Interview with PhD Krste Shajnoski, President of the Council of Experts within the Insurance Supervision Agency for the „Svet osiguranja“Journal: Unfair competition – the biggest challenge on the insurance market
The Agency will reorganize itself since the current approach in which all entities are treated equally, with the same intensity and frequency and regardless of risk exposure, degree of capital adequacy and internal control system efficiency, has proved to be inadequate for the conditions and goals we want to achieve. Until now, the supervision focus has been set on past performance reports. Supervision will now require entities to explain their vision for the future, and the Agency will seek to prevent, not punish.
During the upcoming period, the Insurance Supervision Agency will work on building a new risk-based supervision approach, which will identify and encourage sound operations both in terms of maintaining the solvency and financial stability of insurance companies and in terms of their market behavior, transparency and fair attitude towards the insured. Within its competencies, the Agency will ensure full transparency of positive corporate practices and public acknowledgement when the satisfaction of policyholders for the use of insurance services is indisputable, and this is to be achieved without compromising the financial situation and solvency, said the President of the Council of Experts within the Insurance Supervision Agency, Krste Shajnoski.
You have been the President of the Council of Experts within the Insurance Supervision Agency in RNM for seven months now. Have you changed the course and how do you see the role of the Agency in creating opportunities for growth and development of the insurance market in RNM?
The role of the regulator in the forthcoming period will be dimensioned to be an impartial, objective, professional and timely participant in the insurance market with the function of a judge-distributor of justice, who shall promote equal rules of game for all market participants. At the same time, the intensity and robustness of the supervision will be dosed depending on the general risk profile of the entities, their understanding of the risks and their management. We will focus on clearly detecting the market behavior of the participants, primarily towards the insured and insurance beneficiaries, both in concluding insurance contracts and in receiving, processing and resolving claims and insured amounts. Thus, the Agency will be in function of developing a dynamic, competitive, stable and transparent insurance market in which equal or similar insurance services which developed markets offer, will be offered here under the same or similar conditions, and at affordable prices, both for the current and for a large number of new insured persons.
You emphasized that your focus is on providing a dynamic, competitive, stable and transparent insurance market. How do you plan on ensuring the growth of the insurance market, in conditions of exposure to high risks in society?
The growth of the insurance market is closely related to the constant development of insurance and its growing expansion as an activity. The development of the market implies healthy competition that brings numerous advantages and benefits for the citizens and at the same time it will encourage a larger volume and variety of services that would be available to the citizens at reasonable prices.
Currently, compared to other countries, the insurance market in RNM is one of the most underdeveloped markets in Europe, which is an additional challenge for the new management to work on its growth and development.
I think that firstly we should point out all the risks to which our society as a whole is exposed, which includes the population sector, entrepreneurs, small and medium-sized enterprises, large corporations and both the state and public sector. Then we need to highlight the distribution of the occurrence of risks in the recent years and the damage caused to the population and property, and what percentage of it were insured and paid by insurance companies. This data will show even worse indicators of the level of insurance development in Macedonia. This undoubtedly leads to the need of building a National Strategy for Insurance Market Development, which should be based on common interests, both of the private and state sector, so that after ten or more years we can feel free to say that insurance in our country is developed at the same or similar level in the EU member states and beyond, in the international financial markets.
Does this mean that the Insurance Supervision Agency is preparing itself for a new approach of functioning?
Exactly; the Insurance Supervision Agency will work on building a new risk-based supervision approach in the next period, which will identify and encourage sound operations both in terms of maintaining the solvency and financial stability of insurance companies and in terms of their market behavior, transparency and fair treatment of policyholders. Within its competencies, the Agency will ensure full transparency of the positive corporate practices and public acknowledgement when the satisfaction of the insured persons from the use of insurance services is indisputable, and that has been achieved without disruption of the financial condition and solvency. It will stimulate competition between market participants to better meet the interests of policyholders, and add value to the corporate image, through public acknowledgement of their business policies.
