S&P assesses industry and country risk of Turkish P&C sector

The industry and country risk for the Turkish property and casualty (P&C) insurance sector is moderate, according to an assessment by S&P Global Ratings, reflecting high country risk and moderate industry risk.

The rating agency said it did not expect any upward movement during the period 2017/2018, because it expects to see further losses caused by reserve strengthening due to changes in the legal, legislative and judicial framework in the past three years.

S&P noted a difficult operating environment for the Turkish P&C insurance sector and said the assessment of country risk as high was partly due to Turkey’s high private sector external debt, which posed a risk to economic stability. S&P said the P&C insurance sector will continue to benefit from high interest rates in Turkey and the country’s favourable demographics.

The assessment of industry risk for the P&C insurance sector as moderate was partly based on concerns that natural catastrophes and unpredictable settlements in the market could materially affect underwriting for property insurance, increasing ROE volatility. Turkey is one of the most earthquake-prone countries in the world and S&P said it views the country’s insurance industry as heavily exposed to modelling and data risk related to earthquake models.

S&P also said it has seen a sharp increase in claims for deaths and bodily injuries covered by motor insurance during the past ten years, which has led to significant reserve strengthening in recent times. “In our view, the level of reserves set aside for historical claims remains uncertain and may not be sufficient,” said S&P.

The rating agency said the barriers to entry for the Turkish P&C insurance sector benefit established insurers. “We consider the process regulators impose on an insurer seeking to gain a license is robust, but not prohibitive. Our assessment of the sector’s operational barriers partly reflects how important good distribution is for successfully accessing the market. We consider it difficult for a new entrant to establish and build viable distribution relationships when the market is heavily dominated by the agents,” said S&P. However, the past decade has seen a rise in mergers and acquisitions in the Turkish insurance industry.

Growth prospects for the Turkish P&C insurance sector are considered to be neutral despite recent abnormal growth in the market, said S&P, with the real growth rate expected to be below 5% in 2017/2018, partly due to an economic slowdown and partly because of a lack of price increases to boost growth in 2017.

S&P said the regulator is pushing to implement the EU’s Solvency II directive on supervision of insurers and reinsurers in the short to medium term. “In our opinion, this timeframe could be difficult; only a few Turkish insurers have been participating in the quantitative impact studies being used to refine the implementation guidelines,” said the agency.