The insurance sector in South Eastern Europe has undergone considerable change in recent years, marked by Croatia's accession to the EU, amendments to legislation including harmonization efforts in Bosnia & Herzegovina, Macedonia, Montenegro, Serbia and Slovenia, and major acquisitions on the market.
While harmonization efforts in some jurisdictions have been slow, overall there has been a gradual liberalization of the insurance sector, easing restrictions for new markets entrants and ultimately providing more choice to individual and corporate consumers seeking insurance.
Bosnia and Herzegovina
Republic of Srpska adopts new regulations
The Insurance Agency of the Republic of Srpska (the "Agency") adopted an instruction addressing the balance of assets and liabilities associated with warranties of insurance companies which came into force in January, 2015.
The Agency also adopted the new Articles of Association and simultaneously the Decision on amendments of the Decision on Method of Determinating and Calculating of Contributions for the Protection Fund of the Republic of Srpska, Terms of Payment and Manner of Maintaining Contributions. The Articles of Association have been harmonized with regulations on voluntary pension insurance and more clearly defines the supervisory and regulatory functions of the Agency, as well as the competencies of the Board of Directors. The definition of "business secret" has also been expanded to provide more detail.
Recently, the Agency adopted a Decision on Payment of Fees for Supervision of Operations for 2015 and the new Rulebook on Procedures of Insurance Companies in connection with Complaints ("Rulebook") which will be applied as of 1 April 2015. The decision requires insurance companies to harmonize their operations with the Rulebook and to adopt internal acts which will regulate procedures for making decisions on complaints. Insurance companies must submit their internal rulebook to the Agency within 90 days of the date when the Rulebook enters into force. The new Rulebook will also address the method of determining and monitoring the liquidity of insurance and reinsurance companies.
Information from the market suggest that the relevant parliamentary working group in the Republic of Srpska has completed a draft of the new Law on Liability Insurance for Motor Vehicles and that the draft will soon enter the legislative procedure.
Potential changes in the Federation of Bosnia and Herzegovina ("FBiH")
A new insurance law in FBiH (the "Draft Law") is being considered by Parliament which, if passed, should bring FBiH's insurance legislation in line with European Union directives and standards. The Draft Law is more extensive than the existing Law on Insurance Companies in the Private Insurance Sector and regulates, among other things, procedures on the establishment, operation, inspection and termination of insurance companies.
The Draft Law provides for minimum standards of solvency and risk management regulations. In addition, it liberalises insurance business operations for the purpose of enhancing market competitiveness. One of the novelties introduced by the Draft Law is the rules on inspections and audits of group insurance companies.
Unfortunately, the Draft Law has been under consideration by the legislature for almost two years. It is not currently possible to anticipate when the Draft Law will be adopted, taking into account the political restructuring process being undertaken in Bosnia and Herzegovina following the October 2014 elections.
Insurers in Croatia have experienced a significant fall of premium profits in recent years. In the three-year period prior to EU accession (2011-2013), around EUR 70 million in premium value was lost, mostly in the car insurance sector. At the same time, the number of companies providing insurance services increased, boosting competition in a shrinking market. Currently, there are 26 insurers operating in Croatia, the top five of which maintain 65% of the insurance market share.
Amendments to legislation in light of EU Accession
On 1 July 2013 Croatia became a full EU Member State and entered an insurance market of approximately 500 million people. Earlier in 2013, in order to prepare for accession, the Croatian parliament passed amendments to the Insurance Act and the Act on Compulsory Insurance within the Transport Sector in order to implement relevant EU directives.
Under the amended Insurance Act, insurance companies from the EU can freely operate in Croatia either by establishing a local branch or providing services and covering risks directly in Croatia (e.g. regarding real estate or vehicles registered in the country). In cases of life insurance, the new Croatian Insurance Act applies if the insured party is a Croatian resident.
Furthermore, inspired by a decision brought by the ECJ, gender can no longer affect the price of insurance premiums. Prior to the ECJ decision, prices of certain insurance policies (e.g. life insurance, vehicle insurance) were calculated in part, on the basis of the gender of the insured.
