## _cr10154

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---

### Overall assessment
- The Serbian insurance sector remains small and underdeveloped with per-capita consumption of non-life €76 and life €10.
- In 2009 the industry accounted for 4.6 percent of total assets and 5.6 percent of total capital in the Serbian financial sector.
- The sector experienced very little real growth over the last three years and is likely to experience an 8 percent contraction (in real terms) in 2009 due to the economic crisis.
- Despite limited real growth, the sector is well capitalized relative to its overall net risk exposure and has improved balance-sheet quality via a growing share of highly liquid assets and declining receivables.
- Outstanding legacy issues include:
  - Adoption of pro-growth measures to stimulate real growth of the sector.
  - Final settlement of €80 million of unpaid claims inherited from bankrupt MTPL insurers in 2004–05.
  - Privatization of Dunav.
  - Liberalization of the local reinsurance market.
  - Separation of life and non-life parts of the business.

### Market overview and structure
- Premium composition and lines (2009):
  - Life 10.9 percent; non-life 89.1 percent.
  - Major non-life lines: MTPL 30.4 percent; motor CASCO 13.9 percent.
- Property insurance:
  - Voluntary property insurance share declined from 33.2 percent in 2008 to 27.9 percent in 2009.
  - Very small percentage of fire policies include catastrophic perils (flood or earthquake); almost 99 percent of households lack such coverage.
- Market participants and ownership (by end-2009):
  - 25 insurance companies operating; 18 foreign owned.
  - Dunav remained the only state-owned company, accounting for less than 28 percent of GPW.
  - 66 insurance brokerage and agent firms.
  - 8,190 individual licensed insurance agents.
  - Industry employs around 12,000 people (largest employer in Serbian financial sector).
- Market growth and size:
  - Number of insurers increased from 17 in 2005 to 25 in 2009.
  - Total GPW (life and non-life) in 2008: SRD 52.2 billion, a 5.3 percent annual inflation-adjusted increase over 2007 (17 percent nominal growth).
  - Industry expected to experience an 8 percent contraction in 2009 (in real terms); GPW in Q2 2009 unchanged relative to Q2 2008.

### Financial and underwriting performance (selected indicators)
- Capitalization and solvency:
  - Solvency ratio of the sector close to 200 percent from 2005 to 2009; dropped slightly below 200 percent in 2008–09.
  - Solvency considerably higher for larger companies.
- Premium leverage:
  - Premium leverage ratio (NPW/surplus capital): 1.7 (2006), 1.7 (2007), 1.9 (2008), 1.9 (2009 (II)).
  - International comparators: 2.5–3.0.
- Reserving and liquidity:
  - TRR (technical reserves ratio) rose from 63.0 (2006) to 76.0 (2008) after a new NBS methodology in 2007.
  - Receivables ratio: 14.3 (2006), 12.7 (2007), 11.8 (2008), 14.3 (2009 (II)).
  - Liquidity ratio (cash and short-term investment/total assets): 36.3 (2006), 39.3 (2007), 39.1 (2008), 37.9 (2009 (II)).
- Claims and combined ratios:
  - Claims ratio (total): 75.0 (2006), 79.5 (2007), 77.9 (2008).
  - Combined ratio: 97.6 (2006), 99.7 (2007), 97.1 (2008).
  - Business-line claims ratios (2006–08 highlights):
    - Accident: 108.17 (2006), 94.69 (2007), 88.24 (2008).
    - Motor: 105.87 (2006), 103.16 (2007), 98.00 (2008).
    - Motor vehicle liability (MTPL): 70.12 (2006), 87.75 (2007), 87.32 (2008).
  - CASCO and MTPL are worst performers with claims ratios of 98 percent and 87.3 percent (period referenced); property insurance had claims ratio of 46.8 percent.
- Sector totals (2008):
  - Total revenues: SRD 61.239 billion (increase of 25.2 percent).
  - Total assets: SRD 84.807 billion (increase of 20.1 percent).
  - Net profit: SRD 2.146 billion (rise of 48.9 percent).
  - 15 insurers reported profits; nine ended the year in the red.

### Reinsurance, retention, and market frictions
- Premium retention and reinsurance constraints:
  - Premium retention ratio (NPW/GPW): 92.0 (2006), 92.0 (2007), 92.0 (2008), 88.0 (2009 (II)).
  - Due to restrictions on direct placements with foreign reinsurers, insurers retained more than 92 percent of GPW in 2008 (compared with 50–60 percent in more developed markets).
  - Local regime effect: a 5–7 percent additional surcharge (fronting fee) on reinsurance placed by local companies through Dunav Re.
  - Historically Dunav Re functioned effectively as a fronting company for foreign reinsurers; recent entrants (VIG Group, Delta Re) expected to reduce Dunav Re’s dominance.
- Legal constraint:
  - Cut-through clauses in reinsurance treaties are outlawed by bankruptcy legislation that grants equal rights to all creditors.

