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MTPL: is it time for profits?

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Turkish insurance market


An overview

Turkey has been an attractive market


for insurers in recent years due to its
combination of economic growth,
changing demographics and low
insurance penetration.

With an average economic growth of 5%


since 2003, a population of 80 million (m) which
is weighted towards younger generations (40%
is under 24 years old) and a non-life insurance
penetration of 1.1%, it indeed presents a
significant growth opportunity.
However, despite this positive outlook
and the growth opportunities, the market
profitability for the non-life industry has not
lived up to expectations. From 2005-09,
return on equity in the non-life industry was
around 7% per annum. Over the last three years
this deteriorated substantially to provide an
average return of -5.5%. This was driven by the
soft market and resultant price inadequacy, as
well as the one-off reserve deteriorations.
The compulsory MTPL market is the highest
policy-volume market in Turkey, with almost
12m policies as at the end of 2012. It is a
significant contributor to insurance sector premium
production with more than 3.6 billion (bn) TL gross
premium written during 2012. However, it is also
the single largest branch contributing to insurance
losses. At the end of 2012, Turkish companies
reported a combined loss in compulsory MTPL of
nearly 1.3bn TL with a combined operating ratio
(COR) of 144%.

In this article we explore some of the challenges


for this line of business, some of the changes and
some thoughts about the future.

Figure 01. MTPL


Policy counts
MTPL

Compulsory MTPL (traffic)

2009

11,604,457

10,757,334

2010

12,643,507

11,652,461

2011

14,226,019

13,099,465

2012

15,031,849

13,862,944

The

Compulsory MTPL market is


the highest policy-volume market in
Turkey, with almost 12m policies as at
the end of 2012.

MTPL: is it time for profits? 3

What are the challenges?


The issues in the MTPL branch stem
mainly from bodily injury claims.
The material damage claims are reported
and settled quickly, which makes them
predictable; however, the volatility, size of
reserves and time to report and settle bodily
injury claims make their performance more
difficult to monitor.

Even though most of the claim amounts come from


damage claims, the majority of the reserves (and
in our view the majority of actuarial challenges)
come from the injury claims. Other common
challenges for insurers in the MTPL business are:
Significant reserving changes
Increasing activity of claims management
companies (CMCs)
Legislative changes that may be
effective retrospectively

Bodily injury claims


Bodily injury claims take time to settle and are
substantially fewer in number compared to
material claims. (As a rough estimate, a company
might expect only 1-3 injury claims for every 100
material claims.) However, these claims constitute
the majority of an insurance companys MTPL
reserves. Due to the long waiting periods (statute
of limitations), a claim may be notified several
years after the accident, making it difficult to
estimate reserves.
But these claims have always been a challenge:
why have bodily injury claims become such a big
issue in recent years? Four of the reasons are
described below.

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CMCs

Use of different assumptions

Increasingly, CMCs uncover claims that would


otherwise not come to the insurance companies.
A fixture in most European countries, CMCs were
not common in the Turkish market until a few
years ago. They encourage the families of recent
accident victims to claim, as well as older ones;
a significant number of cases are from older
accidents, either as new claims or reopening
previously closed cases. CMCs usually behave as
the claimants representatives in correspondences
with the insurance company and are paid a
commission by the claimant in return. For this
reason, they follow the cases closely. In many
European markets, this activity is considered a
significant part of increased claims costs. In the
UK, for example, there have been changes to
the law regarding fees payable between various
parties in the insurance process, including lawyers
and insurers.

We often see a discrepancy between the reserve


amount for individual cases calculated by
companies and the payment amount that courts
decide. This is usually because the calculation
method is not standard and different assumptions
are used by two parties. The benefit amount
calculated by actuaries is smaller than the amount
calculated by the court, which is payable to the
claimant. This makes it difficult to estimate the real
burden on companies and reserve appropriately,
causing under-reserving problems. (Please refer to
(3) on page 10.)

While CMCs are not inherently a problem, we think


that regulation should monitor activities to ensure
fairness to claimants and consumers.
CMCs can also be an opportunity to settle claims
quicker and to reduce the uncertainty over claims
reserves and interest on court settlements.
An effective claims management function can
enable companies to adjust their approach
to the first notification of loss and take the
initiative in the claims process, shortening it
and reducing opportunities for cost increases
and claim reopenings. It can also mean taking
advantage of CMC activities where appropriate
and converting the threat into an opportunity.
(Please refer to (1) on page 10.)

Transfer of medical expenses


Another major change was the transfer of medical
treatment expenses to Social Security Institution
(SGK) in 2011. Insurance companies currently
transfer 10% of MTPL premium to SGK, which
is then responsible for these claims. While this
was effective as of the second half of 2011, SGK
requested additional premium for the earlier periods
in 2012. This brought further unexpected burden
on the companies, with concerns over possible
additional premium transfers in the future.
Although this transfer of premiums may seem
straightforward at first glance, companies should
be careful not to disregard the claims liabilities
that do not belong to SGK. Examples include
the damages to non-Turkish claimants and the
amounts exceeding the SUT limits, which are
the medical limits payable by the Government.
The danger here is that companies may be faced
with additional claim payments that they had not
considered as their liability.

