The Cyprus insurance sector has seen impressive growth over the last few years, with rates surpassing even pre-crisis levels. The resilience of the industry has been proven in its ability to tackle challenges and adapt to increasing regulation, as well as in expanding its services and product offering.
The Cyprus insurance industry has regained its strength with healthy growth rates and fresh momentum to diversify and introduce new services to meet increasing market demands. Despite the fact that the global outlook for insurance companies remains relatively bleak with the introduction of new waves of costly regulation and challenges of implementing digital transformations, Cyprus seems to be bucking the trend at the moment with solid growth across the full spectrum of insurance classes.
Although the domestic insurance market in Cyprus is small and has faced challenges, the sector has truly bounced back, and 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 local and international markets.
A number of foreign insurance operators have been successfully operating 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 30 insurance companies operating on the island account for about 95% of the annual gross premiums written in the domestic market, with a handful of these companies dominating the landscape. The insurance industry also manages assets well over €2 billion, making it one of the largest institutional investors in Cyprus.
With increasingly specialised needs arising from clients, new opportunities are found in creating innovative services and products, forging new synergies and using the country as a gateway to expand business into new regional markets. These factors are set to support the future growth and diversification of the Cyprus insurance sector.
Healthy Market Growth
The insurance sector has seen steady recovery following the 2013 financial crisis with both 2017 and 2018 registering strong growth, demonstrating that the industry has taken corrective actions to overcome challenges. 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 during the crisis-laden years.
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. Whereas the first nine months of 2018 recorded 10% growth compared to the same period in 2017. On the general side (non-life), the first nine months of 2018 saw a 5.2% increase compared to the same period the previous year, according to figures released by the Insurance Association of Cyprus (IAC). Industry professionals maintain positive expectations that 2019 will continue on the same healthy track, providing there are no surprising macro-economic shocks.
British Industry Roots
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 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 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 ofFinance, and regulates the 30 insurance companies in Cyprus. In addition, nine companies are operating under the freedom of establishment (FOE) and over 500 EU insurance companies have exercised their freedom to provide services (FOS) right by registering with ICCS to carry out business in Cyprus. Insurance experts estimate that this type of business will see further expansion in the coming years.
Diversifying Products and Services
Cyprus is continuously upgrading its offering to stay on par with international insurance industry standards. 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 offered and sought out and new products, such as cyber and drone insurance, are emerging as new tech rolls out into the market. As demand has been rising for 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 also experiencing significant momentum with respect to the provision of second pillar occupational pension products as a result of a change in the law that allows 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 in 2016, and is an area to keep an eye on. 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 market driven and being a small step behind global insurance trends also offers the benefit of learning from the trials and errors of bigger and faster moving markets that lead the way in development. Furthermore, many of the Cypriot insurance firms are partnerships with international giants, enabling them to tap into the in-house expertise of these powerhouses and use it to develop products with their unique understanding of how the Cypriot market works.
Solid Regulatory Framework
Cyprus is fully compliant with EU and OECD regulation and offers an efficient and transparent framework for business. However, increased pressure from new and complex regulation over the last few 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, GDPR and PRIIPS Regulation, one of the main challenges for 2018 was the Insurance Distribution Directive (IDD) – which aims to bolster consumer protection and ensure a level playing field across all participants selling products in the European insurance landscape. In 2019 insurance firms will be grappling with the immense task of the future implementation of IFRS17, which will align financial reporting with Solvency II. With the already extended deadline looming in 2021, implementation of IFRS17 will no doubt place serious pressure on firms in terms of time, cost and human resources.
Although Cyprus is well equipped to transpose and implement new regulation and legislation to stay competitive in the EU market, the intense margin pressures and expense of regulatory burdens could give impetus to more consolidation in the market through mergers, acquisitions and strategic partnerships in the years ahead – especially due to the high number of companies competing in the Cypriot sector.
Challenges and Opportunities
For some time now, Cyprus 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 to Cyprus and facilitate sustainable development in the future.
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.
Traditional insurance companies are also facing growing competition from online insurance providers who have the advantage of lower cost burdens, more transparency and improved customer experience through digital platforms. Similarly to other industries, traditional big firms must streamline and digitise antiquated systems in order to stay competitive in this cut-throat environment.
Another challenge facing the industry in Cyprus 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 its efficacy 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. However, despite these fears for the future, so far quite the contrary has occurred with the number of new private health insurance policies growing over the last year.
Brexit remains a key issue, but does not directly affect Cyprus. The challenge lies more with UK companies operating outside their own market, which 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 separate authorities regulating insurance undertakings and pension funds under a single independent authority, which will operate on the model of the Cyprus Securities and Exchange Commission (CySEC). This will facilitate better supervision within these sectors 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.
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’s FDI regime allows up to 100% foreign participation in domestic insurance companies, and Cyprus is keen to become a centre for insurance management and reinsurance activities by encouraging companies looking to enter the EU and EMEA region to choose Cyprus as their regional headquarters.
The country offers multiple benefits for international business, such as easy market access and the services of a vast pool of professionals in the insurance and financial services industry. Another attractive aspect is Cyprus’ tax system and its network of double tax agreements. Profits of insurance companies are liable to corporation tax similar to all other companies except in the case where the corporation tax payable on taxable profit of life insurance business is less than 1.5% of the gross premium. In this case the difference is paid as additional corporation tax. The country’s 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 numerous fiscal advantages. With continuous future growth projected in the insurance sector, Cyprus is becoming a serious contender as a location of choice for cross-border insurance operations and as a launch pad into new markets.
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