The Cyprus insurance industry saw improving growth rates across the board in 2016, with the next two years expected to continue on an upward trajectory. A number of renowned foreign insurers successfully operate on the island through their branches and subsidiaries, and with more market consolidation coming into play, large insurance firms with high capital are set to reap the benefits.
As an EU member state, Cyprus offers insurance and reinsurance companies a straightforward and transparent framework in which to offer cost-effective services in both the domestic and international markets. With over 30 insurance companies operating on the island today and several hundred EU insurers registered to carry out business in Cyprus, competition is fierce in the local market. However, opportunities do exist, particularly in creating innovative services and products, as well as in developing new synergies and using the country as an advantageous gateway to expand business into new markets. EU passporting rights have long 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 country passed the Insurance Companies Law, allowing the establishment of local insurance firms, which led to several agencies transforming into fully-fledged independent companies.
Developments since then have seen both the number of insurers and the volume of business increase considerably. The introduction of the modern risk-based EU regulatory system, known as Solvency II, as well as a migration to more technologically advanced systems, along with a broader offering of top-quality products, have all helped transform the Cypriot insurance sector.
Today, the domestic insurance sector is considered to be highly competitive 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. Currently, around 470 EU insurance companies are exercising their right to provide cross-border services in Cyprus. Insurance experts estimate that this type of business will see further expansion in the coming years, and although small compared to its European peers, Cyprus’ insurance sector has solid foundations, a proven track record of withstanding both external and internal shocks, and has optimistic long-term growth prospects.
Industry leaders 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. Currently the contribution of the domestic industry to the island’s GDP is around 4.2%, compared to an EU average of 6.9%.
Over the years the industry has developed impressively, and the Cyprus insurance sector remains one of the largest institutional investors, managing assets worth around €2.35 billion. Although the international financial crisis and subsequent 2013 Cyprus banking crisis took its toll, the insurance industry has finally started to see a return to growth.
During 2016, the industry saw a boost in all classes of business, with total written premiums increasing by 2.6% compared to 2015, and reaching €764 million. This is a significant rise when compared to 2015, which saw only a marginal growth rate of 0.7%. Also non-life business grew by an impressive 4%, compared to a modest 0.4% in 2015. The key contributors to this growth were the strong 15% rise in health insurance business and a 2.9% increase in motor class business.
The life business has also kept on a steady growth path, although registering only a marginal increase of 0.7% in 2016, but the Insurance Association of Cyprus (IAC) is optimistic about the industry achieving better results in 2017 and 2018. As for claims and benefits in 2016, the sector paid an average of €1.3 million a day, bringing total payments to €472.5 million – representing an increase of 3.6% over the previous year.
The European insurance landscape is experiencing a wave of new and extensive regulatory requirements, mostly coming from EU directives. Over-regulation has become a new reality and poses a real challenge for all European insurers, and especially for small markets like Cyprus. However, despite its size, the country has a large pool of professionals who are well prepared to face the continuously growing regulatory burden. Following the challenges of transposing and implementing Solvency II – the largest-ever change to European insurance solvency regulations – the industry is now tackling a number of new and important legislative instruments.
A game changer and at the top of the agenda for 2017, is the new EU Directive on Insurance Distribution, together with numerous accompanying implementing measures. Also the EU’s Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation is of paramount importance, as it introduces new requirements to pre-contractual information of investment-linked insurance products – which should be successfully implemented as it comes into force by the end of 2017.
The Cyprus insurance industry is also closely monitoring changes emanating from the new EU Data Protection Regulation, and is preparing a phased implementation by gradually adjusting to the new rules to be ready to hit the ground running when the regulation comes into effect in May 2018.
Opportunities from Pensions Reform
As Cyprus tackles the challenge of an ageing population, pension reform is high on the agenda, and presents an opportunity for insurers to broaden their horizons and become active in a field that has remained off-limits due to legal and tax barriers. 2016 marked an important shift, with barriers lifted in regard to the provision of occupational pension schemes, enabling insurance companies to offer more product choices to both employers and employees.
The move has underlined the government’s recognition of the important role private insurance can play in ensuring sustainable and sufficient pensions. With a legal framework fully compliant with EU directives and employing best practices, Cyprus is now promoting itself as an international hub in the investment pension market, which could also enhance current efforts to market Cyprus as an emerging funds jurisdiction.
Cyprus offers a wide scope of insurance products, ranging from the more traditional third party motor insurance – the biggest class of the sector – to more niche products such as cyber insurance. However, new opportunities to expand its product offering exist in developing the aforementioned occupational retirement provision, as well as in looking at ways to grow captive insurance and other niche business.
As a cost-effective EU jurisdiction, Cyprus already has all the necessary features in place to attract more captive business, but industry chiefs say the country needs a more government-led approach to promote the island internationally as a captive business destination.
For foreign insurers in particular, compelling reasons include the ease of operating in a Cyprus’ business-friendly environment, the Solvency II framework and its European-based legislation, EU passporting rights, and the country’s beneficial tax regime. For insurers doing business in the Middle East and Africa, Cyprus is especially advantageous, due to its close proximity and excellent relations with these countries.
Mergers and Acquisitions
Increasing global regulatory changes and intensifying competition could also give impetus to more mergers and acquisitions in Cyprus over the next few years. Given the high number of companies competing in the sector, more consolidation is expected in the near future, thereby reducing the number of current players in favour of larger sized insurance firms with high capital.
Cyprus’ insurance landscape is an interesting area of the island’s diversified financial services industry, being equally attractive to both EU and non-EU based insurance companies and managers. The country aims to become a centre for insurance management and reinsurance activities, encouraging companies to choose Cyprus as their regional headquarters. As many Cyprus-based companies already attest, having a business base on the island offers the benefit of easy market access, the services of a large pool of highly qualified insurance and finance professionals, and a competitive operating environment in an established international business centre.
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 a location of choice for group insurance operations.
While Cyprus’ domestic market remains small by international comparison, the island’s insurance industry believes the reservoir of experience of its 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 offer great potential for companies seeking to expand into the EU and surrounding markets of the Mediterranean region, while simultaneously enjoying a host of fiscal advantages.
All rights reserved. The material on this site may not be reproduced, distributed, transmitted, cached, or otherwise used, except with the prior written permission of CountryProfiler.
Updated: May 2017