### Insurance regulation, NBS capacity, and activity
- Legal framework:
  - The cornerstone: 2004 Insurance Law (Official Gazette no. 55/04, published May 24, 2004; came into effect May 29, 2004).
  - Law sets minimum solvency margin requirements closely following the EU Solvency I Directive.
  - Subsequent laws and amendments include Official Gazette no. 61/2005 (privatization enabling and bankruptcy/liquidation procedures).
  - New MTPL Law, effective October 2009, introduces higher insured limits, sets a cap on insurance commissions, and aligns MTPL with EU legislation.
  - Accounting Law (end-2005) statutory provisioning for bad and doubtful debts: 20 percent for 30 days overdue; 50 percent for 60 days overdue; 100 percent for 90 days overdue. Receivables more than 90 days overdue must be reported to the NBS.
- NBS Insurance Supervision Department:
  - Staff: 35 (2007), 38 (2008), 42 (2009).
  - Five key responsibilities: regulatory policy work; licensing; off-site supervision; on-site supervision; consumer protection.
  - Since 2005 NBS has withdrawn licenses from 17 insolvent insurers, issued 23 new by-laws and six guidance papers, revoked 128 institutional agent licenses and issued 154 new licenses, and introduced pro-active on-site and off-site supervision plus a consumer protection unit.
  - Licensing activity (2007–2009): nine green-field operating licenses for insurance companies; 22 institutional licenses for brokerage; 10 institutional licenses for agency operations; 110 individual licenses for agents or entrepreneurs.
  - Reporting and supervision cadence: electronic reporting (quarterly, monthly, daily depending on item); regular on-site inspections typically once every three to four years; immediate inspections for suspected solvency deterioration or fraud.
  - Consumer protection: Consumer Protection Division, claims mediation service, complaint hotline; complaints filed: 213 (2006), 66 (2008). Claims settled as percent of total claims: 92 (2006), 93 (2007), 93 (2008).

### Main legacy issues constraining sector development
- Enumerated legacy issues:
  - Unpaid claims inherited by the Insurance Guarantee Fund from bankrupt insurers.
  - Privatization of Dunav.
  - Privatization/liberalization of the local reinsurance monopoly.
  - A tax on premiums.
  - Separation of life and non-life business.
- Unresolved MTPL claims (Guarantee Fund):
  - In 2004–05 NBS recalled licenses from 17 companies; insolvencies resulted in €80 million of unsettled MTPL claims.
  - Guarantee Fund estimates: more than 12,000 unsettled claims from all insolvent companies.
  - As of October 2009, SRD 2.654 billion worth of claims were filed with the fund (none had all necessary documents for immediate payment).
  - Fund expects an additional SRD 4.712 billion worth of claims to be filed once bankruptcy procedures are completed.
  - Overall estimate of claims on the Guarantee Fund: around SRD 7 billion or about €75 million at today’s exchange rate.
  - Pace of bankruptcy proceedings very slow; almost six years after proceedings against eight companies only one case closed.
  - Guarantee Fund has financed legacy claims from current cash flow and proceeds of the DDOR privatization sale; fund employs 12 full-time employees dedicated to resolving claims.
  - Since creation in 1997 the fund resolved more than 15,000 claims at a total cost about SRD 535 million, including SRD 223 million paid during the last two years to policyholders of bankrupt insurers.
  - Funding risks and remedies: potential additional funding sources include government budget transfers and a premium surcharge on MTPL policies; new MTPL Law creates a new Guarantee Fund and requires ensuring adequate funding for liabilities of both funds.

- Privatization of Dunav:
  - Dunav real growth rate: 7 percent compared with 8.2 percent for the market.
  - Market share dropped from 35 percent in 2007 to 28 percent in 2009.
  - Profitability: 14.5 percent return on equity in 2008; return on equity close to zero in Q2 2009.
  - Operational improvements: new IT system, centralized cash and claims management, restructuring.
  - Underwriting performance: claims ratio consistently above 80 percent historically; Dunav claims ratio: 89.0 (2007), 82.0 (2008), 79.0 (2009, I–IV) [author’s estimate].
  - Financial and ratio comparisons (Dunav vs market):
    - Receivables/total assets: Dunav 11.61 (2007), 13.22 (2008), 15.55 (2009); Market 12.7 (2007), 11.8 (2008), 14.3 (2009).
    - Liquid assets/total assets: Dunav 56.54 (2007), 52.48 (2008), 55.68 (2009); Market 39.3 (2007), 39.1 (2008), 37.9 (2009).
    - Guarantee reserve/solvency margin: Dunav 326.78 (2007), 298.49 (2008), 372.57 (2009); Market 211.0 (2007), 173.0 (2008), 186.0 (2009).
  - Policy considerations: management should prioritize underwriting improvements and cost reductions; government should commit to privatization and consider divestment of non-core assets or sale of a minority stake.

### Key regulatory and policy recommendations
- A. Risk-based supervision
  - NBS should prepare for early adoption of the risk-based supervision regime envisaged under Solvency II to align solvency requirements with net risk exposure and potentially reduce required risk capital and consumer premiums without compromising credit quality.
- B. Tax incentives
  - Non-life: temporarily eliminate the 5 percent tax currently levied on non-life insurance premiums to lower coverage cost.
  - Life: introduce favorable tax treatment for life insurance premiums; at minimum extend the same tax treatment as voluntary pension schemes (third pension pillar). Consider making employers’ contributions fully tax deductible (up to a limit), and enable policyholders to deduct life premium contributions or receive a tax credit on annual returns.
- C. Licensing for life agents
  - Review employment requirements so affiliation (rather than full-time employment) with a life insurance company or an agency would be sufficient to boost penetration and reduce fixed costs.
- D. Product development and catastrophic coverage
  - Promote catastrophic risk insurance: less than 10 percent of homeowner policies include catastrophic coverage.
  - Consider compulsory catastrophic coverage for mortgage borrowers in disaster-prone areas; develop public disaster risk maps; insure state-owned housing; consider a national or regional catastrophic insurance pool.
- E. Consumer education
  - NBS and government should devise a public education campaign to publicize benefits of insurance and raise awareness of products and policyholder rights.
- F. Funding of MTPL claims
  - Ensure continuity of funding for liabilities of both the existing Guarantee Fund (run-off) and the newly created Guarantee Fund under the new MTPL Law.
  - Funding options: industry contributions, a temporary surcharge on all future MTPL policies earmarked for the Guarantee Fund, and possible government contributions.
  - NBS to define minimum annual contribution of the industry to the “old” Guarantee Fund to ensure ability to offer immediate settlements.
  - Current view: no immediate need for an additional surcharge or government budget transfer if current revenue remains the same and bankruptcy pace unchanged.
- G. Privatization of Dunav
  - Government should commit to privatization over the next three years and initiate divestment of non-core assets as an interim step.
- H. Liberalization of domestic reinsurance market
  - Government and NBS should review reinsurance requirements to broaden competition among local and international reinsurers even prior to WTO accession to reduce costs.
- I. Separation of life and non-life
  - Separation should be an immediate policy priority and implemented per the announced timetable; further postponement would penalize early-compliant companies.

