A number of foreign insurance operators successfully operate in Cyprus, and with increasing global regulation coming into play, the sector could see more consolidation to the benefit of larger sized insurance firms with high capital.
As an EU member state, Cyprus offers insurance and reinsurance companies a straightforward and transparent framework in which to offer services in both the domestic and international markets. With over 30 insurance companies operating on the island, and only a handful of companies dominating the market, Cyprus’ insurance sector is highly concentrated. New opportunities lie mainly in creating innovative services and products, new synergies and using the country as an advantageous gateway to develop and expand business into new markets. EU passporting rights have attracted international industry players to the country, and Cyprus is positioning itself to play a key role serving the markets of the Eastern Mediterranean, Middle East, Russia and the CIS region.
As a former British colony, insurance in Cyprus was mainly 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-fledged 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. There are 33 insurance companies operating in the domestic market, all regulated by the Superintendent of Insurance at the Ministry of Finance, while the Insurance Companies Control Service (ICCS) assists in the supervision of the insurance companies.
Some of the largest insurance companies operating within Cyprus are subsidiaries or affiliates of banks, although following current international trends many are making efforts to break away and form new companies independent of the banks. Today, around 470 EU insurance companies are exercising their right to provide cross-border services in Cyprus, and insurance experts estimate that this type of business will see further expansion in the coming years
Over the years the industry developed impressively, as figures released by the Insurance Association of Cyprus (IAC) attest, with the total gross premiums written almost doubling between 2001 and 2010. Although the international financial crisis and the subsequent 2013 Cyprus banking crisis took its toll, the Cyprus insurance industry has finally started to see return to modest growth. The total domestic Gross Written Premiums (GWPs) in 2015 saw an increase of 0.71% compared to the previous year, representing a rate of 4.04% of GDP.
With Solvency II regulatory compliance obligations and tightened oversight, the insurance industry is facing higher solvency capital requirements and increased pressure on earnings. Insurers must maintain sufficient levels of risk-based regulatory capital as well as establish strong and on-going risk management and corporate governance systems. Solvency II is the largest-ever change to European Insurance solvency regulations and constitutes a significant transformation process for insurers – a move well anticipated by Cyprus professionals, who have taken relevant measures to prepare for the change. The move to a harmonised International Financial Reporting Standard (IFRS) for insurance contracts is also gathering momentum, with a new standard on the horizon expected to fundamentally change the accounting for insurance contracts. Insurers are also facing a shake-up in other key areas of financial reporting, including the basis for financial instrument measurement.
Insurance executives believe that the coming years will also see a major shift in attitude and a corresponding increase in underwriting in Cyprus, where the penetration rate for insurance policies has historically been lower than in other countries, particularly in Western Europe – demonstrating there is potential for growth. As Cyprus tackles the challenges of an ageing population, a greater demand for life insurance is now being felt and pension reform is high on the agenda. With a legal framework fully compliant with EU directives and employing best practices, Cyprus is also 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.
Mergers and Acquisitions
Solvency II regulatory requirements could also give impetus to more mergers and acquisitions in the years ahead. Given the high number of companies competing in the sector, it is expected that Cyprus could see more consolidation in the near future, thereby further reducing the number of current players in favour of larger sized insurance firms with high capital.
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, Russia, CIS countries, the Middle East or Mediterranean, to choose Cyprus as their regional headquarters, benefiting from the easy market access and the fact that it has a stock of insurance professionals to service the industry and a reputable international financial centre. Among the most attractive aspects is also 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. Now Cyprus is also being considered as the location of choice for group insurance operations.
A Pool of Professionals
While Cyprus’ domestic market remains small by international comparison, the island’s insurance industry believes the reservoir of experience and large number of qualified professionals gives it an edge when seeking to attract international insurance management and reinsurance operations to the island. Cyprus’ EU membership and strategic location offers 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.
Updated: March 2017