Cyprus hosts a number of foreign insurance operators successfully transacting business in, or through the island, and with new EU 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 34 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.
British Heritage and International Influence
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 34 insurance companies operating in the domestic market. All are 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.
Market Leaders with a Banking Background
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, almost 450 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.
Crisis-Related Drop in Premiums
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. However, the international financial crisis and the 2013 Cyprus banking crisis have taken their toll. The Cypriot insurance sector continued to shrink in 2014, with operating companies seeing their total life and non-life premiums fall an annual 3.9% to €699.3 million, according to the Insurance Companies Control Service (ICCS). Life premiums and non-life premiums fell 7.3% and 1.4% to €289.4 million and €410 million respectively in 2014, compared to the year before. The drop, the third in three consecutive years, accompanied a drop in gross claims and expenses incurred. Gross claims in the life business and the non-life business fell 37% and 5.3% respectively in 2014 to €249.1 million and €195.2 million, while expenses fell 5.6% and 8.2% to €62.7 million and €115.2 million respectively. In 2014, total admissible assets of insurance companies in both life and non-life business increased by 4.9% to over €1.9 billion compared to 2013, according to ICCS. During 2014, the total gross premiums written by International Business Undertakings and by Branches of Non-EU Undertakings, which transact mostly International Business, and are all supervised by ICCS, presented an increase of 7.22%.
Challenges and Increasing Oversight
With Solvency II regulatory compliance obligations and tightened oversight coming into play in 2016, the insurance industry is expecting to face 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. Insurance premiums in Cyprus are around 4.5% of GDP, compared to 9% in the UK, demonstrating there is still room 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. 2014 and 2015 saw reforms in the legal framework in terms of tax treatment of pensions and currently foreign pension income is taxed at a flat rate of 5%, but an annual exemption of €3,420 is granted. However, a taxpayer can elect to be taxed at the normal tax rates, a choice which can be made year-on-year.
Mergers on the Horizon
New Solvency II regulatory requirements could also give impetus to more mergers and acquisitions in 2016. 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.
Attracting International Insurance Groups
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 has 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.
Seasoned Insurance Professionals to Drive Expansion
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.