Hungary 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.

Hungary's IBER is 60.7. Hungary is a medium-sized insurance market for foreign companies in comparison with other countries in Central and Eastern Europe. In relation to other countries in the region, Hungary is notable for the openness of both the non-life and the life segments: the long list of foreign companies that are active is testament to barriers to entry that, in the past at least, have been low.

Economic and political issues are challenging. The budget deficit appears likely to shrink relative to GDP over the coming years, but is at a high level. A crisis revolving around Hungary's ability to fund its current account deficit is not BMI's core scenario, but is an outcome that cannot be ruled out. At this stage it looks as though Hungary will have a Socialist Party-led minority government over the medium term: it may be that another round of elections is held in 2008.

The main issues constraining the IBER are the small size of the insurance industry and the low levels of expected growth and penetration of the life and non-life sectors. High levels of external risks, bureaucracy, GDP volatility and tax levels are also factors that hold down Hungary's IBER. Against this, the IBER is boosted by the overall quality of the financial infrastructure and by Hungary's relatively high per capita GDP (in comparison with other countries in Central and Eastern Europe).

We are looking for non-life premiums to grow by 13% per annum in forint terms and by 12% annually in US dollar terms through the forecast period. For life premiums, the corresponding figures are 11% and 10%. Growth in the non-life segment is driven in part by the anticipated rise in non-life penetration from 1.78% of GDP in 2007 to 2.40% of GDP in 2012. In addition, we are looking for nominal GDP to grow from about US$135.0bn to US$180bn over the forecast period. In the life segment, the main change is the envisaged increase in life density from US$219 per capita to US$350 per capita. The total population of Hungary is actually falling very slowly in absolute terms.

Like its counterparts in Slovakia and the Czech Republic, Hungary's non-life segment is extremely crowded, both in terms of the absolute numbers of firms and in terms of the numbers of competitors relative to the actual and potential size of premiums. The same is true of the life segment. In 2005, the largest player in each segment spoke for about one-third of total premiums. Allianz is the leader in nonlife insurance; ING, in life.