Motor insurance constitutes a major portion of the P&C insurance sector in Poland. Its market share according to the Polish Insurance Association (PIU) is 49.9% (GWP). Joint indemnities for Casco and MTPL total 68.8%. Naturally, this market started to develop along with the vehicle market value rise. Motor insurance however has not proven itself to be entirely profitable: Upon realization of potential profit, every insurer desired to secure its share in the market. The subsequent competition and price war eventually resulted in negative technical results for the market. Ever tighter regulations introduced by the Polish Financial Supervision Authority (KNF) have also had a negative impact on the insurance companies net profit. To mitigate this, insurers must increase premiums.
Motor insurance products in Poland may be divided into two groups: compulsory motor third party liability insurance (MTPL) and voluntary insurance policies such as accident and theft (Casco).
According to the PIU, in 2015 there were 19.6m MTPL policies and 5.2m Casco insurance policies registered. The total gross written premium of motor insurance in 2015 in Poland was registered at 3.2bn, (2.6% of the total estimated European market).
When the MTPL technical result is examined, structural market inefficiencies become apparent. The year 2015 was the ninth consecutive year when the MTPL sector reported a negative result amounting to a loss of 242m, compared to 187m in 2014. In 2006 technical profit in the MTPL sector was only 47m and has not been positive since. As for Casco insurance, a technical loss of 27m was reported in 2015, compared to a profit of 66m in the previous year.
Due to the price war which has shaped the market in previous years insurance premiums in Poland have long been considerably lower than in other EU countries. The average MTPL insurance premium was 138, half the average premium and the second lowest result in the EU. This was particularly significant to the entire insurance market in Poland, since the share of motor insurance in the market is 49.9% out of which 78.7% is compulsory MTPL insurance, the EU average being 27.3% and 57% respectively.
As well as fierce competition, in 2010 the courts started to rule for higher payouts in fatality compensation, a factor which until that point had not been considered in premium valuations forcing estimates to be applied retrospectively. Although such mechanisms are certainly beneficial for individuals affected, the risk of abuse may be considerable. Court rulings in such cases are often arbitrary as in Poland there are no standard compensation tables for injury or death. Therefore, an increase in rulings resulting in payouts has been observed: their frequency is 1.3 p.p. greater than the EU average (7% to 5.7%). In addition to this, MTPL indemnity payments rose by an average of 7.5% per annum (CAGR) between 2011 and 2015.
Apart from tight competition, a significant driver of a persistent technical loss were the KNF regulations. These aimed to avoid insurance misselling by obliging insurers to adjust premiums to the risks associated. From 2016 onwards, the newly introduced asset tax imposed on financial institutions above 2bn PLN as high as 0.44% will certainly be a negative factor. It is estimated that the tax has decreased net profit of the largest insurance company in Poland, PZU, by ca 10%.
Polish drivers have grown accustomed to low MTPL premiums and thus the last increases are severe. The price rise in the entire market is however necessary to ensure the profitability of the motor insurance sector. Compulsory MTPL profitability is particularly important, since other motor insurance products are significantly less popular in Poland than in other countries. However, due to the price surge, fewer drivers purchase additional motor insurance products. It is also worth noting that the price rise and the desire to search for the least expensive policy available will result in the increased importance of comparison sites and multiagencies. It is very probable that some market players may utilise this pursuit for low prices and offer significantly cheaper insurance to secure a higher market share. It is however unclear which player will be ready for such an investment.
For most insurers, a further price competition is unbearable, since their primary activity has long been unprofitable. Quality competition is more likely. This would mean adjusting insurance products to the clients needs. A transparent and attractive offer with a tailored product and efficient customer service may gain importance. Insurers may widen their cooperation with multiagencies and comparison sites, or develop and activate their networks of exclusive agents. A development in the direction of User Experience improvement or radical simplification of processes along with pioneers such as the InsurTech startups Lemonade or Trov is also possible, however under Polish conditions it may not happen in the near future.
Along with the shrinking market, sales support activities may become both expensive and insufficient. Therefore, operational cost reduction through automation of internal processes seems to be a way of securing future profitability. Automated claim and policy handling will allow companies to reduce operational costs and shorten these processes significantly. This is particularly important in claims handling; quick and automated handling process may reduce both the insurers costs and the clients stress. It is worth pointing out the increasing popularity of the application, Snapsheet, which allows the claimant to document a claim via a mobile device. Additionally, the utilisation of drones will gain importance in handling of claims associated with mass losses and natural catastrophes.
After extensive media coverage, politicians have directed their attention towards MTPL premium increases and expressed their deep concern with the scale of the price increases. Unofficial suggestions have recently indicated that the government may try to halt the surge. Whether or not such talk will turn into something tangible is yet to be seen.
First publication appeared in Insurance Day, 23rd Jan 2017.