Mitigating Risk

The Cyprus insurance sector remains strong and resilient with companies registering another year of growth in 2019. The highly developed sector has been on an upward trajectory for three years expanding its range of services and products, but now faces new challenges and opportunities as a result of the coronavirus pandemic.

The Cyprus insurance industry has shown strong growth over the last few years with revenues surpassing even pre-banking crisis levels. 2019 was no different in this respect, with companies posting healthy figures across all insurance classes, highlighting consistent growth in the sector. The insurance industry, which is one of the largest institutional investors in Cyprus managing assets well over €2.5 billion, has successfully tackled challenges and expanded its services and product offering, while adapting to a new reality of digitalisation and the ever-increasing burden of regulation.

Cyprus’ economy is predicted to shrink in 2020 due to the coronavirus pandemic, with the hit bearing some resemblance to the 2013 Cyprus banking crisis, throughout which the local in- However, a worst case scenario could potentially have serious repercussions for insurance companies. The coronavirus is not expected to have a serious impact on insurance undertakings from a claims perspective, as most products usually exclude pandemics and public health threats from insurance coverage. However, companies in France and the UK, for example, are now working with governments to explore solutions for providing at least some cover for exceptional events such as the Covid-19 pandemic.

Although the domestic insurance market in Cyprus is small and has faced challenges, the sector is highly developed and has a proven ability to overcome external shocks and quickly adapt to new market realities. As a jurisdiction, Cyprus 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 international markets. A number of foreign insurance operators have been successfully operating in Cyprus for many years, attracted by the island’s EU member status, its straightforward legal framework, ease of doing business and advantageous tax regulation. EU passporting has attracted major international industry players to the country, and Cyprus is particularly well positioned as a centre for companies doing business in the EU and Middle East region.

The over 30 insurance companies operating on the island account for more than 99% of the annual gross premiums written in the domestic market, with a handful of these companies dominating the industry. A continuously evolving market and increasingly specialised demand have opened up new opportunities in creating innovative services and products, and using the country as a launchpad to expand business into new regional markets.

Consistent Growth 

The insurance sector has seen steady growth in the last three years bouncing back to pre-crisis level revenues, which is evidence of a strong recovery from the downturn of the 2013 financial crisis. Insurance was a major financial sector in Cyprus that managed to safeguard its employment numbers and contribution to the labour market. In 2019, the growth momentum continued, with premiums on the life side increasing 0.7%, compared to 8.8% in 2018. On the general side (non-life), 2019 saw a 6.1% increase compared to 5.8% in 2018, according to figures released by the Insurance Association of Cyprus (IAC).

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 currently 32 insurance undertakings in Cyprus that are licensed and supervised by the Insurance Companies Control Service (ICCS), which is part of the Ministry of Finance. In addition, eight companies are operating under the freedom of establishment (FOE) and well over 500 EU insurance companies have exercised their freedom to provide services (FOS) right by registering with ICCS to carry out business in Cyprus. Leading figures from the industry estimate that this type of business will see further expansion in the coming years.

Sharpening the Competitive Edge 

Continuously improving its offering and upgrading its services, Cyprus is on par with international industry standards. The insurance sector in Cyprus is market driven and although perhaps moving at a somewhat slower pace than the rest of Europe due to its size, demand for more sophisticated products is rising. The slower pace also offers the benefit of learning from the experience of bigger and faster moving markets that lead the way in development. Furthermore, numerous Cypriot insurance firms are partnerships with international heavyweights, enabling them to tap into the in-house expertise of these powerhouses and use it to adapt products for the Cypriot market.

For example, products 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. In addition, the wave of cutting-edge fintech coming into the market is diversifying insurance covers into products, such as the employment of telematic devices, for instance. As demand has been rising for these and other types of policies, the Cyprus insurance industry has been quick to broaden the spectrum of services.

The industry is also experiencing fresh momentum in the provision of second pillar occupational pension schemes as a result of a change in the law that enabled life companies to offer these types of products and clarified that the associated contributions are tax deductible. There has also been a resurgence in demand for insurance investment products. Insurance firms have been offering pillar II occupational pension schemes, known as Class 7 schemes, which are similar to the traditional provident funds but with more benefits, according to the IAC. These new schemes were introduced in Cyprus for the first time in 2016, and are growing to be a very promising alternative for pension-related saving and investing. The Class 7 funds resemble classic provident funds set up by associations of professionals, unions and companies for their employees, but are managed by insurance companies and are governed by the legal framework regulating insurance companies. They can be flexible and more cost-effective products, suitable to all types of organisations regardless of size and sector. The evolution of class 7 products has brought drastic changes to Cyprus’ occupational pensions sector and is set to make an even bigger impact in the future, as they offer a convenient and hassle-free way to complement future social insurance pensions and constitute a tax-advantageous investment vehicle at a time when having money in the bank could prove to be costly.