### Key statistics and exact figures cited
- Per-capita GPW, 2008:
  - Serbia: Non-life €76; Life €10
  - Bosnia and Herzegovina: Non-life 43; Life 13
  - Croatia: Non-life 219; Life 81
  - Hungary: Non-life 169; Life 181
  - Romania: Non-life 91; Life 22
  - Bulgaria: Non-life 103; Life 18
- Table 1 selected indicators (2006–2009 (II)):
  - Premium retention ratio (NPW/GPW): 92.0, 92.0, 92.0, 88.0
  - Claims performance ratio (outstanding/total claims): 7.6, 7.1, 7.2, —
  - Claims ratio: 75.0, 79.5, 77.9, —
  - Combined ratio: 97.6, 99.7, 97.1, —
  - Receivables ratio (receivables/total assets): 14.3, 12.7, 11.8, 14.3
  - Liquidity ratio (cash and short-term investment/total assets): 36.3, 39.3, 39.1, 37.9
  - Market solvency margin ratio (surplus capital/required solvency I capital): 206.0, 211.0, 173.0, 186.0
  - Largest five companies: 245.0, 252.0, 202.0, 223.0
  - Smallest five companies: 154.0, 182.0, 116.0, 144.0
  - Premium leverage ratio (NPW/surplus capital): 1.7, 1.7, 1.9, 1.9
  - Non-life technical reserves ratio (technical reserves/NPW): 63.0, 70.0, 76.0, —
- Reinsurance surcharge via Dunav Re: 5–7 percent additional surcharge.
- Insurance premium tax (effective January 1, 2005): 5 percent of gross premiums (non-life, except employer-paid group personal accident).
- MTPL and CASCO share of premium: 44.3 percent in 2009; 42 percent in 2008.
- Property premium share: 27.9 percent in 2009; 33.2 percent in 2008.
- Guarantee Fund 2008 membership fees: around SDR 450 million; SDR 150 million spent on new claims.
- Guarantee Fund received 10 percent of DDOR privatization proceeds.
- Estimated unresolved MTPL claims inherited from bankrupt insurers in 2004–05: €80 million (overall Guarantee Fund estimate around SRD 7 billion or about €75 million at today’s exchange rate).
- Recommended government commitment timeframe for privatizing Dunav: over the next three years.

*Source: _cr10154 - IMF staff report excerpt (Preface iv and selected sections).*

### Preface iv

### Preface iv

### Overall Assessment
- The Serbian insurance sector remains small and underdeveloped, with consumption of €76 and €10 per capita for non-life and life insurance, respectively.
- In 2009 the industry accounted for 4.6 percent of total assets and 5.6 percent of total capital in the Serbian financial sector.
- The sector experienced very little growth in real terms over the last three years and is likely to experience an 8 percent contraction (in real terms) in 2009 due to the economic crisis.
- Despite limited real growth, the sector is well capitalized relative to its overall net risk exposure and has improved balance-sheet quality via a growing share of highly liquid assets and declining receivables.
- Outstanding legacy issues include:
  - Adoption of pro-growth measures to stimulate real growth of the sector.
  - Final settlement of €80 million of unpaid claims inherited from bankrupt MTPL insurers in 2004–05.
  - Privatization of Dunav.
  - Liberalization of the local reinsurance market.
  - Separation of life and non-life parts of the business.

### Market Overview
- Market structure and size:
  - 2009 premium composition: life 10.9 percent; non-life 89.1 percent.
  - Major non-life lines: MTPL 30.4 percent; motor CASCO 13.9 percent.
  - Voluntary property insurance share declined from 33.2 percent in 2008 to 27.9 percent in 2009.
  - By mid-2009 there were 25 insurance companies, 18 foreign owned; Dunav remained the only state-owned company, accounting for less than 28 percent of GPW.
- Historical context:
  - Number of insurers increased from 17 in 2005 to 25 in 2009.
  - 2008 GPW for life and non-life: SRD 52.2 billion, a 5.3 percent annual inflation-adjusted increase over 2007 (17 percent nominal growth).

### Financial and Underwriting Performance of the Sector
- Capitalization and solvency:
  - Solvency ratio of the sector was close to 200 percent from 2005 to 2009; dropped slightly below 200 percent in 2008–09.
  - Solvency was considerably higher for larger companies.
- Premium leverage:
  - Premium leverage ratio (NPW/surplus capital) observed at 1.7–1.9 (Serbia) versus 2.5–3.0 internationally.
- Reserving and liquidity:
  - TRR (technical reserves ratio) rose from 63 percent in 2006 to 76 percent in 2008 after a new NBS methodology in 2007.
  - Receivables ratio fell to 11.8 percent of total assets in 2008.
  - Liquidity ratio (cash and short-term investment/total assets) reached 39.1 percent in 2008.
- Reinsurance and retention:
  - Due to restrictions on direct placements with foreign reinsurers, insurers retained more than 92 percent of GPW in 2008 (compared with 50–60 percent in more developed markets).
  - Dunav Re functioned effectively as a fronting company for foreign reinsurers until recent changes.

