Turkish life and non-life insurers' credit quality has deteriorated as a result of the country's macroeconomic instability and the large fall in the value of the Turkish lira, Fitch Ratings says.
In addition, motor insurers face added pressure from the cap on motor third-party liability (MTPL) insurance premiums.
However, in contrast to banks and many corporates, Turkish insurers are not exposed to foreign-currency (or local-currency) refinancing risk as they are entirely equity financed.
In its report titled "Turkish Insurance: Price Cap, Weak Lira Squeeze Underwriting Profits", Fitch points out that Turkey's macroeconomic instability and currency weakness are detrimental to insurers in several ways. Insurers' asset quality has deteriorated due to recent downgrades of the sovereign and the banking sector; motor claim costs are soaring due to lira depreciation because spare parts for vehicle repairs are mostly imported; and demand for insurance may decline as disposable incomes are eroded by high inflation (at 15.9% in July).
The vast majority of Turkish life and non-life insurers' assets are held as deposits in local banks or are invested in Turkish government bonds. In July 2018, Fitch downgraded Turkey by one notch to 'BB'/Negative, driven by increased downside risks to macroeconomic stability and deterioration in economic policy credibility. Fitch subsequently downgraded 24 Turkish banks and their subsidiaries, in most cases by two notches.
Insurers' asset quality has dropped accordingly, and could fall further given the Negative Outlook on the sovereign rating and Negative Outlooks (or Negative Rating Watches) on the banks' ratings.
The MTPL price cap, which was introduced in 2017, forces insurers to price MTPL business below break-even. This is reducing profitability even for insurers seeking to avoid MTPL, as some of the losses are distributed among all insurers via a pool system based partly on each insurer's historical share of the MTPL market. The government introduced the cap in response to sharply rising premium rates as insurers sought to counter the effects of more onerous reserving rules and rising claim costs. Fitch does not expect it to be removed in the near term.
Leading insurers are generally retreating from the MTPL market but some small, local insurers have significantly increased their MTPL business as a loss-leader to access cross-selling opportunities, such as motor damage insurance. However, Fitch believes they could be storing up problems for the future, given the long-tail nature of MTPL, with unpredictable claims patterns, inflation risk and exposure to regulatory changes.
Fitch expects the non-life sector combined ratio to worsen to around 105% (2017: 103%) as the full effect of the MTPL premium cap feeds through and pricing competition in other insurance lines intensifies as insurers look to compensate for lost MTPL earnings.
However, the international rating agency expects the sector to achieve an overall profit, albeit reduced, in 2018, helped by strong investment income as interest rates remain high.