Insurance

Mitigating Risk

The Cyprus insurance sector has remained strong and resilient with the industry consistently expanding its range of services and products.

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.

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.

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 over 30 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, 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.

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.

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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October 2022

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