- Table 1. Key Indicators of Insurance Sector Performance, 2006–09 (exact values)
  - Premium retention ratio (NPW/GPW): 2006 92.0, 2007 92.0, 2008 92.0, 2009 (II) 88.0
  - Claims performance ratio (outstanding/total claims): 2006 7.6, 2007 7.1, 2008 7.2, 2009 (II) —
  - Claims ratio: 2006 75.0, 2007 79.5, 2008 77.9, 2009 (II) —
  - Combined ratio: 2006 97.6, 2007 99.7, 2008 97.1, 2009 (II) —
  - Receivables ratio (receivables/total assets): 2006 14.3, 2007 12.7, 2008 11.8, 2009 (II) 14.3
  - Liquidity ratio (cash and short-term investment/total assets): 2006 36.3, 2007 39.3, 2008 39.1, 2009 (II) 37.9
  - Market solvency margin ratio (surplus capital/required solvency I capital): 2006 206.0, 2007 211.0, 2008 173.0, 2009 (II) 186.0
  - Largest five companies: 2006 245.0, 2007 252.0, 2008 202.0, 2009 (II) 223.0
  - Smallest five companies: 2006 154.0, 2007 182.0, 2008 116.0, 2009 (II) 144.0
  - Premium leverage ratio (NPW/surplus capital): 2006 1.7, 2007 1.7, 2008 1.9, 2009 (II) 1.9
  - Non-life technical reserves ratio (technical reserves/NPW): 2006 63.0, 2007 70.0, 2008 76.0, 2009 (II) —

### Insurance Regulation
- Regulatory framework and enforcement:
  - NBS Insurance Supervision Department employs 42 staff.
  - Key NBS responsibilities: regulatory policy work, off-site supervision, on-site supervision, licensing, and consumer protection.
  - Since 2005 the NBS has:
    - Withdrawn insurance licenses from 17 insolvent insurance companies.
    - Issued 23 new by-laws and six guidance papers.
    - Revoked 128 institutional agent licenses and issued 154 new licenses.
    - Introduced pro-active on-site and off-site supervision and created a consumer protection unit.
  - NBS strategic plan 2006–09 envisages evolution from compliance-based to risk-based supervision, starting with an early-warning system.

### Outstanding Issues
- Enumerated unresolved matters:
  - Adoption of comprehensive pro-growth measures to stimulate sector growth.
  - Settlement of €80 million of unpaid claims inherited from bankrupt MTPL insurers in 2004–05.
  - Privatization of Dunav.
  - Liberalization of the local reinsurance market.
  - Separation of life and non-life parts of the business.

### Recommendations
- Risk-based Supervision:
  - NBS should prepare for early adoption of risk-based supervision under Solvency II to potentially reduce required risk capital and consumer premiums without compromising credit quality.
- Tax Incentives:
  - Non-life: Temporarily eliminate the 5 percent tax currently levied on non-life insurance premiums to lower coverage cost.
  - Life: Introduce favorable tax treatment for life insurance premiums; at minimum, extend the same tax treatment as voluntary pension schemes (third pension pillar). Consider making employers’ contributions fully tax deductible (up to a limit), and enabling policyholders to deduct life premium contributions or receive a tax credit on annual returns.
- Licensing for Life Agents:
  - Review employment requirements; allow agents to be affiliated with a life insurance company or an agency rather than requiring full-time employment to boost penetration.
- Product Development:
  - NBS and government should promote catastrophic risk insurance; less than 10 percent of homeowner policies include catastrophic coverage. Consider compulsory catastrophic coverage for mortgage borrowers in disaster-prone areas.
- Consumer Education:
  - NBS and government should devise a public education campaign to publicize the benefits of insurance and raise awareness.
- Funding of MTPL Claims:
  - With the new MTPL Law creating a new Guarantee Fund (in addition to the existing runoff fund), ensure adequate continuous funding for liabilities of both funds. Funding options include industry contributions, a temporary surcharge on all future MTPL policies earmarked for the Guarantee Fund, and possible future government contributions.
- Privatization of Dunav:
  - Government should commit to privatization; over the next three years initiate technical pre-privatization work and divest non-core assets.
- Liberalization of Reinsurance Market:
  - Government and NBS should review reinsurance requirements to introduce broader competition among local and international reinsurers, anticipating WTO accession.
- Separation of Life and Non-life:
  - Separation should be an immediate policy priority and implemented per the announced timetable.