Changes in regulations
Changes in regulations may sometimes affect the
claims reserves retrospectively. A clear example
was the treatment of pilot cases. Claimants have
to pay a tax based on the compensation amount
they request from the insurance company. In some
cases, they request a very small benefit amount
in order to pay less tax, but increase the amount
when they feel confident that they will win the
case. The big jump in the claims reserves makes
the reserves volatile and the IBNR difficult to
estimate accurately.

The

change in the regulation about how to


estimate the initial reserves for these pilot
cases increased case reserves significantly
and caused some discrepancies in the
reserve triangles.

The change in the regulation about how to


estimate the initial reserves for these pilot cases
increased case reserves significantly and caused
some discrepancies in the reserve triangles.
Companies can apply to the Treasury in order to
get permission to manipulate data and eliminate
the impact of these changes on triangle reserves.
The effect may be significant for companies
that do not get permission from the Treasury,
resulting in uncertainties and usually considerable
increases in the claims cost estimates. (Please
refer to (2) on page 10.)
MTPL: is it time for profits? 5

Performance monitoring: compulsory


MTPL versus other
Turkish companies are monitoring their MTPL
performances closely. But are they looking
at the right key performance indicators (KPIs)?
The answer to this question may vary a lot across
companies: let us first clarify the sub-classes of
MTPL product.
By Treasury definition, for reporting purposes the
MTPL product covers compulsory MTPL, voluntary
MTPL and compulsory transportation covers.
(Reserving voluntary MTPL is done in a separate
triangle.) Compulsory MTPL business is often
loss-making while the voluntary MTPL is profitable.

This is particularly a concern if the voluntary MTPL


product is packaged with another product
(for example, Casco), as is often the case.
When companies look at these sub-classes
together, they can easily miss the real picture of
their compulsory MTPL business, which may result
in making strategic and pricing decisions based
on misleading information. Defining the product
groups carefully and looking at the right KPIs
are crucial for monitoring the MTPL performance
reliably. (Please refer to (4) on page 10.)

Percentage

Figure 02. Net loss ratio


120
115
110
105
100
95
90
85
80

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009
2010
2011
2012
2013

Traffic MTPL

Percentage

Figure 03. Combined ratio


150
140
130
120
110
100
90
80

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009
2010
2011
2012
2013

Traffic MTPL

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Increasing market awareness


and actions taken
While MTPL performance has been a
major issue for almost all players in the
market for some time, companies have
been reluctant to take significant pricing
actions due to competitive pressures.
Companies have acted to keep their market
share and ranking stable, even if this meant
making a loss. We see this in the market figures
that show an average premium increasing
broadly in-line with ination throughout 2010
and 2011, despite the indicators of increasing
claims costs above ination.
In 2012, we started to see this changing.
Companies significantly increased prices and
adjusted their MTPL business strategies. In
some cases these price increases aimed
at shrinking their MTPL portfolio, in others
some volume loss was accepted in order to
increase profitability. Given this notable shift to
a hardening market, it was a challenging time
for many companies to monitor their portfolios
and competitors price movements. Discussing
and deciding on prices and coming up with
estimations on possible portfolio impacts still
have companies wondering: When have we
done enough to be profitable? (Please refer to
(5) on page 10.)

We can see these price increases clearly in the


performance figures published by the Turkish
Insurance Association (TSB). The increase in the
GWP between the second quarters of 2012 and
2013 was 43%. Similarly, the GWP in the final
quarter of 2012 was 45% higher than the GWP
in the last quarter of 2011. The price increases
were significant, and penetration reduced but the
combined impact was still a substantial increase
in total premium.

Companies have acted to keep their market


share and ranking stable, even if this meant
making a loss.

MTPL: is it time for profi ts? 7

Billions TL

Figure 04. MTPL Turkish market GWP


1.6
1.4

43%

1.2
26%

1.0
0.8
0.6
0.4
0.2
0.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009
2010
2011
2012
2013

GWP
Figure 05. Quarterly average premium
400
350

34%

300

39%

10%

250

9%

200

With the significant price


increases in the market,
we would expect a big
improvement in the loss
ratios and profitability.
But is this really the case?

150
100
50
0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009
2010
2011
2012
2013

Traffic MTPL
**The numbers show the annual increase between 2010Q4 to 2011Q4 and from 2011Q4 to 2012Q4.

