign trade away from former Soviet Union states towards the
European Union (EU) and US, a move that, as Nauseda said,
“restarted the stalled Lithuanian economic engine.”
This was reflected in GDP growth of 4.1 percent in 2000 followed
by acceleration to an average of 7.84 percent annually between 2001
and 2007 – with an increase of 8.7 percent achieved in 2007.
During the period, Lithuania also strengthened its ties with
Europe. In February 2002, Lithuania pegged its currency, the litas,
to the euro (LTL3.451 per euro) and in May 2004 became a member of
the EU. Lithuania is scheduled to switch to the euro in January
2010.
Insurance comes into its own
Strong GDP growth brought with it rising disposable incomes. For
example, according to Romania’s Department of Statistics average
disposable income per capita increased from LTL457 ($170) per month
in 2003 to LTL859 in 2007. Unemployment also decreased sharply,
falling from a peak of 12.5 percent of the labour force in 2001 to
3.9 percent at the end of 2007.
In tandem with rising prosperity Lithuania’s insurance market’s
development picked up pace substantially. According to the
Lithuanian State Insurance Supervisory Authority (SISA), between
2000 and 2007 total premium income – life and general insurance –
increased from LTL360.5 million to LTL2.09 billion, a CAGR of 28.5
percent.
During this period life insurance consistently gained ground in
the total insurance market, with new life premium income rising
from LTL76.2 million in 2000 to LTL788.1 million in 2007. This
represented a CAGR of 39.6 percent with a record increase of 73.4
percent recorded in 2007. Adjusted for inflation, real growth in
2007 was 63.9 percent, according to SISA.
Notably, in 2000 though Lithuania’s developing life insurance
market had already attracted six players, the country’s 22 general
insurers still accounted for 43 percent of life insurance premium
income. Non-life insurers ceased writing new life business in July
1997.
During the period between 2000 and 2007, total new general
insurance premiums written achieved a CAGR of 20.1 percent with an
increase of 28.6 percent recorded in 2007.
Lithuania’s emerging life insurance market has attracted a
number of new entrants over the past decade, with the number
standing at 10 at the end of 2007. Six of these were registered in
Lithuania and four were branches of insurers from other EU member
states. The number of life insurers increased to 11 in 2008 with
the establishment of a branch office by Norwegian insurer
Vital.
Expansion of Lithuania’s life insurance industry has been
characterised by the significant influence of foreign entrants.
Indicatively, according to SISA foreign companies accounted for 55
percent of total equity in Lithuanian life insurers at the end of
2007. Banks have also played a key role, holding 45 percent of the
industry’s total equity.
Expansion of the industry has seen a combination of acquisitions
and grass roots development, the latter followed by Swedish bank
Skandinaviska Enskilda Banken (SEB) which in 1998 became the first
foreign bank to enter Lithuania when it acquired a controlling
stake in Lithuania’s largest private bank Vilniaus Bankas, since
renamed SEB Bank. SEB went on to establish SEB Gyvybes Draudimas
(SEB Life), Lithuania’s second-largest life insurer in 1999.
However, SEB has not shunned acquisitions, in 2004 acquiring UK
insurer Royal & Sun Alliance’s Codan Life which included a
Lithuanian life and pensions operation.
Though SEB Life has held its second position in the market, its
market share stood at 19 percent in the first eight months of 2008,
down from 25.5 percent in 2007 and 27 percent in 2006.
Lithuania’s largest insurer, Hansa Gyvybes Draudimas, is also
controlled by a foreign bank – Swedbank of Sweden. Swedbank
established a presence in Lithuania in 1998 when it acquired a 50
percent stake in Latvian bank Hansabankas.
This acquisition brought with it Hansabankas’s Lithuanian unit,
which in October 2003 acquired full control of the largest
Lithuanian life insurance company, UAB Lietuvos Draudimo Gyvybes
Draudimas, now Hansa Life. Swedbank acquired full control of
Hansabankas in 2005.
Hansa Life has also seen some erosion of its market, which stood
at 37.1 percent in the first eight months compared with 41.4
percent in 2007 and 37.6 percent in 2006.
Another significant foreign entrant was UK insurer Aviva, which
launched operations in Lithuania’s life market in 2002 under the
Commercial Union brand. Renamed Aviva Lietuva in 2006, the unit has
gained market share consistently and has also done especially well
in Lithuania’s private pension market, to which workers have had a
choice of contributing a portion of their monthly compulsory
contributions since 2003.
According to SISA, Aviva Lietuva had pension assets under
management of LTL193.6 million at the end of 2007. The only other
life insurer participating in the private pension fund market, ERGO
Lietuva, a unit of German insurer ERGO, had assets under management
of LTL46.7 million.