### Current State of the Serbian Insurance Market
- Size and penetration:
  - In 2009 the industry accounted for 4.6 percent of total assets and 5.6 percent of total surplus capital (equity) of the Serbian financial sector.
  - Per-capita GPW, 2008 (exact values):
    - Serbia: Non-life €76; Life €10
    - Bosnia and Herzegovina: Non-life 43; Life 13
    - Croatia: Non-life 219; Life 81
    - Hungary: Non-life 169; Life 181
    - Romania: Non-life 91; Life 22
    - Bulgaria: Non-life 103; Life 18

*Source: _cr10154 - Preface iv*

### 24. The low level of insurance penetration in Serbia is primarily the result of protracted

### _cr10154 - 24. The low level of insurance penetration in Serbia is primarily the result of protracted

### Sector development and insurance penetration
- Low insurance penetration mainly reflects protracted economic stagnation in 2005–08 and a considerable economic decline in 2009 due to the global economic crisis.
- Structural and market constraints cited:
  - Lack of effective insurance supervision (historically).
  - Low disposable incomes of the Serbian population.
  - Poor claims performance record of the industry.
  - Dominance of socially-owned companies that stifled competition.
- Market size and recent performance:
  - Total GPW (life and non-life) in 2008: SRD 52.2 billion, representing a 5.3 percent annual inflation-adjusted increase (17 percent growth in nominal terms).
  - Industry expected to experience an 8 percent contraction in 2009 (in real terms); GPW in Q2 2009 unchanged relative to Q2 2008.
  - Growth in number of industry players: 17 insurers in 2005 compared with 25 in 2009; fierce price competition contributed to declining average premium rates.

### Product mix and policy counts
- Share of GPW by line (as reported):
  - Life: 10.9 percent.
  - Non-life: 89.1 percent.
  - MTPL: 30.4 percent.
  - CASCO: 13.9 percent.
- Voluntary property insurance share rose from 24.7 percent in 2008 to 27.9 percent in 2009, but accompanied by an overall drop in gross property premium written and fewer personal property policies.
- Number of policies and composition (2006–08 data highlights):
  - Total non-life insurance policies: 2,888,968 (2006), 3,203,555 (2007), 3,423,246 (2008).
  - Property insurance against fire and other perils: 102,821 (2006), 146,511 (2007), 118,422 (2008) — 118,422 equals about 4 percent of all dwellings.
  - Only a very small percentage of fire policies include catastrophic perils (flood or earthquake), leaving almost 99 percent of households without such coverage.

### Market structure, employment, and ownership
- By end-2009:
  - 25 insurers operating; 18 foreign owned.
  - 66 insurance brokerage and agent firms.
  - 8,190 individual licensed insurance agents.
  - Industry employs around 12,000 people (largest employer in Serbian financial sector).
- Market concentration decreased following privatization (DDOR sold to Fondiaria), leaving Dunav as the only socially-owned insurer, accounting for less than 28 percent of GPW.

### Financial results and balance-sheet trends (2008)
- Insurance sector totals for 2008:
  - Total revenues: SRD 61.239 billion (increase of 25.2 percent).
  - Total assets: SRD 84.807 billion (increase of 20.1 percent).
  - Net profit: SRD 2.146 billion (rise of 48.9 percent).
  - 15 insurers reported profits; nine ended the year in the red.
- Balance-sheet quality improvements noted: growing share of highly liquid high-quality assets relative to total assets.

### Key indicators and solvency, 2006–09 (selected ratios from Table 5)
- Premium retention ratio (NPW/GPW): 92.0, 92.0, 92.0, 88.0 (2006, 2007, 2008, 2009 (II)).
- Claims performance ratio (outstanding/total claims): 7.6, 7.1, 7.2, —.
- Claims ratio: 75.0, 79.5, 77.9, —.
- Combined ratio: 97.6, 99.7, 97.1, —.
- Receivables ratio (receivables/total assets): 14.3, 12.7, 11.8, 14.3.
- Liquidity ratio (cash and short-term investment/total assets): 36.3, 39.3, 39.1, 37.9.
- Market solvency margin ratio (surplus capital/required solvency I capital): 206.0, 211.0, 173.0, 186.0.
  - Largest five companies: 245.0, 252.0, 202.0, 223.0.
  - Smallest five companies: 154.0, 182.0, 116.0, 144.0.
- Premium leverage ratio (NPW/surplus capital): 1.7, 1.7, 1.9, 1.9.
- Non-life technical reserves ratio (technical reserves/NPW): 63.0, 70.0, 76.0, —.
- Note: “—” indicates not available.

### Financial-strength interpretation
- Solvency:
  - Solvency margin ratio (SMR) close to 200 percent from 2005 to 2009; dropped below 200 percent in 2008–09 due to additional NBS solvency capital requirements and reduced asset values from the financial crisis.
  - SMR considerably higher for larger companies than for smaller ones.
- Leverage:
  - Premium leverage ratio of 1.7–1.9 viewed as a healthy capital safety margin for Serbia’s predominantly non-catastrophe-exposed portfolio; recommended that NBS monitor PLR closely in 2009–10 for deterioration.
- Technical reserves:
  - TRR rose from 63 percent in 2006 to 76 percent in 2008 after a new NBS methodology introduced in 2007 — interpreted as healthier development.
- Receivables:
  - Receivables ratio improved to 11.8 percent of total assets in 2008 as a result of stricter NBS treatment of overdue receivables.
- Liquidity:
  - LR improved; 39.1 percent of insurers’ assets were held in highly liquid assets in 2008.

### Underwriting performance and claims experience
- Claims ratio (total): 74.95 (2006), 79.53 (2007), 77.90 (2008).
- Business-line claims ratios (2006–08, Table 6 highlights):
  - Accident insurance: 108.17, 94.69, 88.24 (2006, 2007, 2008).
  - Motor insurance: 105.87, 103.16, 98.00.
  - Property insurance against fire and other perils: 41.12, 36.49, 46.79.
  - Other property insurance: 88.47, 87.10, 68.88.
  - Motor vehicle liability insurance: 70.12, 87.75, 87.32.
- Top performers and concerns:
  - CASCO and MTPL have the worst claims ratios: 98 percent and 87.3 percent, respectively (period referenced).
  - Property insurance had a claims ratio of 46.8 percent, the best-performing business line.
- Combined ratio:
  - 97.1 percent in 2008 — below 100 percent but under pressure from competition and rising distribution/commission costs, especially in MTPL.

