Feature story

Shoring up Albania’s insurance sector

Subscribe to feature stories email alerts

Related links Albania homepage Non-bank financial institutions homepage INSIG (portage equity) [Project Summary Document]

Car insurance dominates sector.

V. Piranjani

Property insurance is growing.

Albanians are among the least-insured people in Europe, a fact that offers plenty of scope for the insurance business to expand. But for growth to flourish, the industry’s ‘wild west’ aspects must be tamed to create a level playing field on which Albania’s state insurer, part-owned by the EBRD, can be safely privatised.

Albania’s state-owned INSIG insurance company observes international standards of best practice, keeps its reserves up and pays out claims promptly. Unfortunately, according to Insig, many of its private sector competitors have been less rigorous in operating within the rules governing the insurance sector and thus have unfairly come to dominate the motor insurance business, the fattest part of the market in Albania.

“It’s not unusual to hear complaints about the free market environment from agencies that once enjoyed government-sanctioned monopoly,” says Alasdair Macdougall of the EBRD’s financial institutions team; he guided the Bank’s 2003 purchase of 19.5 per cent of Insig’s equity. “But INSIG has been unfairly disadvantaged since competition entered the insurance market in 1999.”

The former monopoly now has just an 18 per cent market share. “The competition gained market share over several years by undercutting the government’s official motor insurance price, or tariff,” says Mr Macdougall. “They could afford to do this because they don’t pay out many claims. In 2003 INSIG had less than 20 per cent of the market, yet it paid out 60 per cent of all claims in the business.”

Adds an exasperated Varuzhan Piranjani, INSIG’s General Manager: “If the insurance sector is not shored up, there will be a catastrophe, one we absolutely cannot afford.” (The country is just beginning to recover from the devastating pyramid scheme scandal that rocked Albania to its core in 1998.)

Situation improving

“The government is starting to understand that it must act, particularly in forcing all insurers to observe at least the minimum reserve requirements,” says Mr Piranjani. “Also, the motor tariff has been liberalised, allowing us greater flexibility in pricing INSIG policies. And state regulators have been toughening up insurance supervision of late, forcing our competitors to start paying claims. At INSIG we’ve also brought more rigour to our evaluation of claims. All this means that the balance is being righted.”

While the sector is slowly getting onto firmer footing, the ground is not yet solid enough to privatise INSIG as foreseen when the EBRD bought its equity stake. The World Bank’s International Finance Corp. bought a matching 19.5 per cent stake in 2003 and the two institutions have worked hand-in-hand with INSIG ever since to prepare it for sale.

INSIG’s reserves are now far above the level required by the Albanian government and EU directives, its management has improved and excess staff numbers are gradually being reduced while skills and product lines have expanded.

Motor insurance compulsory

But motor insurance continues to dominate and distort Albania’s insurance sector. Three-quarters of all premiums paid in the country are for vehicle coverage and seven out of the country’s 10 insurers offer nothing but motor insurance.

“Motor insurance is compulsory and thus is viewed as a kind of tax, and not one administered by the government,” says Mr Piranjani. “So customers don’t always look at it as something they can benefit from it, it’s just something they have to pay; therefore many insurers don’t have to feel much responsibility to these clients.

“Second, in Albania, 90 per cent of vehicle damages paid by insurers are for material damage to fix cars; only 10 per cent goes toward bodily injury. In most other countries the opposite is true. The reason for this irregularity is that in Albania, a bodily damage claim can put the driver in jail and start family feuds. So people settle between themselves, without involving insurers. This adds to the ‘unreality’ in our sector.”

INSIG has found it more profitable to do business in Kosovo than in Albania. One would think the business of ensuring life, limb, house, car and business in an unstable UN protectorate would be not very profitable. But regulation of the insurance industry by UN officials has been “robust”, says Mr Macdougall, “and in Kosovo where the playing field is more level, INSIG has fared significantly better, as in Macedonia.”

Albanian market still promising

Not that INSIG is giving up on its home market which is, to a large extent, untapped. The country’s past as one of the most closed communist dictatorships in Europe meant there was no private property to insure, and with the state allegedly providing cradle-to-grave security for citizens, no thought was given to life and health insurance. In 2003 premiums in Albania equalled just 0.4 per cent of GDP compared with 3-4 per cent in central European countries. Only three per cent of Albanian real estate is insured.

“Albanians are beginning to see the merits of insurance,” says Mr Piranjani who projects growth for the sector at five per cent for 2005. “Banks are starting to make insurance a condition of lending to businesses and to people seeking mortgages, many of whom want protection anyway against the very real threat of flood, fire and earthquake. As well, a lot of Albanians working abroad have brought back an appreciation of life and health insurance.”

The EBRD and World Bank have done more than just finance INSIG. Together with the UK and Irish governments and the Central European Initiative they’re providing expert advice and training to the insurance industry and the government to bring the sector up to date, to improve legislation and supervision, and to prepare Insig for eventual privatisation.

“If INSIG is to play by the rules, everyone must play by the rules,” says Mr Piranjani. “We need political will to make sure that happens, and we are seeing positive change in that regard. We have to thank the EBRD and the World Bank for giving helpful assistance to focus on these issues.”

Written by EBRD Senior Writer Kate Dunn.

Photos: A. Andjić

6 September 2005