GIG: The new government has created a new institutional framework that welcomes the participation of private insurance companies as a basic part of the second pillar insurance scheme. What does this mean for insurance companies? What effect do you foresee this having on Minetta Insurance?
Kakatsis: The new government has announced its intention to proceed with a reform of the framework which will support further private insurance involvement in the pension system. Such an initiative can help propel not only the business generated for private insurance companies by products adjacent to the secondary and tertiary pillar, but also the prospects of the entire private insurance industry.
Furthermore, the government has announced its plans to reduce social security contributions gradually within the next four years. Those savings in favour of both individuals and enterprises could be the necessary monetary resources required for the former to gain access to complimentary private insurance schemes.
We at Minetta, not being primarily active in this field, have decided to carefully monitor these developments and act once we are confident a true opportunity, which we can exploit, arises.
GIG: Do you consider the Greek insurance sector to be a healthy entrepreneurial space? What opportunities does this segment hold for potential investors?
Kakatsis: The domestic insurance industry has proven to be one of the most resilient sectors during the economic downturn in terms of profits and economic value generated. This came in the aftermath of a really big shock, as a result of the PSI and PSI+ exercises as Greek government bonds were a significant part of Greek insurers’ investment portfolios.
In addition, the imposed capital controls tremendously limited the flexibility of domestic carriers to invest their holdings and, as such, the opportunity cost until the waiver was quite significant. Supported by the lower rate of claims for the 2012 to 2018 period, the entire sector recorded a cumulative net profit of €1.6 billion, with total shareholder equity growing by an impressive 12.6% compound annual growth rate (CAGR). As regards the capital position under the Solvency II framework, the entire sector is more than adequately capitalised.
Reasons behind this evolution for the 2010 to 2019 period were multiple, and the results cannot be based on a single catalyst. That said, there is at least one key takeaway, which is the inherent flexibility of the business model of insurers that allows them to maintain profitability levels even under stressed economic conditions as long as fixed costs are managed successfully.
That said, all market participants should be cautious because the sector’s health presented herein above is a static image. Looking at it from a more dynamic and forward-looking perspective, it is conditional on the actions of the sector’s participants. We are just exiting a long period of recession, amidst a very challenging global economic environment, and, regretfully, our country’s economic cycle seems to be off sync vis-à-vis the rest of the world.
The domestic market has been severely affected by a drastic reduction of consumers’ disposable income – consumers in a market which has been historically lagging in terms of penetration rates compared to the rest of Europe. This environment significantly increased the demand elasticity, and the insurers all entered a spiral of premium reductions to maintain their market share.
This commercial policy [of premium reductions] was successful because we entered into a recession. Now that we are exiting, we should be able to observe a rebalancing. Regretfully, however, we are not. To give you an example based on the most active line of business, which is motor policies, we witnessed a growth in the fleet of insured vehicles over the last two years and at the same time a reduction in the premiums. This is a clear indication that there is a dislocation in the market which will have to be addressed.
In other lines of business, we are witnessing a growth in terms of premiums – as a result of increased demand by new customers – however, those lines of business are not profitable under the current pricing conditions.
In the past, insurers acted more as asset managers wishing to collect premiums just because available yields in the capital markets were very appealing. In that respect, a potential loss on the technical result was offset by the investment income as long as an insurer was able to continuously grow its revenue.
It seems, however, that the above model will not be applicable any more on the back of a) lack of yields; and b) the new regulatory framework of Solvency II, which increases capital requirements for investments and therefore significantly increases the risk/reward ratio of any investment compared to what the same investment offered a couple of years ago. As such, I estimate that we have to return to the old way of doing business, which is to make the technical result the key profit generation source.
The above environment, in my humble opinion, is one which suggests that there is a need for premiums growth which can support further profit generation. This is a very appealing environment for any investor, especially having very recent proof of the sector’s resilience during a severe economic downturn as it provides adequate downside protection with the potential of a significant upside. This upside can be further coupled if penetration rates increase in sync with the anticipated economic growth. That said, the sector’s health will be jeopardised if we don’t realise that the risks which existed during the crisis years have increased, and the crisis premiums cannot be charged anymore.
GIG: Minetta Insurance is one of the oldest players within Greece’s private insurance space. Can you provide us with an overview of the company and the key objectives you have set out to achieve within your recent business plan?