However, the Agency will do the same if it identifies the development of negative corporate phenomena that disrupt the financial stability of the sector, provide incorrect and incomplete information about insurance services and affect the deterioration of the reputation of insurance services. The Agency will use all legal powers, and will propose amendments to existing laws, in order to fundamentally change the course of insurance supervision, and set it on new paths in terms of anticipating risks in the insurance sector and timely management. The Agency will establish a new dialogue with all market participants, which will focus on the future, and where the market participants will be informed in a clear and simple way about the expectations that the Agency will have from them, be it insurance companies, insurance brokerage companies, insurance represenation companies, banks representing insurance or the National Insurance Bureau, which we must not forget that it performs an activity not only in the interest of the corporations that founded it, but is of interest to us all, who are participants in the international, but domestic too, road traffic.
In these conditions, the question inevitably arises as to how the insurance market copes with the consequences of COVID-19 and what measures has the Agency taken to remedy some of the negative consequences?
Immediately after the declaration of the pandemic and the state of emergency in the country, the Insurance Supervision Agency established intensive communication with all entities in the insurance sector in order to identify potential threats to the continuity of operations. The Agency stopped all initiated misdemeanor proceedings against the subjects of supervision, for findings established earlier. The Agency informed the entities of supervision that it will enable delays in fulfilling the reporting obligations. Field supervisions have been postponed indefinitely.
Immediately after the declaration of the state of emergency in the country, upon the proposal of the insurance companies, the Agency adopted a set of rules that amended the existing rules governing certain aspects of operations related to the valuation of claims based on premiums, permitted categories of assets covering technical reserves, and claims processing, in order to enable insurance companies to amortize the initial shocks of reduced sales after the financial result, solvency and liquidity in operations. These changes allow insurance companies to be more flexible with policyholders, without incurring losses due to regulatory requirements to make value adjustments on claims.
Scheduled trainings for insurance agents and insurance brokers are also postponed indefinitely.
In this context, no one can say for sure what will happen in the upcoming years. Of course, as a regulatory body responsible for the insurance market, we will closely monitor the situation and we will take all necessary measures within our competencies, in order to amortize the blows from the “invisible enemy”, while not endangering the stability and quality of the insurance market.
In context of the previous question, do you have information on how the sale of policies has worked in the past two months?
Having in mind our preliminary analyzes for the first quarter of 2020, the parameters are positive. Gross written premium in the total insurance portfolio increased by 4.50% compared to the first quarter of 2019. In both segments, growth was registered, in life insurance – of 4.30%, in non-life insurance – of 4.54%. If we check insurance classes, growth was registered at fire and other hazard classes by 9.16%, auto liability by 0.16%, general liability by 3.55%, while premium decrease was registered at casco insurance for motor vehicles class by 2, 51%.
Regarding the payment of claims in the analyzed period, the total portfolio increased by 0.51% (+ 30.81% in the life insurance segment, – 2.55% in the non-life insurance segment).
However, this data is not crucial and sufficient to draw conclusions about the possible results by the end of the business year, given that the state of emergency was declared at the end of the first quarter of this year.
According to the information we receive from market participants, it is indisputable that there will be a decline in sales by the end of the year. Travel insurance and „green cards“ that provide coverage for motor vehicles traveling abroad will be most affected. The total decline in premiums is expected to be around 20%. Despite the negative projections on the trend of written policy premium for 2020, we do not expect a deterioration in the profitability of the insurance sector; on the contrary, the expectations are that it will even improve, given that there are large reductions on the operating costs, and both in terms of reported insured cases and claims, as well as in terms of administrative and acquisition operating costs.
I would here like to point out that, some insurance companies have recognized this situation as an opportunity to offer expansion of the existing insurance coverage by including the risk of illness and/or death due to COVID-19 disease, to the existing policies, as well as to the newly concluded policies, at same price.
Has on-line sales increased and will it affect the change of consumer habits and the introduction of new operating methods of the entities?
On-line sales in the insurance market is still not widely present. Few insurance products are available online to consumers by a small number of insurance entities. However, given that information technologies are dynamically transforming modern society and in such conditions the insurance sector is faced with the challenge of following and adapting to new trends and changes, this will mean that insurance companies will need to change and adjust their business models, to adopt new technologies, to apply digital tools and to encourage a culture of change in their operations, not only in concluding insurance contracts, but also in receiving and processing claims as well as reimbursement of the insured sums. The focus on customers and their needs, new ways of selling, fast delivery and quality of services will inevitably require achieving high competence of employees in companies and application of new methods of work and handling new tasks.
