Insurers struggle to cope in shadow of PZU

By : Greg Goodale

   Poland’s insurers see little hope of challenging the dominance of giant Powszechny Zakład Ubezpieczeń (PZU). But while the creation of new niches is helping foreign players to steadily gain market share, the sector’s slowing rate of expansion is set to squeeze less-established firms out of the market.

   “It’s enough for PZU to raise car insurance prices; its scale means that the value of the whole market increases,” said Paweł Dangel, chairman of German insurer Allianz. “If it doesn’t raise its prices for a whole year (there’s) talk of market stagnation.”

   PZU is Central and Eastern Europe’s largest insurance company. Combined with its life insurance arm PZU Życie, it controls 56% of Poland’s insurance market, including 51% of the life sector and 59% of the property market. According to Dangel, a downside to the privatization of Poland’s insurance market was that it made PZU a dominant player that is now affecting the returns of every player in the industry.

   New companies on the market have small margins to claim a stake in the Polish insurance business by competing on prices because economies of scale make it easy for PZU to reduce its prices. “It is very difficult to compete with PZU on price,” said Mirosław Kowalski, chairman of Zurich Group in Poland. “Its portfolio is too big for it to be undercut.”

   Earlier this month, Netherlands-based insurance group Eureko completed deals with the Treasury Ministry and PZU trade unions on the zł. 4.3 billion ($1.02 billion) purchase of 56% of PZU. Smaller competitors, however, are concerned that under Eureko’s guidance a leaner and more efficient PZU will pose an even more ominous threat. “(Eureko’s) restructuring policy as an investor will be aimed at recouping its investment,” Kowalski said. “The size of its portfolio will give them more flexibility in adapting to the market. They can launch products at dumping prices, for instance.”

   The solution is to specialize in market segments such as small and medium-size firms, or creating special policies for company directors. Success also calls for a diversification away from PZU’s strongest areas.

   One market with potential is civil liability insurance, said Alojzy Choda, chairman of German insurance firm Gerling Polska. “There is a growing knowledge of insurance among our clients,” Choda said. “They are looking for the right form of civil liability cover, so that we can expect a big increase in these contracts in the near future.”

   By expanding the market with new products, companies like Gerling are contributing to the slow erosion of PZU’s market share. But although the State Insurance Supervision Office (PUNU) indicates that PZU’s chunk of the insurance market declined by only 1% since 2000, the market is confident that the trend will continue. “PZU gives up a few percent each year,” Dangel said. “Ten years ago it had 100%.”

   But according to PZU spokesman Adam Taukert, this decline in market share does not mean that PZU’s control of the sector will diminish. “While the Polish market keeps growing we have to take into account a fall in our market share,” Taukert said. “But this does not mean a fall in absolute value market, but only in percentage terms, resulting from the overwhelming growth of our competition.”

   But the struggle of insurers to prosper is becoming difficult in a period of slowing market growth caused by a lackluster economy and a dearth of legislative support for the industry. “Only a few firms have seen spectacular success,” Dangel said. “Virtually nothing was done for insurers. No legislation was created, no fiscal policy was created, no government had any vision for developing insurance.”

   According to the PUNU, the combined revenues of Poland’s 35 life insurance and 35 property insurance companies in the first half of this year amounted to zł. 12 billion ($2.8 billion), an increase of 12.25% over the same period last year. But this growth is attributable to insurers’ investments rather than growing premiums, which accounted for zł. 11.6 billion ($2.76 billion) of total revenues, rising just 6.33% since June 2000.

   The figure belies a gradual slowdown in market growth. Gross insurance premiums on the market mushroomed in the 1990s, peaking in 1997 when they hiked by 50.7%. In the late 1990s, the market entered a period of slowing growth that saw a 21% expansion in 1998, 15.9% in 1999 and 11% in 2000, according to the Polish Chamber of Insurance (PIU).

   Kowalski said the slump can be partly blamed on the lack of consumer awareness. “This is evident on a wider scale,” Kowalski said. “We spend just over 1% of GDP on life insurance and just over 2% on property insurance. The European average is three or four times higher.”

   Investors that entered the insurance market with expectations based on premium growth in the mid-1990s may not be prepared to wait for a recovery, Dangel said. “(Foreign investors) can always make a profit, but the question is in what time and at what expense,” Dangel said. “Many can afford to wait, but there may be markets where they can expect quicker returns.”