Notably, Aviva shifted from fourth position in 2007 with a
market share of 9 percent to third in the first eight months of
2008 with a market share of 15.2 percent. In the process Aviva
ousted Finnish insurer Sampo Life Insurance from third place, the
latter’s market share falling from 10.9 percent to 8.2 percent.
In another significant shifting of position in the Lithuanian
market, ERGO Lietuva fell from third position in 2006 to fifth
position in the first eight months of 2008. During the period the
insurer’s market share has halved from 15.7 percent to 7.1
percent.
Indicative of a high level of concentration in the life market,
the top five players in the life market accounted for 86.6 percent
of total premium income in the first eight months of 2008.
Unit-linked driven growth
The most striking characteristic of premium income growth in
Lithuania’s life insurance market has been the huge rise in the
importance of unit-linked products which were first introduced in
1999. By 2002, unit-linked products accounted for 33.9 percent of
policies on insurers’ life books, rising to 65.8 percent in
2007.
Unit-linked policies accounted for LTL615 million, or 78
percent, of premiums written in 2007 – up 117 percent compared from
sales of LTL284 million in 2006 when they accounted for 62.5
percent of total new sales. Hansa Life accounted for LTL235 million
(38.3 percent) of unit-linked sales in 2007, SEB Life LTL198
million (32.2 percent), Sampo Life LTL82 million (13.4 percent) and
Aviva Lietuva LTL71 million (11.5 percent).
Based on policy contracts on insurers’ books traditional life
insurance has made progress since 2005, rising from about 3 percent
of policies to 26.6 percent in 2007 and according to SISA has
continued this growth trend in 2008.
Biggest losers over the past several years have been annuity
products, where based on contracts on insurers’ books their market
share fell from almost 50 percent in 2002 to under 8 percent in
2007.
Overall, 2007 was a record year for Lithuania’s life insurance
industry with SISA data indicating a total net profit of LTL47.06
million, up from LTL19.2 million in 2007. The most profitable
insurer was Hansa Life with a net profit of some LTL27 million. It
was followed by Aviva Lietuva with a net profit of about LTL8
million and SEB Life with a net profit of about LTL4 million.
Return on equity also soared in 2007, for the total industry
rising to 30.2 percent from 15.2 percent in 2006 and 0.1 percent in
2005.
Tougher times ahead
Unfortunately all good
things come to an end and this is the clear picture emerging in
Lithuania’s economy and life insurance market in the wake of the
global financial crisis . Notably, rating agencies Moody’s and
Fitch both recently revised their outlook on Lithuania from stable
to negative.
A primary concern is the country’s substantial current account
deficit, which stood at 17.9 percent of GDP at the end of the
second quarter of 2008. Lithuania’s GDP growth rate has also slowed
appreciably, in the second quarter of 2008 coming in 1 percent up
compared with the previous quarter.
An early indication of a reversal in the country’s life
industry’s fortunes came in 2007 when, according to SISA, the
industry experienced a 58.4 percent increase in its lapse rate,
though total numbers were small – 11,700 policies.
More telling, new premium income in the first eight months of
2008 totalled LTL432.5 million, which on an annualised basis
indicates that new premium income in 2008 will fall by about 18
percent compared with 2007. SISA is taking an even more negative
view and is forecasting a 22 percent decline in new premium income
in 2008.
Despite the growth setback Irmina Judickaite, a member of the
Lithuanian Insurance Commission, confidently predicts that life
assurance products continue to have “great growth potential.”
Underlying her confidence and that of other members of the
commission is the potential for disposable incomes in the country
to continue rising over time towards average levels in the EU.
Indicative of comparative wage levels, in 2007 Lithuania’s per
capita GDP stood at 70 percent of the average in the EU.
It is not only average incomes in Lithuania that are below the
average in the EU. Insurance penetration, though climbing steadily
in recent years, is also below average while general insurance
remains dominant.
According to SISA, total life insurance premium income in
Lithuania climbed from 0.4 percent of GDP in 2003 to 0.7 percent in
2007. This ranked Lithuania’s life insurance penetration 30th out
of 35 European countries, according to reinsurer Swiss Re.
Between 2003 and 2006 penetration in Lithuania’s general
insurance market increased from 1.1 percent to 1.3 percent. Though
this lower growth rate compared with life insurance reduced general
insurance’s relative importance it still represented just over 62
percent of total premium income in 2007 compared with a global norm
of about 40 percent. According to reinsurer Swiss Re, annual per
capita life premiums averaged $81.20 in 2007 and general insurance
premiums $146.10.
Overall, this situation supports confidence in the potential for
Lithuania’s life industry to achieve further substantial long-term
growth. Regrettably, global economic woes and Lithuania’s severe
current account deficit are likely to delay full realisation of the
industry’s potential for some time to come.