Kakatsis: Minetta has operated for nearly half a century and has established itself in the domestic market as a reputable medium-sized specialty insurer. We are among the remaining four combined-license (under the same license we can operate in all lines of business of property and casualty (P&C) insurance and life without having to abide by the requirements of the currently applicable law where a composite insurer must operate distinct entities of each line of business) composite carriers, having amassed significant goodwill from customers as well as technical expertise in the motor business, which allows us to present one of the highest retention rates in the market (87% average renewal rate for FY2019).
We have managed to accomplish that by providing a minimum level of service to our clientele, which is reflected in our premiums. Whilst, of course, we try to be competitive, on the other hand we address a certain client profile who will acknowledge and accept the premium he/she must pay for insuring a vehicle with us compared to the other carriers.
The property and casualty business (excluding the motor segment) is not as developed as we would like it to be, and this is an area where we are trying to explore ways to grow profitably. Lastly, despite being a composite insurer, our life line of business is underdeveloped.
We have just successfully completed our 2015 to 2019 plan and we are fine-tuning our plan for the 2020 to 2024 period. The key objective is to leverage the existing goodwill and robust loyal customer base to propel our growth rate, primarily in the P&C space. We aim to do this by operating under a ‘boutique’ mentality, which will resemble a provision of services similar to that provided by private banks. We have gained our reputation based on the provision of high-quality services, and we believe that the only profitable way forward is by maintaining the same mentality.
Traditional operating models amidst technological advances will become obsolete. On the other hand, we are not firm believers that a completely digitalised experience without any human interaction between the company and the client is optimum. As such, our key objective can be summarised in trying to exploit all the available digital transformation tools which can be profitably applied in revamping the traditional operating model to a more ‘hybrid’ one, by operating simple and efficient structures, releasing resources to minimise complexity and enhance productivity.
We have identified enough areas to do so across the entire operational chain, whether this be in product development, pricing, distribution, or claims management. This is the core of our approach to be used as a complementary stepping-stone to propel the growth rates in the remaining P&C space.
As regards the life line of business, we believe we need to be cautiously optimistic. We see other players carrying significant adverse legacy issues (single premium products, guaranteed return products) which in light of the IFRS 17 adoption will put more strain on their finances. On the optimistic side, and following your second question, we need to see where the market, and demand, will position private insurers within this landscape. Depending on how things evolve, we will assess our options and readjust our tactics accordingly.
GIG: Which segments within the Greek insurance market have the best growth potential in your opinion and why? What are the main challenges? Which insurance products do you focus on most heavily? Which are most familiar to your intermediaries?
Kakatsis: It depends on which will be the driving force that will act as a growth catalyst. If we refer to higher demand, I believe the key area is the P&C business excluding the motor business. The new mandatory nature of the motor civil liability insurance has helped increase the clientele base, but as mentioned earlier, a poor approach on behalf of industry participants has led to lower premiums – although claims have begun to pick up. For that part of the market I don’t see any room for growth from higher demand.
Regretfully, in the last couple of years we have witnessed tragic events in our country where people would have been better off in the aftermath if they had decided to insure their property. These unfortunate events create awareness to potentially increase the demand for fire and peril products. Additionally, there are civil liability policies which could be sought by many trades and professions.
I am purposefully not including in the above list very recent offerings such as cyber security. The reason being that we feel those products are sought after by a certain profile of corporate clients, and one that does not abound in Greek market. When the domestic market presents such low penetration rates for simple P&C products, we see more potential upside from more traditional policies rather than exotic ones.
If we refer to premiums growth to reflect the increased underwritten risks – as I explained earlier – all sectors have room for growth. The main challenges for the above to happen are: clients’ disposable income; economic growth.
The former is partially dependent on the latter. Even if potential clients wish to insure themselves, they must be able to afford the policy and a policy which will be priced accordingly. This is highly correlated to economic growth.
All the traditional products are familiar to the intermediaries. Keep in mind that the specific distribution channel for intermediaries has been working successfully since the early days. And it keeps on working more successfully even after the appearance of direct insurance options. That said, the intermediaries themselves must act on the current as well as upcoming challenges of the market whether driven by the new regulatory changes imposed on them or the shifts in the market itself. This will also be a changing landscape and the insurance players not operating through own agency networks must prepare themselves for what may come.