### Reinsurance structure and risk-transfer practices
- Premium retention ratio (PRR) unusually high in Serbia: around 92 percent (compared with 60 percent globally), reflecting compulsory cession through locally registered reinsurers and limited direct access to foreign reinsurers.
- Local reinsurance dynamics:
  - Historically dominated by Dunav Re acting effectively as a fronting company for foreign reinsurers.
  - Recent entrance of the VIG Group expected to reduce Dunav Re’s market dominance due to Dunav Re’s lack of investment-grade rating and low capitalization.
- Legal constraint:
  - Cut-through clauses in reinsurance treaties are outlawed by existing bankruptcy legislation, which grants equal rights to all creditors of an insolvent company; the law does not distinguish insurance/reinsurance from other industries.

### Assessment and regulatory implications
- Overall assessment:
  - Despite the financial crisis effects, the industry appears financially stable with improved claims and underwriting performance and enhanced balance-sheet quality, attributable in part to regulatory and legal reforms and vigorous NBS enforcement.
- Recommendations and monitoring priorities (as presented in the source):
  - NBS should monitor the premium leverage ratio (PLR) closely in 2009–10 for signs of deterioration given expected asset value drops and relatively high net risk retentions.
  - Continued supervision and enforcement by NBS credited with improving market discipline (e.g., treatment of overdue receivables) and supporting industry stability.

*Source: NBS data and analysis as presented in the IMF staff report content unit.*

### 46. The  cornerstone  of  the  country’s  insurance  legislation  is  the  2004  Insurance  Law.

### _cr10154 - 46. The  cornerstone  of  the  country’s  insurance  legislation  is  the  2004  Insurance  Law.

### Insurance Law: scope, timing, and key provisions
- The 2004 Insurance Law was published in the Official Gazette no. 55/04 on May 24, 2004, and came into effect on May 29, 2004.
- The law largely replaced the Property and Personal Insurance Act 1996.
- The Insurance Law sets the minimum solvency margin requirements, which closely follow the EU Solvency I Directive.
- Important subsequent legislation and supplements:
  - Law on Amendments and Supplements to the Insurance Law (Official Gazette no. 61/2005) — main purpose: allow privatization of state-owned insurance companies—Dunav, DDOR Novi Sad, and Kopaonik—through a sale of social capital to private investors.
  - Law on the Bankruptcy and Liquidation of Banks and Insurance Companies (Official Gazette no. 61/2005) — lays down procedures for bankruptcy and compulsory and voluntary liquidation of insurance companies, assigns priority rankings to creditors of insolvent insurers, and enables the NBS to freeze assets of insurers that are out of compliance with minimum solvency requirements.
- The new MTPL Law, effective October 2009:
  - Introduces higher insured limits.
  - Sets a cap on insurance commissions.
  - Brings MTPL legislation in line with that in the European Union.
- A new Accounting Law, in force end-2005, requires statutory provisioning for bad and doubtful debts:
  - 20 percent for receivables that are 30 days overdue,
  - 50 percent for receivables that are 60 days overdue,
  - 100 percent for receivables that are 90 days overdue.
  - Receivables more than 90 days overdue must be reported to the NBS.

### NBS supervisory role and powers under the Insurance Law
- The Insurance Law made the National Bank of Serbia (NBS) responsible for investigating complaints from policyholders and claimants under motor third-party liability (MTPL) policies.
- NBS powers to intervene in delinquent insurers include ordering elimination of irregularities, portfolio transfers, financial restructuring, taking control of a company or its assets, appointing receivers, and withdrawing an insurance license.
- NBS established a consumer protection unit, including a claims mediation service.
- The Insurance Law requires all insurance companies to appoint a certified actuary licensed by the NBS. Actuary duties:
  - Calculating premium tariffs and the solvency margin.
  - Certifying the adequacy of technical reserves.
- Reporting requirements:
  - If a supervisory board cannot accept its actuary’s opinion, it must report the fact to the NBS within 15 days and justify its position.
  - Companies must submit annual audited accounts and a report on implementation of reinsurance risk management policy, certified by a qualified actuary, within 15 days of completion and not later than April 30 in the year following the reporting year.
  - Electronic reports (some certified by a qualified actuary) covering premium income, reinsurance, settled and outstanding claims, technical reserves, liquidity, solvency, investments, and so on—some reports quarterly, some monthly, some daily.

