Ante Žigman: Insurance market should aim to increase capital for protection of market risks

When analysing the current situation on the global, European and Croatian financial markets at the Croatian Insurance Days Conference, held on 9 and 10 May 2024 in Opatija, President of Hanfa Board Ante Žigman stressed the importance of preserving the stability of the financial system, especially the insurance market, which accounts for almost 20% of the total assets of the Croatian non-banking financial services sector.

Describing the current circumstances, he pointed out that the global stock market is experiencing rapid growth in value, investors are easily embarking on riskier investments, while economic growth, despite a slight recovery, remains unaffected by this stock market optimism. At the same time, inflation is still hampering monetary easing and the fall of interest rates despite central banks, governments, businesses and consumers' expectations that this will happen soon. However, due to responsible fiscal policy, Croatian public debt could fall below 60% of GDP, which gives us an opportunity for an investment grade A, and with that a better situation on the financial market. While higher inflation is believed to be behind us, insurance companies remain under pressure from rising prices of motor vehicles and healthcare services, which certainly has an impact on the rise in claims payments.

In this environment, Žigman stresses, insurers must pay particular attention to potential market risks and find ways to minimise the impact of a possible fall in prices and value of portfolios. It is positive that due to the introduction of the euro, our currency risk completely decreased last year, which, despite the rise in interest rates, reduced certain costs and capital requirements of insurance companies.

However, the slowdown in sales of commercial and residential real estate over the past year suggests that the European and thus the domestic real estate market could undergo changes. According to Žigman, this is an important signal for Croatian insurance companies because they have a significantly higher share of real estate in their assets compared to the European Union average. On average, real estate accounts for about a quarter of total assets, while in some companies this figure reaches almost 60%. "This highlights the need for domestic insurance companies to review their investment strategy, consider diversification to mitigate the risk of possible real estate price correction and provide sufficient liquidity," he said.

He pointed out that while direct investment in real estate has some advantages, we must not ignore the risks that such investments entail. In addition to being prone to large price fluctuations, real estate is more difficult to liquidate and does not provide quick liquidity as other investments. Unlike direct investment in real estate, insurers at the EU level usually allocate their investments proportionately among real estate funds, shares and corporate bonds of real estate companies.

“As the insurance market regulator, Hanfa must ensure its stability and solvency level. Therefore, we regularly run stress tests to assess how insurance companies' capital responds to real estate price changes. Hanfa's recent stress tests showed that even in the event of a significant price decrease, the insurance market as a whole has sufficient capital reserves. Nevertheless, we believe that companies should increase their capital coverage as it is already relatively lower than in other EU countries. There is room for capital preservation and growth and we expect companies to carefully assess the risks associated with investment in real estate, diversify their portfolios and plan their reserves in order to maintain market stability”, Žigman concluded in his presentation.

More than four hundred experts discussed current trends and challenges, as well as the latest developments in the Croatian and European insurance markets at the largest regional gathering of insurance experts – the Croatian Insurance Days 2024. The eleventh edition of the major professional event dedicated to the insurance industry was organised by the Croatian Insurance Bureau and partners and under the auspices of the President of the Republic of Croatia and the Ministry of Finance of the Republic of Croatia. The latest strategies in risk management, regulatory and legal changes, market expectations, artificial intelligence and macroeconomic reality were discussed by experts from insurance and reinsurance sector and the regulator. The introductory speeches were given by Ana Zorić, Head of the Directorate for Economic Affairs and Financial System at the Ministry of Finance of the Republic of Croatia, and Velibor Mačkić, Representative of the President of the Republic of Croatia.

Mr Žigman's presentation is available here


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