The Cyprus insurance sector has bounced back to dynamic growth, proving the resilience of the industry, which has been able to successfully tackle the challenges of the last few years and fully adapt to the ever-changing regulatory environment in Europe.
Although the domestic insurance market in Cyprus is small and highly competitive, the country continues to offer international insurance firms many opportunities as a cost-effective and business-friendly base to launch and manage products, services and operations in both the domestic and in international markets.
A number of foreign insurance operators have been successfully established in Cyprus for years, attracted by the island’s EU member status, its straightforward and transparent legal framework, ease of doing business and advantageous tax regulation. EU passporting has enticed major international industry players to the country, and Cyprus is particularly well positioned as a centre for companies wishing to do business especially in the EU and the Middle East region.
The 33 insurance companies operating on the island account for over 90% of the annual gross premiums written in the domestic market, with a handful of these companies dominating the market. The insurance industry also manages assets well over €2 billion, making it one of the largest institutional investors in Cyprus.
With the increasingly specialised needs and demands arising from clients – both corporate and private – new opportunities are found in creating innovative services and products, as well as in forging new synergies and using the country as an advantageous gateway to develop and expand business into new regional markets. These factors are set to support the future growth and diversification of the Cyprus insurance sector.
A Return to Growth
The insurance sector has seen signs of steady recovery following the 2013 financial crisis, while 2017 registered strong growth, proving the industry has taken corrective actions, has managed to overcome challenges and maintain a growth trajectory despite the negative environment and low-rate yields. Insurance was also the only major financial sector in Cyprus that managed to safeguard its employment numbers and contribution to the labour market – despite some minor reductions to salaries.
In 2017, growth continued to more dynamic levels, with premiums on the life side increasing an impressive 7.8%, compared to only 0.7% in 2016. On the general side (non-life), 2017 saw a 5.4% increase, compared to 4% the previous year, according to figures released by the Insurance Association of Cyprus (IAC). Industry professionals expect 2018 will close with even better figures, and project that the sector will soon be able to reach its pre-crisis levels of gross written premiums, providing there are no surprising economic shocks on a macro level.
Strong International Foundations
As a former British colony, insurance in Cyprus was traditionally provided by the large UK insurance houses, represented by agents in Cyprus. The companies themselves were registered in England under the English Insurance Law. It was not until the late 1960s that the island passed the Insurance Companies Law allowing the establishment of local insurance companies, which led to several of the agencies transforming themselves into fully- edged independent insurance companies.
Developments since then have seen both the number of companies and the volume of business increase considerably. Today, the domestic insurance sector is considered to be highly competitive and sophisticated due to the large number of insurance suppliers on the island in relation to the size of the population. The insurance sector’s supervisory authority is the Insurance Companies Control Service (ICCS), which is part of the Ministry of Finance, and regulates the 33 insurance companies in Cyprus. In addition, over 500 EU insurance companies have exercised their freedom to provide services (FOS) right by registering in ICCS records for carrying out business in Cyprus, and insurance experts estimate that this type of business will see further expansion in the coming years.
Developing Products and Services
Cyprus is continuously upgrading and ne tuning its offering to stay on par with the standards of the international insurance industry. Although perhaps moving at a slower pace than the rest of Europe due to its size, demand for more sophisticated products is rising. For example, products that were not widely promoted in the past, such as director and officer liability, are now widely offered and sought out and new products, such as cyber and drone insurance, are emerging in the market. These types of covers were not widely promoted before, but as the business sector develops and demands these types of policies, the Cyprus insurance industry has been quick to meet the needs of their clients – thus also broadening the spectrum of services.
The industry is experiencing significant momentum with respect to the provision of second pillar occupational pension products, as a result of a recent change in the law that allowed companies to offer these types of products. There has also been a resurgence in demand for insurance investment products. With a legal framework fully compliant with EU directives and employing best practices, Cyprus is promoting itself as an international hub in the investment pension market, as it offers an alternative market to the traditional financial service business and will enhance efforts to also promote Cyprus as a funds jurisdiction. This type of business is moving ahead fast since the barriers were lifted two years ago in 2016 and is an area to watch. Also, the wave of enhanced business technology, or fintech, coming into the market is diversifying insurance covers into products relating to for example telematics.
The development of the sector in Cyprus is very market driven and being a small step behind global insurance product trends also offers the benefit of learning from the trials and errors of bigger and faster moving markets that lead the way in product development. Furthermore, many of the Cypriot insurance firms are partnerships with international giants, enabling them to utilise the know-how and experience of these powerhouses and bring back that expertise to develop products with their unique understanding of how the Cypriot market works.