### NBS regulatory capabilities, organization, and activity
- Insurance supervision delegated to NBS; a special Insurance Supervision Department was established. The department head reports to the NBS vice governor.
- Department staffing and market participants (Table 7, NBS data, 2009):
  - NBS Insurance Supervision Department staff: 35 (2007), 38 (2008), 42 (2009).
  - Insurance companies: 20 (2007), 24 (2008), 25 (2009).
  - Agent and broker firms: 59 (2007), 65 (2008), 66 (2009).
- Five key responsibilities of the Insurance Supervision Department:
  - Regulatory policy work (preparation and issuance of insurance directives and by-laws),
  - Licensing of market participants,
  - Off-site supervision,
  - On-site supervision,
  - Consumer protection.
- Regulatory activity since inception:
  - NBS adopted 23 by-laws, issued six guidance papers, and assisted the government with preparation of two laws.
  - Recent by-laws (selected, by year):
    - 2007: decision on specific criteria and manner of calculating outstanding claims;
    - 2007: decision on data-reporting requirements for insurance companies;
    - 2007: decision on the systems of internal controls and risk management in insurance companies;
    - 2008: decision on restrictions on certain forms of deposits and investments of technical reserves and on highest amounts of certain deposits and investments of the guarantee fund;
    - 2009: decision on the guidance paper for the risk assessment of money laundering and the financing of terrorism;
    - 2009: decision on the minimum content of the “know your client” procedure;
    - Draft decision on specific criteria and the manner of calculating mathematical reserves and profit share reserves (in process of being finalized).
  - In 2009, NBS amended chart of accounts rules for insurance companies with stronger requirements than IFRS 7 and IAS 39 and adopted new rules on forms and content of financial statement items.
  - December 2008 decision on temporary measures for preserving financial stability specifies new maximum asset allocation limits during the crisis.
  - NBS is about to introduce a by-law prescribing basic criteria of a bonus malus system in MTPL and defining data-reporting requirements for such a system.

### Licensing, supervision, and consumer protection practice
- Licensing:
  - Article 41: estimated period for receiving an insurance license is 60 days from submission with all necessary documentation.
  - From 2007 to 2009, NBS issued:
    - nine green-field operating licenses for insurance companies (four in 2007, four in 2008, one in 2009),
    - 22 institutional licenses for insurance brokerage operations,
    - 10 institutional licenses for insurance agency operations,
    - 110 individual licenses for insurance agents or entrepreneurs (natural persons).
- Off-site supervision:
  - Conducts desk reviews and analysis of regular and electronic reporting.
  - Insurers must report at least quarterly in prescribed electronic format their guarantee reserve and required solvency margin.
  - Department collects annual data on premiums and claims, premium rates by business lines, costs related to claim settlement and payment, changes in life insurance equalization reserves, receivables, and loss reserving in non-life insurance.
  - Outputs to on-site department include short financial analysis, monitoring status, and risk matrix.
- On-site supervision:
  - Regular on-site supervision for every insurer typically once every three to four years; immediate inspections in cases of suspected solvency deterioration or fraud.
  - NBS is entitled to withdraw an insurance license for severe violations (solvency and internal risk management). Since 2004, NBS has recalled licenses from 17 insurance companies.
- Consumer protection:
  - NBS instituted a Consumer Protection Division and operates an insurance complaint hotline.
  - Number of complaints filed by policyholders: 213 (2006), 66 (2008).
  - Claim settlement statistics (Table 8, NBS data, 2009):
    - Number of claims, Total: 328,744 (2006), 364,875 (2007), 409,213 (2008).
    - Number of claims, Outstanding: 25,143 (2006), 25,837 (2007), 29,338 (2008).
    - Settled claims as a percent of total claims: 92 (2006), 93 (2007), 93 (2008).

### Strategic direction
- NBS published a strategic plan for 2006–09 envisaging evolution from compliance-based to risk-based supervision.
- First stage involves introduction of an early-warning system to allow NBS intervention before weaknesses become irreversible.

### Main legacy issues constraining sector development
- At least five legacy issues identified: (a) unpaid claims inherited by the Insurance Guarantee Fund from bankrupt insurers, (b) privatization of Dunav, (c) privatization of the local reinsurance monopoly, (d) a tax on premiums, and (e) separation of life and non-life business.

A. Unresolved MTPL claims
- Background and magnitude:
  - In 2004–05, NBS recalled insurance licenses from 17 companies; insolvencies resulted in €80 million of unsettled MTPL claims.
  - Guarantee Fund estimates: more than 12,000 unsettled claims from all insolvent companies.
  - As of October 2009, SRD 2.654 billion worth of claims were filed with the fund (none had all necessary documents for immediate payment).
  - Fund expects an additional SRD 4.712 billion worth of claims to be filed once bankruptcy procedures are completed.
  - Overall estimate of claims on the Guarantee Fund: around SRD 7 billion or about €75 million at today’s exchange rate.
- Observations:
  - Pace of bankruptcy proceedings has been very slow; almost six years after start of proceedings against eight companies, only one case closed.
  - Many policyholders reluctant to accept immediate out-of-court settlement at a 30 percent discount from the Guarantee Fund.
  - To date, the Guarantee Fund has financed legacy claims from current cash flow and proceeds of the DDOR privatization sale received from the government in 2008.
  - The fund employs 12 full-time employees dedicated to resolving these claims.
  - Since creation in 1997, the fund has resolved more than 15,000 claims, total cost about SRD 535 million, including SRD 223 million paid during the last two years to policyholders of bankrupt insurers.
- Funding risks and potential remedies:
  - Given slow bankruptcy progress and low acceptance of discounted settlements, the fund expects to be able to finance legacy claims out of current cash flow.
  - If a major change in bankruptcy court proceedings results in an upsurge of filed claims, additional funding sources may be needed.
  - As stipulated by the new MTPL Law, potential additional funding sources include government budget transfers and a premium surcharge on MTPL insurance policies.
  - The government and NBS must ensure that, on creation of a new Guarantee Fund, the “old” fund will receive sufficient funding to deal with expected claims.

