Insurance industry yearns for strict oversight and incentives

Never has a sector of the economy asked so persistently for strict oversight as insurance and had it fall on such deaf ears, says the chairman of the Association of Insurance Companies of Greece (EAEE) Giorgos Kotsalos. Supervision is a basic requirement for the growth of the sector, he points out, and its continuing absence is leading to problems mounting up. «Greece is the only European Union member showing a decline in the share of the insurance industry in the national product; furthermore, insurance’s share in investment is only 4 percent when that of other members starts at 15 percent,» Kotsalos says. Concern in the sector is growing, as international developments are testing the sector’s endurance while a new round of negotiations is about to start with the big foreign reinsurance groups. These are expected to make their intentions clear next week regarding next year’s contracts at the fifth conference of insurers and reinsurers taking place in Hydra. After overcoming the repercussions of September 11, the industry has focused interest on the impact of natural calamities and reinsurance leaders seem to be shifting pressure onto the construction sector. In this way, Kotsalos explains, the burdens on the industry are increasing as branches that were traditionally part of a bigger category, such as fire insurance, are now being monitored much more closely by reinsurers, who are imposing stricter terms. Hysteria He describes the situation as «hysterical,» claiming that developments are so rapid that they are difficult to keep up with. Changes such as the adoption of a new regulation (ISSP) – scheduled to come into force less than a year from now – which envisages the possibility of depriving ships the right to dock if they are considered to have links with terrorist activities, or a new European Union directive on the environment and the gradual pollution of ecosystems by industry, are new types of risk, unknown to the industry before. «These developments dictate a redefinition of the role of the insurer, who to date would assume risks with relative ease under cover from the reinsurers. This era is coming to an end, and insurers are having to review the basic principles of underwriting,» he says. These changes make more imperative the need for upgrading the supervisory function, Kotsalos insists. He notes, however, that the concept of oversight in Greece is «misunderstood, as it is associated with the closure of firms while the truth is exactly the reverse. Proper control and intervention is necessary to prevent deterioration; revoking a license is only a last resort, after a company is found not complying with a program of restructuring and rehabilitation.» Kotsalos is in favor of the proposal put forward in the Stathopoulos committee report for the setting-up of an independent administrative authority for the industry, but notes that the reasons why it is not being implemented must be attributed to «mysterious forces.» «It is rather paradoxical for all parties involved in the industry to be pressing for the upgrading of the supervisory function and the government itself to be showing such conspicuous indifference on an issue which is developing into a malignant growth,» he says. Unequal treatment Besides fostering supervision, the growth of the industry also requires enhancing incentives. In this context, the prospect of the abolition of tax breaks which were instituted only a year ago poses the danger of a fatal blow to the industry. The tax incentives were nothing more than a minimal adaptation to what applies in the rest of the European Union, where the industry enjoys full tax exemption for all types of contracts, Kotsalos insists. «There is no going back from expanding tax breaks,» he emphasizes, adding that the sector will now raise the issue of equal treatment of private insurance, in this respect, with company pension funds, which received tax incentives in last year’s reform of social insurance. He says this inequitable treatment is a major stumbling block for the growth of the industry in Greece. «One year after the reform, the government seems to have realized the difficulties involved in promoting the institution of company pension funds but does not realize the changes it must make,» Kotsalos says. One of the points the government must focus on in amending the relevant provision of the law, he adds, is the minimum requirement of 100 people, given the fact that 90 percent of the country’s enterprises employ less than that number; another is the competence of management of such funds. Their success and viability, he notes, depends on the adoption of such terms that the product will have the characteristics of social insurance, such as, for instance, the right to cash in a policy only under certain conditions. Responsibilities Kotsalos defends the role of private insurance but does not shy away from pointing out the bad practices which expose the sector to negative characterizations. For this reason, he insists, «oversight must be strict and comprehensive» and points out that EAEE is in favor of control both by the new independent administrative authority which will be set up and the actuarial authority of the Labor Ministry which will be responsible for the company pension funds. «The public must be convinced that we are being effectively supervised, otherwise it will not trust us.» He acknowledges that problems of the reliability of and lack of confidence in insurance companies among the public mainly originate in the vehicle insurance branch, but notes that public departments bear a significant share of responsibility. «It is incomprehensible for the average frequency of damage to be around 10-11 percent and for a particular company to show 3 percent.» The adoption of simple indices, such as the incidence of damage and the average of outstanding claims in each company in relation to market averages constitute an indispensable part of supervision and a simple method for the supervisory authority to identify the companies that diverge, he says. The «objectification» of the system, which should not be compulsory but open to the discretion of victims to accept, would be another measure toward limiting liabilities. The aim is to have a speedy settlement of the bulk of claims; this will contribute to a «rehabilitation» of the market, as the healthy companies will pay and be done while the inability of the unreliable ones to pay will be evident. Finally, Kotsalos notes that proper pricing and the maintenance of the «bonus-malus» system by the companies themselves will allow premiums to be kept at low levels. «You escape the problem if you ensure you stick to the rules meticulously, if you apply self-control in keeping them and if you differentiate according to category, which is difficult but not unfeasible.»