Cyprus is fully compliant with EU and OECD regulation and offers an efficient and transparent framework for business. However, it is no secret that the increased pressure from new regulation over the last five years has been very literally felt by the financial services industry around the world. Following the wave of regulatory changes such as Solvency II, MiFID II and PRIIPS Regulation, one of the main challenges for 2018 is the Insurance Distribution Directive (IDD) – coming into force in October 2018 – which aims to bolster consumer protection and ensure a level playing field across all participants selling insurance products in the European insurance landscape.
Packaged Retail Investment and Insurance-based Products (PRIIPs) was implemented at the beginning of 2018 and is a demanding piece of EU regulation aimed at obliging those who offer packaged investment products to retail investors to provide them with a clear standardised product information sheet. PRIIPs cover a range of investment products which make up a market in Europe worth up to €10 trillion. Implemented in May 2018, GDPR was another piece of EU-wide regulation, that has been a time-consuming and costly process for the industry.
Cyprus has stayed abreast with all these changes and is well equipped to transpose and implement new regulation and legislation in a bid to stay competitive in the EU market. However, the burden and expense of regulatory pressures are expected to also give impetus to more mergers and acquisitions, as well as strategic partnerships, in the years ahead. Given the high number of companies competing in the sector, it is expected that Cyprus will see more consolidation in the near future.
Challenges and Opportunities
Insurance experts have been calling for a more long-term vision from a government standpoint on how the sector should be developed in the future. This would help the industry focus on building more niche segments that could attract further business and investment and facilitate sustainable development.
For example, Cyprus has not been able to develop a strong reinsurance business, because the legislative changes which are necessary to reform the market structure and make it more competitive and appealing for reinsurers – such as cell company formation – have not yet taken place. Cell company formation is a structure that is a building block for this type of business and should be introduced to attract reinsurers and captive companies to the island.
Another challenge facing the insurance industry is the current implementation of the new National Health System (NHS). The insurance industry supported the introduction of the NHS and was vocal about creating a hybrid system to ensure the efficacy of the system and to work on solutions that ensure adequate and high quality cover, while avoiding situations of double insurance. However, the industry’s position was not accepted, and the legal framework voted through by Parliament is based on a single-payer system instead of the proposed hybrid multi-payer system. The implementation presents challenges to the existing health insurance business as group policies are an estimated 60% of total health business. Industry experts say it is likely that employers who currently pay for these policies may decide to terminate them once they are compelled to pay contributions to the NHS in a bid to avoid the double cost.
Brexit is also a hot topic. However, it does not directly affect Cyprus who has companies selling or distributing insurance products in Europe, but not in the UK market. The challenge lies more with UK companies operating outside its own market and this could provide opportunities for Cyprus. For example, the major global shipping insurer, London P&I Club, announced in July 2018 that it was setting up a ‘post-Brexit subsidiary’ in Cyprus. So far, the message from the EU has been clear that companies themselves have to find a way to continue servicing existing contracts and claims, and the IAC in cooperation with Insurance Europe are closely following developments to advise how the industry should adjust.
Another development that will facilitate more opportunities, is the announcement from the Cyprus Ministry of Finance to reform the pension funds framework – a positive and welcome move. The reform includes a plan to unite the two authorities supervising insurance undertakings and pension funds under one independent supervisory authority, which will facilitate better supervision within these areas and help reboot the pension fund market in Cyprus. These plans are still in their infancy and pending consultations and reviews, as well as parliamentary approval.
A Location of Choice
Although relatively saturated, Cyprus’ insurance landscape is an interesting area of the island’s diversified financial services industry, being equally attractive to EU and non-EU based insurance companies and managers. The country aims to become a centre for insurance management and reinsurance activities, encouraging companies seeking to enter the EU and the wider Middle East region to choose Cyprus as their regional headquarters to benefit from the easy market access and the services of a vast reservoir of experience and large number of qualified insurance professionals. Among the most attractive aspects is Cyprus’ tax system. The strong network of double tax agreements, the absence of tax on capital gains, and the participation exemption for dividends – both receivable and payable – without onerous conditions and without any thin capitalisation rules have already made Cyprus an attractive option for holding companies for multinational groups. Today, with growth in the insurance sector on an upward trajectory, Cyprus is becoming a serious contender as a location of choice for cross-border insurance operations. Its EU membership and strategic location offer great potential for companies seeking to expand into the EU and surrounding markets of the Mediterranean region, while simultaneously enjoying the low taxation, extensive number of tax treaties and a host of other fiscal advantages.
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