Turkish insurers remain vulnerable to economic and political turbulence, as well as limited pricing control in motor third-party liability business, says AM Best.
In a new Best’s Market Segment Report, “Attraction of Turkish Insurance Market Hampered by Underwriting Losses and Economic Volatility,” the international credit rating agency notes that Turkey has historically provided great opportunities for investors, offering high economic growth potential and a unique “East meets West” position.
As a result, most foreign insurance groups have set up or acquired operations in Turkey to take advantage of the huge economic potential.
However, more recently, with elevated geopolitical tensions, currency devaluation, high inflation, changing financial regulation and an insurance market that has consistently generated poor underwriting performance for most market participants, sentiment is less optimistic. Many global insurers now think twice about investing in Turkey, with those present considering their options.
As a result of Turkish insurers’ potentially significant exposure to catastrophe risk from earthquake events, many cede the bulk of commercial risk to reinsurers, while the majority of individual (residential) property risks are absorbed through the government-backed Turkish Catastrophe Insurance Pool. This means that many domestic insurers are more focused on underwriting motor business.
Mr Will Keen-Tomlinson, AM Best financial analyst, said, “The underperformance of motor third-party liability (MTPL) portfolios has been driven principally by regulatory and legal changes in recent years. Regulatory changes such as pricing caps have further limited companies’ ability to recover losses. This has left investment income as the most viable means of profitability for companies underwriting MTPL risks.”
The report also notes that while Turkey’s insurance market has grown by an average of 20% annually, depreciation of the lira against the euro (and other currencies) has meant that the market has contracted slightly in euro terms. Further, insurers have experienced inflation rises for motor repair parts and also encountered increasingly burdensome reinsurance costs from the international market.
Mr Keen-Tomlinson added, “When currency devaluation and inflation are taken into account, foreign shareholders can find returns falling short of their cost of capital for participating in the market. At least one large foreign player has pulled out of the market recently, and others are likely to be considering their options.”