A similar effect was also seen in the average


premium amounts. While we see a moderate
increase of around 10% during 2010 and 2011,
the average premium increased by 39% during
2012 and in just the first two quarters of 2013,
there was an additional increase of 19%.
With the significant price increases in the market,
we would expect a big improvement in the loss
ratios and profitability. But is this really the case?
When we look at the claims and premium figures
published by TSB, we do not see that the loss
ratios (after allowing for the impact of SGK) show a
corresponding improvement in 2012 or early 2013.
In the last quarter of 2012, we observe a loss ratio
of 117%, which has been significantly higher than
the previous periods loss ratios. The two main
reasons for this are:
The big reserve increases at the end of 2012,
the market total gross claims reserve increased
by 21% in 2012Q4 (compared to 2012Q3) and a
further 10% in 2013Q1. As the TSB figures are
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on an accounting year basis, the increases for all


previous accident years reserves are reected
in the latest accounting year. This shows that the
accounting year performance is worse than the
accident year performance.
The time it takes for the price increases to
be earned through the performance. Because of
the time lag, we would expect to see the impact
of price increases in accounting year 2013
and onwards.
Companies also monitor distribution channels
(for example, agencies) more closely as another
way to improve their MTPL performance, cancelling
the contracts of poor performers and incentivising
better-performing agencies in order to write more
business through them.
Some companies were more proactive, recruiting
people to support bodily injury claims earlier
identification and settlement to cut reserves
and improve performance, as mentioned in our
section above.

Whats next?
The past two years have been
turbulent for companies in
the Turkish MTPL market:
significant changes to the
claims environment, reserving
environment and competitive
environment have meant
companies have needed to
monitor, analyse and react quickly
in terms of pricing, claims
management and also strategy.

During this time we have seen companies


expanding in MTPL and others pulling back, but
for the majority of companies in the Turkish
market, MTPL remains a significant part of their
overall strategy and therefore a key question for
many is: what happens next?
The price increases seen during 2012 have
continued during the first quarter of 2013; this
may be a sign of continuing uncertainty around
the cost side of the market and may be an
indicator of further reserving deterioration to be
expected during 2013. We would predict increases
in reserves to have an adverse impact on the
reported accounting year 2013 profitability of
MTPL. However, the significant price increases in
2012 will also earn through into the 2013 results,
which should mean substantial improvements in
performance ratios compared to 2012.
This could mean that for 2014 there is a
real possibility of seeing a profitable Turkish
MTPL market, if you include the performance
improvement from voluntary MTPL. Our view is that
the MTPL market being profitable is less likely
it has further to travel and remains a very
competitive product.

Along with product profitability changes, we are


seeing significant preparations for potential
changes to the product structure. The TSBs
project to enhance the MTPL market in direct
settlement, loss of support, fraud, and spare parts
could have both short- and long-term impacts on
performance. We believe that each of these areas
could improve efficiency, certainty and profitability
for the market, but also has a risk of short-term
volatility in results. This may make it difficult for
companies to measure performance during the
changes, which may feed into incorrect strategic or
pricing choices. In particular, the Association and
individual companies will need to carefully assess
the impact and decisions about direct settlement,
which could significantly change the landscape for
MTPL and other motor products.
So to answer the question Whats next?: we
think that it would be premature to mark the end
of reserving challenges, and market changes may
result in more turbulence, but fundamentally the
market is at a healthier price point than it was one
year ago and profitability on an accident year basis
could be a reasonable ambition for insurers in
2013 and 2014.

MTPL: is it time for profi ts? 9

How can we offer support?


Towers Watson is a leading global professional services company
with 14,000 associates worldwide that helps organisations
improve performance through eective people, risk and
financial management. Towers Watson has been working with
Turkish and international financial institutions in Turkey to
develop insurance and pensions businesses since 2000.

Some of our services include:


(1) An effective claims management function
can help companies to improve their MTPL
performance significantly. We offer services on
bodily injury claims processes. By reviewing a
sample of files, we can identify the improvement
areas in the processes and talk to you about best
practice approaches.
(2) Estimating reserves accurately is crucial in
order to monitor performance closely and make
the correct pricing decisions. We offer reserve
review services to companies in order to help them
understand the sufficiency or otherwise of their
reserves. Our reserving software, ResQ, is used by
many companies in the Turkish market.
(3) Discrepancies between the company and
court calculations are one of the major areas of
concern for companies. We have worked with the
TSB to investigate worldwide examples to see
how the loss of support calculations is made in
other countries.
(4) We offer services for understanding KPIs and
building a framework to come up with a consistent
definition of KPIs throughout the company.
This enables different departments to come
up with a single definition of KPIs and helps
management look at the most suitable figures
for performance monitoring.

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(5) We offer services on best practice pricing


techniques and on how to estimate the effects of
pricing decisions in the portfolio. Our specialised
tools, Emblem and Radar, are used by many
of the non-life insurance companies in Turkey.
We have worked with companies to understand
the impact of pricing changes on their results,
creating a single company view of performance
and predicting future accounting performance to
support communication and planning.

Further information
For further information, please contact your
Towers Watson consultant, or

Evrim Kksal Arkut


+90 212 337 21 22
evrim.koksal.arkut@towerswatson.com

Chris Halliday
+90 212 337 21 04
chris.halliday@towerswatson.com

zlen Kurt Kandemirli


+90 212 337 21 05
ozlen.kurt.kandemirli@towerswatson.com

MTPL: is it time for profi ts? 11

About Towers Watson


Towers Watson is a leading global professional services
company that helps organisations improve performance
through effective people, risk and financial management.
With 14,000 associates around the world, we offer solutions
in the areas of benefits, talent management, rewards, and
risk and capital management.

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