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10 Questions

with John Young
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By Paul Voosen
Staff Writer, The Prague Post
August 22nd, 2007 issue

VLADIMÍR WEISS/THE PRAGUE POST
John Young discusses the European-wide shift toward individual responsibility for retirement savings.
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THE YOUNG FILE

Job title: Senior partner, Lovells
Age: 50
Nationality: British
History: Joined Lovells in 1979, became partner in 1987
Education: M.A. in law, Cambridge University

Long an industry that saw strong growth, the Czech insurance market is becoming saturated as most residents have accepted the need to insure their property and lives outside of state-provided supports. Growth remains possible in the life insurance sector, particularly depending on the nature of the government’s planned pension reforms. John Young, a corporate insurance expert and senior partner at Lovells, one of the world’s largest law firms, talks with The Prague Post about the rise of individual responsibility for retirement, Russian distrust of institutions and who insures the insurers.
➊ In tracking the domestic insurance market over the past 18 years, what changes have you seen?
I compare the Czech Republic to the UK, where insurance has grown organically over 300 years and only now we’re seeing a gradual consolidation of the market. Here, this is happening in a very compressed timescale. After the country opened, a lot of companies formed and failed as the market dissolved itself down to the right size.
Now you have Česká pojišťovna [ČP] and then three or four others that hold most of the market, especially in personal insurance, like car, house and life insurance. And then you have about 35 companies, many foreign, doing commercial insurance — insuring factories, aviation or big import/export orders.
➋ Is it difficult for foreign firms to enter the personal insurance market?
The personal market depends on getting access to people. In a lot of countries, including the Czech Republic, it’s sold through networks of agents or banks. It’s difficult to get at normal people unless you’re able to get into that distribution system. With commercial insurance, it’s much easier to convince the big corporate buyers to move around, which is why you see foreign companies there.
➌ Last year, the giant French insurer AXA bought Winterthur, which operates major life insurance lines in the country. Should we expect any more deals?
There is a question going forward of how many of these companies will survive, how far consolidation will go. It’s still possible that mergers will take place at the top end of the market.
However, I don’t expect another multinational insurer to enter the country. When they buy companies, these firms want something big. And the opportunities for a big acquisition in the Czech Republic are limited. I don’t see signs of anyone buying ČP. Wiener Städtische already owns Kooperativa and ING is already quite large.
➍ Recently, we’ve seen ČP merge with the Italian insurer Generali, with the aim of investing eastward. Is this where insurance companies are headed?
Every insurance company is wondering where to go next. Most are based in mature markets where it’s difficult to find new customers. Italy’s market is tied up by about five companies. So they look elsewhere. For a period, Eastern Europe was where people were rushing, but it’s maturing, too.
Now, everyone is looking at India and Southeast Asia. India is difficult to crack because it is very protectionist. Whereas Southeast Asia — whether it’s Malaysia, Vietnam or mainland China — has vast markets and access to them is reasonably simple. All the big companies are going to fight it out there.
➎ What about the former Soviet states?
Russia is very underdeveloped. Insurance penetration is tiny at the moment. The average Russian still doesn’t trust big institutions. If you think about the nature of an insurance contract, it involves a company coming in and saying, “Give me your money. I may pay it back if you need it in a year, five years or 10 years.” That level of trust still hasn’t evolved in Russia.
➏ What regulatory changes should Czech insurers expect in the upcoming future?
The EU directive we’re all waiting for is Solvency II, which will make it much harder for insurers to go bankrupt. The fundamental problem with insurers is that assessing their solvency is quite difficult. With a normal company, you work out its assets and liabilities, simple. With insurers, you generally know their assets, but liabilities are a guess. You can’t always know what claims are going to come in: If you’re insuring against earthquakes, there may be no claims for 10 years and then a huge one the next year.
Solvency II will impose requirements that make sure every insurance company has enough spare capital. Until now, these requirements were quite basic, imposed in the 1970s. Those days many companies didn’t even have a computer. Since then, the understanding of risk fluctuation has evolved. Companies can now feed information into models that will show what will happen if too many cars crash or too many earthquakes strike.
➐ When do you expect the directive to pass?
It should come through in about 2010, finally. It’s been worked on for 10 years. No one will suggest it was done in a cursory way. And it will make a big impact. Some smaller companies may be forced out of business, either because they’re not capable of complying with its requirements or they’re not sophisticated enough to calculate their insolvency.
➑ When spectacular disasters strike, who insures the insurance companies?
There’s a whole separate industry called reinsurance, which absorbs the shocks that can’t be covered by insurance companies. One of the calculations insurers make is how much risk they want to hold and how much they want to pass to a reinsurance company. It’s quite an art form, this relationship.
It doesn’t stop there. Reinsurers pass on their risk to other reinsurers, what’s known as retro-session. This means that there are a small number of utterly huge reinsurance groups that end up with a large proportion of the world’s biggest disasters. For example, the World Trade Center disaster, a lot of the risk in that funneled back to the largest reinsurance companies like Swiss Re, General Re — a lot of them are based in Germany and Switzerland.
➒ Back to the Czech Republic, where do you see the insurance market going?
I think the growth that’s still to come is likely in the personal lines market. Growth there has leveled off now, which is not surprising. For a while you had to educate people about the need to insure their lives, property and everything else, whereas previously they relied on the state or their families. They began to buy insurance and now it’s saturated.
But there’s a lot of potential for growth in life insurance. This is partly a question of whether people feel the need to buy more life insurance and partly whether the government encourages people to do it.
➓ Why would the government do that?
People tend to think about life insurance as insuring their death. That’s one part of it. But the biggest part of it is long-term savings, like pensions. What we’re seeing in Western Europe is a shift from the state to the individual in retirement savings. People are being told that if they want a comfortable retirement they need to worry about it for themselves.
My suspicion is that we’ll see more of this in the Czech Republic over the next few years. The state cannot afford to keep people in retirement at the level they want. It will provide a basic level — you won’t die, you won’t starve — but you won’t have a great life either.
The remaining issue is whether people put savings into insurance or other investments. If the state supplies tax incentives to put money into almost anything, then banks and investment houses benefit. But often the encouragement is focused on insurance companies because they are highly regulated. There is far less concern about these companies going bankrupt.
Want your top manager to answer our 10 Questions? Send a message to Paul Voosen at pvoosen@praguepost.com


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