State abets cutthroat competition among car insurance firms

The car insurance market is on the verge of an attack of nerves due to the war raging among small, medium and large companies, all eying the sector’s 753 million euros in new contracts as a trophy. The recent decision by Ethniki Insurance to reduce premiums by up to 35 percent, dragging with it the other two major state insurers, Phoenix Metrolife and Agrotiki Insurance, has caused panic among many small and medium-sized companies. The latter have in recent years exhausted the tactic of low premiums in their efforts to obtain market shares. The huge switch of vehicles over the last five years from big insurers to the smaller companies in the sector has led to the influx of many new players and changed the rules of the game in the civil responsibility domain. Besides reducing premiums, a policy used by small companies to gain the market share from the major ones that once monopolized the market has been based on the extremely high commissions given to insurance agents who transferred a large number of vehicles from one company to another, using the argument that it was to the consumer’s benefit. The number of vehicles that changed insurers was impressive and reflected the battle that has broken out between big and small firms. In less than three years, that is from the first quarter of 2003 until the end of 2005, more than 1 million insured cars moved from major companies to smaller ones, many of which have involved into sector leaders. This transfer has come with the drop in the prices of car premiums, the level of which, according to 2005 data, starts at 130 euros and reaches 350 euros, while the sector’s average premium declined from 244 euros in 2004 to 240 euros in 2005. Behind the low premiums, which many new entrants have used as a weapon to attract clients, lies the reduction of the sector’s reserves to below 100 percent, when the acceptable average dictates that the ratio of pending damages on premiums be not lower than 150 percent. Notably in advanced markets, such as Germany, this ratio stands at between 200 and 250 percent. The car insurance market’s paradox goes beyond the lowering of premiums at a time when the amount of damages and obligations for companies is on the rise. Equally strange is that, despite the great capital increases that insurance firms have been forced to hold in reserve the last couple of years due to deficits revealed by the Development Ministry’s check on reserves, companies have not only not raised premiums but have even provided new reductions. The new situation sees major companies abandoning raising premiums against accusations by small companies of a price war. Many observers believe that the Development Ministry has been encouraging this competition, hoping to cause any companies that cannot stand the competition to close.