Czech Republic Insurance Report Q2 2008

As was the case in Q108, the main focus of this report is BMI's proprietary Insurance Business Environment Rating (IBER). The rating brings together a number of pieces of relevant quantitative data, together with BMI's Country Risk Rating (CRR). The IBER makes it easier for the business environment for the insurance sector in a particular country to be compared with the business environment for any other industry in that country that is surveyed by BMI. The IBER also allows an objective and meaningful comparison of the business environment for the insurance sector in one country with the business environment for insurance in another country.

Over the coming months, we will substantially change the format of the BMI insurance reports. In essence, we will focus to a much greater extent on the companies that are active in the non-life and life segments.

The Czech Republic's IBER is 61.5. The Czech Republic is, relative to other countries in Central and Eastern Europe (CEE), a moderately-sized market for foreign insurers, although still relatively small by world standards. It stands out within the region for the measure of openness of the non-life and life segments and the overall economic outlook is also very positive. However, the relative underdevelopment of the sector and the low levels of expected growth and foreign penetration of both the life and non-life sectors, the levels of taxation, bureaucracy and external risks have all held the IBER is held back.

The Czech Republic's excellent regulatory framework, development and competitive landscape along with the strength of the general economy, expected to grow at 6% in 2007, constitute the strengths of the sector. Though the sector is crowded, the low penetration rates and relative diversity of the market in relation to other countries in the region may provide opportunities for growth in the future.

Indeed, the Czech Republic's insurance market is amazingly crowded - in this respect it is very similar to that of Slovakia. According to the Insurance Information Institute (III), by far the largest player in the Czech Republic, both the life and non-life segment in terms of premiums written, is Ceska Poistovna, which had almost a third of all premiums written in 2004. However, despite being the largest player, it is not over-dominant and certainly no longer has the monopoly that it once enjoyed. With a small market and numerous players, there is a likelihood of rationalisation in the future. An economic slowdown or volatility in regional financial markets may provide the catalyst for a substantial rationalisation of the sector over the medium term.

The main weakness of the Czech Republic's insurance sector, on the other hand, is the relatively low total size of the sector and the low expected growth and penetration rates. The sector is also still dealing with issues related to taxation, bureaucracy and possible GDP volatility. There are also possible risks from a reduction in capital inflows following the US sub-prime crisis and possible inflationary pressures.

We anticipate that non-life premiums will grow by 11% annually in local currency terms and by 13% in US$ terms over the forecast period. Life premiums are expected to increase by 4% annually in local currency terms and by 5% in US$ terms. An anticipated rise in nominal GDP from around US$158.30bn to US$237.7bn and an expected increase in non-life penetration from 2.35% of GDP to 2.80% are expected to be the key drivers of growth in the non-life segment in 2007-2012. An envisaged rise in life density from US$208.42 per capita in 2007 to US$280.00 per capita in 2012 is, on the other hand, expected to be the key driver of growth in the life segment. However, the total population of the Czech Republic is declining very moderately.