The amended Insurance Act allows for insurance companies to take the form of a joint stock company, a European Joint Stock Company or a mutual insurance company. Companies providing general or life insurance are now required to have a share capital of HRK 28,860,000 (around EUR 3.5 million), which cannot originate from loans and must be free of any burden. The mandatory insurance assets of general and life insurance companies were increased to HRK 28,860,000 (around EUR 3.5 million).
The Croatian Financial Services Supervisory Agency (HANFA) no longer controls car insurance premiums, which has resulted in a reduction of prices. In the period of only one year after Croatia's EU accession, the average price of car insurance has gone down by around 20%. This rapid reduction in prices (compared to a reduction to 20% over a six year period in Austria) has caused considerable losses (nearly half a billion HRK or EUR 70 million) in the Croatian car insurance market.
The amended Insurance Law extends the deadline for insurance companies to offer damages to 60 days. The minimum death and injury liability limit was raised from HRK 6.5 to 42.75 million (around EUR 0.9 to 5.7 million) per event, while the minimum property damage liability limit was raised to from HRK 1.5 to 8.55 million (around EUR 0.2 to 1.1 million). It should also be noted that the amended Insurance Law no longer applies to air transporters as those issues are now covered by EU regulations.
As of 1 January 2016, the Solvency II Directive should be fully implemented. This is a new regulatory framework providing rules on the business activities of insurance companies in the EU. It establishes more stringent rules on solvency, risk management, transparency and supervisory powers aimed at consumer protection and prevention of serious distortions in the market. The European Insurance and Occupational Pensions Authority (EIOPA) has already issued guidelines for the implementation of new rules.
Recent amendments to the Law on Supervision of Insurance
The Law on Supervision of Insurance (the "Law"), which was adopted in 2002, has been harmonized with the legislation of the European Union and is generally compliant with the principles of the International Association of Insurance Supervisors.
The Law was amended last year to include two additional classes of insurance. These classes refer to insurance annuities for pension users from: (i) mandatory capital financial pension insurance; and (ii) voluntary capital financial pension insurance. Moreover, the already existing provisions regarding health insurance have been further specified, harmonizing such provisions with other applicable legislation (the Law on Payment of Pensions and Pension Benefits from the Capital Financial Pension Insurance and the Law on Mandatory Health Insurance).
Recent amendments now provide for the possibility of transferring insurance agreements on insurance annuities by pension users to other insurance companies in case of liquidation or bankruptcy proceedings.
Amendments from 2014 also provide for certain changes in the procedure for appointing new members of the management board of an insurance company. According to such provisions, the appointment must be completed within six months from the date in which the number of members of the management board was decreased below the legally prescribed minimum.
The Amendments also decrease the period in which an insurance company must start work after the issuance of an insurance license (six months as opposed to the previous 12), and impose monthly reporting on insurance companies in regards to the number of concluded insurance agreements and the amount of collected and transmitted premiums.
Anti-money laundering law enacted
In September of 2014, the Macedonian Assembly passed the Law on Prevention of Money Laundering and Financing of Terrorism (the "Money Laundering Law"), which inter alia regulates the supervision of financial activities as they relate to insurance activities. The Money Laundering Law applies to all financial institutions, including insurance companies, insurance brokerages, companies performing representation in insurance activities, and natural persons performing life insurance activities. The Money Laundering Law has introduced a daily notification obligation regarding all life insurance policies with a minimal amount of EUR 15.000. The Insurance Agency of Macedonia is responsible for enforcement of the Money Laundering Law.
The market in Montenegro
No significant changes have taken place in the insurance sector in Montenegro in recent years, where the Insurance Law includes most of the elements defined by the Solvency I Directive. Full harmonization with the Solvency I Directive is expected to be achieved by the end of 2015, with delayed application of some of the provisions until the date of EU accession.
The legal and institutional framework in Montenegro is almost fully aligned with EU Directive 2002/92/EC on insurance mediation by means of the Insurance Law and associated bylaws, with the exception of professional indemnity cover against negligence for insurance brokerage activity. Insurance intermediaries are important players in the process of selling insurance products in Montenegro.
Another directive that is almost completely implemented into Montenegrin legislation is EU Directive 2009/103/EC on motor insurance. This was achieved through the Law on Compulsory Insurance and the associated implementing bylaws.