Here I would like to emphasize that for us as a regulator, it is important to increase education and knowledge of consumers about the insurance products. All research studies show that our financial literacy is at an extremely low level, which gives an answer to the question why we have not developed online sales at the level we should have. In addition, insurance companies still use the classic sales models, which of course has a negative impact on the total sales of policies, but also on the online sales.
Anyway, the insured persons are not to blame for the low level of financial literacy and on-line sales. It is a systemic problem that must be solved by regulators, insurance companies, brokerage companies and with the sole purpose that by increasing literacy, the sale of policies increases, and thus the insured and the subjects in the insurance market benefit more.
What are your initial impressions of the challenges that insurance companies face? What are basically, their requirements?
My impressions are that insurance companies want a stable and predictable environment. They want stable macroeconomic indicators, fiscal and monetary policy, exchange rate policy, taxes. They want an objective and impartial regulator that will judge impartially and support the development of an insurance market that will punish bad corporate practices and will create an environment for good business practices to be rewarded. The biggest challenge at the moment is the unfair competition, which is especially evident in the bidding of prices for insurance services in public procurement procedures by state bodies and institutions. I hope that together we will respond to these challenges in a fair and transparent way, and I will point out again that the more we work on education, the easier it will be to overcome the challenges. However, I believe that insurance acquires its significance in the occurrence of the insured risks, when the compensation for the claims caused by the occurrence of the insured risks has to be paid. Hence, we as a regulator, need to constantly emphasize and educate all those involved in the insurance offer, that bidding on insurance prices in public procurement procedures can be very dangerous after achieving the fundamental goals of insurance, and that is to provide insurance coverage in all cases for which the insured is not able to otherwise protect against risks.
What are your plans for next year and have you already drafted the priorities for 2021 which you will have to implement as an Insurance Supervision Agency in RNM?
Until 2021 we have another 5 months of uncertainty. In order to have more precise expectations for next year, we need to go through a turbulent period of several months filled with many uncertainties, not only seen directly from the aspect of the development of the insurance market, but also through the development and the way of dealing with the Covid virus which will obviously be with us for some time longer.
The Agency’s priorities in 2021 will be several processes to which we will pay equal attention and energy. Firstly, the Agency will actively cooperate with the Ministry of Finance in the preparation of the new Insurance Law in order to comply with the EU regulation – Solvency 2, as well as compliance with the Insurance Distribution Directive.
Secondly, the Agency will be committed to internal reorganization in order to change the current approach to supervision which is based on the so-called ex post control of compliance with regulations, in order to establish a new approach to risk-based supervision. We believe that this will contribute to strengthening the impartiality in the procedures, because the current approach, in which all entities were treated equally, with the same intensity and frequency, regardless of risk exposure, degree of capital adequacy and effectiveness in the functioning of internal systems controls, i.e. the „one-size-fits-all“ approach, proved to be inappropriate for the conditions and goals we want to achieve. So far, the focus of supervision has been on past performance reports. Supervision will now require entities to explain their views on the future, and the Agency will seek to prevent, rather than punish. Supervision will require insurers to be more transparent about insurance services and care about the insured people. The agency will be put in the function of free insurance advertising in all cases of public acknowledgement of the satisfaction of the insured with the benefits they have received from insurance. The agency will encourage transparency.
Thirdly, the Agency will require insurance companies to be more transparent about their financial condition and solvency, management and internal control systems, but also about their products and the insurance coverage offered. The agency will intensify the communication with the insurance companies in order to emphasize the gap that exists between the real insurance needs in the economy and the existing supply, in order to think in this direction as well.
There is no doubt that the services of the financial market, especially of non-banking financial institutions in many elements are close and competitive, and interconnected.
Hence, in parallel with the harmonization of the standards of functioning with the EU countries, from 2021 we will have to focus on preparing the ground for the unification of the three regulators ISA, Securities and Exchange Commission and MAPAS into a strong and quality regulatory body. I am convinced that in that way we will provide a regulator that at the same time will be able to control, regulate, but also develop the capital market with much faster dynamics. Such a regulator will function more efficiently, which will open space for the development of still underdeveloped financial institutions and the introduction of new financial instruments in the strongly developed bank-centric financial system.