Another developing segment that is currently being refined is insurance coverage for high-rise developments, which requires more specialisation particularly now as Cyprus is experiencing a construction boom of skyscrapers, new luxury marinas, and big hotels. Insurance has an important role in these types of complicated projects with multiple phases and subcontractors, and insurers need to be involved in the entire process from start to finish to maintain the integrity of the cover and mitigate potential risks.

Robust Regulatory Framework 

Cyprus is fully aligned with EU law as well as with legal frameworks stemming from other supranational organisations, such as the OECD, and offers a simple, straight-forward and transparent framework for business. However, increased pressure from new and complex regulation over the last several years has been a challenge faced by the financial services industry around the world. The surge of regulatory changes such as Solvency II, MiFID II, GDPR, PRIIPS Regulation and the Insurance Distribution Directive (IDD) meant that insurers had to use a great deal of their resources for regulatory compliance purposes. In addition, the immense task of the future implementation of IFRS17 by 2023, will place serious pressure on firms in terms of time, cost and human resources.

The Solvency II 2020 review is on the agenda across the EU this year, pushed forward by the European Insurance and Occupational Pensions Authority (EIOPA). The Solvency II Directive is designed to face difficult situations of financial stress, by setting minimum solvency capital requirements and strict rules on the calculation of technical provisions. Although the industry in Cyprus is well equipped to appropriately transpose and implement new regulation 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 local market.

Challenges and Opportunities 

Just like in many other economic sectors, digitalisation is key to staying competitive in the cut-throat insurance landscape. Traditional insurance companies have already completed, or are in the process of completing, their digital transformation, as they face growing competition from online insurance providers. Similarly to other industries, traditional big firms are placing strong emphasis on streamlining processes and implementing more efficient systems.

On a macro level, Cyprus insurance experts would like to see a more defined long-term vision from the government on how the sector could 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 made much progress in developing reinsurance business, perhaps most importantly because the legislative changes to reform the market structure and make it more competitive and appealing for reinsurers – such as cell company formation – have not yet taken place. Creating a reinsurance industry in Cyprus would have multiple positive outcomes for the economy since it would create jobs and keep millions of euros in reinsurance premiums in Cyprus, which are currently paid to reinsurers abroad.

A challenge the insurance industry has faced over the last year is the ongoing implementation of the new National Health System (NHS). The industry supported the introduction of the NHS, but advocated for an NHS that would also involve private insurers. However, the industry’s position was not accepted, and the legal framework voted through by Parliament is based on a single-payer system that excludes private insurers. The implementation presents challenges to the existing private health insurance business and especially group policies, which are an estimated 46% of total health business. Some companies are cancelling or downsizing group health insurance policies for their employees in a bid to avoid paying for two covers, the obligatory employer NHS contribution and private health insurance premiums. This has essentially been a cost-cutting exercise for companies, however, on the flip side the number of new private health insurance policies has been growing over the last year.

Cyprus’ fledgling oil and gas sector, and in particular its formidable shipping industry and developing ship financing business could also bring more marine insurance opportunities. Hull and cargo insurance is still not a very large part of insurance activity in Cyprus, but is a specialised area that has strong potential to see growth and further development in the future. Following the protracted uncertainty caused by Brexit, many UK companies looked abroad to set up subsidiaries or fully fledged offices to secure their future business – and for many, Cyprus proved an advantageous location. A prime example of this was the recent arrival of a new P&I Club member, Steamship Mutual Underwriting Association (Europe) Limited, which has decided to underwrite all of its European business through its Cypriot entity.

Another development that will facilitate more opportunities, is the announcement from the Cyprus Ministry of Finance to reform the pension framework – a positive and welcome move. The reform includes a plan to merge the two separate authorities supervising insurance undertakings and occupational pension funds under a single independent supervisory authority, which will be based on the model of the Cyprus Securities and Exchange Commission (CySEC). This will facilitate better supervision within these sectors and help modernise and reboot the pension fund market in Cyprus. Although a legislative proposal has already been submitted to Parliament, negotiations are expected to be lengthy and the result is uncertain.

Location of Choice 

Equally attractive to both EU and non-EU based insurance companies and managers, Cyprus’ insurance sector is an interesting area of the island’s diversified financial services industry. The jurisdiction offers multiple fiscal 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, rendering it a serious contender as a location of choice for regional headquarters for cross-border insurance operations and as a launch pad into the EU and surrounding markets of the Mediterranean region. 

For more information, contact Cyprus' investment promotion agency, Invest Cyprus.

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