Furthermore, EU Directive 2001/17/EC on the reorganization and winding-up of insurance undertakings was largely implemented through the Law on Bankruptcy and Liquidation of Insurance Companies. The new Act of the Law on Bankruptcy and Liquidation of Insurance Companies is in the parliamentary procedure and it is expected to be adopted shortly.
At the beginning of 2015, bylaws were enacted regarding insurance premiums for owners or users of motor vehicles and trailers. These bylaws increase the number of premium classes and adopt the bonus-malus system in order to differentiate between the treatment of the insured that has caused one or more damages and the insured that has caused no harm.
The second stage of harmonization will take place at the end of 2015 with the introduction of the Solvency II Directive into Montenegrin legislation.
Insurance developments in Serbia
Over the last few years the insurance sector went through a significant transformation in Serbia. The level of market discipline has increased and investors with foreign capital have entered the market. Moreover, new insurance services have been introduced and the level of protection of users has been increased.
The new Insurance Law (the "New Insurance Law") was adopted at the end of 2014 and will come into effect at the end of June 2015, with the exception of certain provisions which will come into effect only after Serbia joins World Trade Organization ("WTO") /EU.
According to the New Insurance Law, insurance companies may be established by a single legal or natural person as opposed to the two persons required under the old law. The New Insurance Law introduces new types of life and non-life insurance and now permits companies that provided together life and non-life insurance so far to prolong with offering of these products together in Serbia if they comply with certain regulatory requirements. Newly established insurance companies in Serbia will not be able to engage together with life and non-life insurance business.
The position of brokerage insurance companies and insurance agents has now been slightly liberalized. In accordance with the New Insurance Law, insurance agents can perform their duties for more than one insurance company, while brokerage insurance companies and insurance agents can now in limited number of cases perform business even without the consent of National Bank of Serbia ("NBS"), but based on an agreement with the insurance company, provided that certain conditions are met. Furthermore, apart from the banks licensed in Serbia, financial leasing companies and the public postal operator can now engage in insurance agency activities with the consent of the NBS.
The New Insurance Law incorporates minimum capital requirements from the EU Solvency II Directive by imposing absolute capital floors for insurance and reinsurance companies. However the capital and solvency requirements are not risk-based and are therefore not compliant with the standards imposed within the Directive. The New Insurance Law also imposes detailed data protection measures and strengthens the supervisory function of the NBS.
Foreign insurance companies, brokerages and agencies will be permitted to carry out business in Serbia through a branch office subject to a license issued by the NBS, but only upon expiry of the four-year period after Serbia joins the WTO. However, Serbian branches of foreign reinsurance companies will be able to apply for a business license from the moment Serbia joins the WTO.
At the end of 2014, the NBS passed two bylaws – on the content and layout of financial statement forms for insurance undertakings and statistical reports for insurance undertakings. The purpose of these bylaws is harmonization with the accounting and audit laws as well as harmonization with applicable EU standards. During the same period the Government of Serbia introduced new minimum sum insured in motor third party liability insurance.
Changes to pension insurance
Slovenia recently adopted the Decree on the uniform methodology and forms for the calculation and payment of salaries in the public sector (the "Decree"), which addresses the calculation of premiums of collective supplementary pension insurance. The Decree was issued as a reaction to errors in the calculation of salaries of public servants, whereby compulsory contributions were based on base salary minus insurance premiums. This calculation was deemed by the Ministry of Internal Affairs to be in violation of the law and all public service employers were required to adapt to the new Decree as of 1 January 2015.
Taking into account the System of Salaries in Public Sector Act (Official Gazette of the RS no. 108/09 with all subsequent changes), regulations and other legislation as well as collective agreements in the public sector, salaries cannot be established in any rate other than the one established by the previously enumerated legislation and collective contracts. According to this, gross salaries cannot be lowered on the basis of an agreement between the employer and the public employee with the aim of paying the premiums of the collective voluntary supplementary pension insurance.
The Ministry of Internal Affairs required all employers to contact insurers providing supplementary pension insurance policies and public sector employee pension plans by 1 January 2015 and to bring the relevant contracts in line with the Pension and Disability Insurance Act and the Decree.
This article can also be viewed on CEE Legal Matters.