International credit ratings agency Fitch Ratings has published on its website a report “Turkish Insurers Are Under Severe Strain”. The agency’s summaries of this report is as follows:
1) “Turkish insurers are facing one of their most challenging operating environments of the past decade, Fitch Ratings says in a new report, with earnings and capital adequacy likely to come under severe strain in 2022-2023. The effects of macroeconomic deterioration, soaring inflation and the continuing price cap on motor third-party liability (MTPL) insurance could push some insurers below minimum regulatory solvency levels, forcing them to raise capital or to be acquired by stronger competitors.
Turkish CPI inflation rose to over 70% in May 2022 and Fitch forecasts it to remain very high (end-2022: 60%, end-2023: 55%). Sustained inflation at such high levels will have significant negative implications for insurers, pushing up the cost of claims and potentially leading to reserve shortfalls on longer-tail business lines. It will also erode customers’ disposable income, weakening their ability to buy insurance.
Insurers are unlikely to be able to increase their prices enough to cover the rise in claims costs. They are constrained by pricing competition and, for MTPL insurance, by regulatory price caps.
MTPL is the non-life sector’s largest business line by net premium written, and it has been the main drag on the sector’s underwriting performance in recent years. The price caps remove insurers’ ability to charge enough for the risk they are taking, forcing them to underwrite MTPL policies at a loss. High inflation will exacerbate this problem, and we do not expect MTPL pricing to be liberalised in the near future.
Turkish insurers’ ratings are pressured by Fitch’s Negative Outlooks on the Turkish sovereign (B+/Negative) and Turkish bank ratings, reflecting the insurers’ exposure to the challenges affecting the Turkish economy, their holdings of Turkish government and bank bonds, and their bank deposits.”
2) “Very Challenging Operating Environment Fitch Ratings views the operating environment for Turkish insurers as one of the most difficult of the past decade. This has been driven by negative macroeconomic trends, rising inflation, high price competition and the regulated tariff system in the motor third-party liability (MTPL) line for non-life insurers. Soaring inflation has multiple negative implications for the sector, from the increase in claims costs and deterioration of reserves adequacy to a drastic reduction in disposable income and customers’ ability to buy insurance, therefore reducing premium volumes.
Profitability Under Severe Pressure in MTPL The MTPL line continues to be loss-making and the largest drag on the sector underwriting performance. It is the largest line in the sector by net premium written and in 2021 it registered a combined ratio of 136% (2020: 109%). The main reason behind the poor performance of the MTPL line is the regulatory price cap, which means insurers are not able to charge risk reflective prices for its policies and they are forced to underwrite MTPL policies at a loss. Inflation also increases the cost of spare parts, largely imported. Fitch believes that it is unlikely that MTPL pricing will be liberalised in the near future, meaning that returns on the non-life sector will continue to be depleted by MTPL underwriting losses.”