B. Privatization of Dunav
- Performance and challenges:
  - Dunav’s real growth rate: 7 percent for Dunav compared with 8.2 percent for the market.
  - Market share dropped from 35 percent in 2007 to 28 percent in 2009.
  - Profitability: 14.5 percent return on equity in 2008; return on equity close to zero in Q2 2009 due to economic crisis and restructuring expenses.
  - Operational improvements: introduction of a new modern information technology system enabling centralized cash and claims management and functional restructuring.
  - Underwriting performance lagging: claims ratio consistently above 80 percent.
- Financial and underwriting ratios (Table 9, Source: NBS, Dunav, 2009):
  - Receivables/total assets:
    - Dunav: 11.61 (2007), 13.22 (2008), 15.55 (2009).
    - Market: 12.7 (2007), 11.8 (2008), 14.3 (2009).
  - Liquid assets/total assets:
    - Dunav: 56.54 (2007), 52.48 (2008), 55.68 (2009).
    - Market liquid: 39.3 (2007), 39.1 (2008), 37.9 (2009).
  - Guarantee reserve/solvency margin:
    - Dunav: 326.78 (2007), 298.49 (2008), 372.57 (2009).
    - Market: 211.0 (2007), 173.0 (2008), 186.0 (2009).
  - Net technical reserve/net written premium:
    - Dunav: 85.45 (2007), 86.48 (2008), — (2009).
    - Market: 70.0 (2007), 76.0 (2008), — (2009).
  - Net written premium/guarantee reserve:
    - Dunav: 196.32 (2007), 209.77 (2008), — (2009).
    - Market: 170.0 (2007), 190.0 (2008), — (2009).
  - Claims ratio:
    - Dunav: 89.0 (2007), 82.0 (2008), 79.0 (2009, I–IV) [author’s estimate].
    - Market: 75.0 (2007), 80.0 (2008), 78.0 (2009, I–IV).
- Policy considerations:
  - Management should prioritize improvements in underwriting performance and further cost reductions.
  - Government and management should consider divesting Dunav’s non-core assets or selling at least a minority stake to a strategic investor.
  - Sale of a minority equity stake to the European Bank for Reconstruction and Development is mentioned as a possible beginning.

C. Two-step reinsurance requirement
- (Content unit ends at the heading for this item; substantive details for this item are not included in the supplied text.)

*IMF staff report excerpt as provided in the source content.*

### 72. According  to  the  Insurance  Law,  Serbian  insurance  companies  are  only  allowed  to

### _cr10154 - 72. According  to  the  Insurance  Law,  Serbian  insurance  companies  are  only  allowed  to

### Reinsurance regime and market structure
- Serbian insurance companies are only allowed to reinsure with authorized domestic reinsurers, which are the only organizations allowed to place reinsurance business abroad.
- This requirement will remain in effect for five more years counting from the day of Serbia’s admission to the WTO.
- Until recently, there were only three domestic reinsurers: Dunav Re, Novi Sad Re (the reinsurance trading name of DDOR Novi Sad), and Delta Re; the role of Novi Sad Re and Delta Re was described as insignificant.
- Recent developments: launch of a VIG-owned Serbia-based reinsurer and the presence of Delta Re (majority owned by Generali) have partially addressed the reinsurance monopoly.
- Current regime effect: a 5–7 percent additional surcharge (essentially a fronting fee) on all reinsurance placed by local companies through Dunav Re.
- Policy implication: liberalization of the local reinsurance market will help local insurers reduce the cost of doing business.

### Premium taxation
- On January 1, 2005, an insurance premium tax of 5 percent of gross premiums was introduced on all non-life premiums except for employer-paid group personal accident.
- The tax is payable by the policyholder.
- Given the anemic growth of the sector, the 5 percent tax on premiums may be viewed as a major deterrent to development of the sector.

### Separation of life and non-life insurance
- Serbia does not require separation of life and non-life insurance in practice, generating considerable systemic risk for the insurance sector.
- The Insurance Law of 2004 calls for such a separation, but the deadline for implementation has been extended twice; the new deadline for complete separation expired at the end of 2009.
- Many insurance companies already made the required organizational and financial arrangements; further postponement would penalize early-compliant companies and send a wrong signal to the market.

### Sector assessment and overall recommendation context
- NBS efforts: the NBS has worked to enhance the insurance regulatory framework, improve financial and underwriting performance, and protect policyholders.
- Industry resilience: no insurance companies reported insolvent or closed by the regulator; solvency and financial stability indicators, despite a small deterioration in 2009, remain solid.
- Main challenge: anemic growth and unresolved legacy issues rather than regulatory weakness.
- Key recommendations focus on policy actions by NBS and government to revive sector growth.

### Recommended policy actions (VI. RECOMMENDATIONS)
- A. Risk-Based Supervision
  - Encourage NBS to prepare for early adoption of the risk-based supervision regime envisaged under Solvency II.
  - Rationale: align solvency requirements with net risk exposure; adoption may result in a significant reduction of risk capital (“guarantee reserve”) and consequently lower insurance premiums without compromising credit quality.

- B. Tax Incentives
  - Non-life Insurance: recommend, at least temporarily, eliminating the 5 percent tax currently levied on non-life insurance premiums to lower cost and stimulate demand.
  - Life Insurance: recommend NBS and government consider introducing favorable tax treatment for life insurance premiums to boost life insurance growth and level the playing field with other long-term savings products.
    - At minimum, life insurance premiums (for long-term savings products) should receive the same tax treatment currently afforded by the pension legislation for personal contributions to the voluntary pension scheme (the so-called third pillar).
    - Additional measures: make employers’ contributions to employees’ group life insurance plans fully tax deductible (up to a certain limit); enable policyholders to deduct life premium contributions from taxable income or receive a tax credit for a percentage of life premium paid on filing annual tax returns.
    - Expected benefit: support development of the dinar-denominated long-term debt market, reduce cost of government long-term borrowings, and limit currency exchange risk for the Serbian Treasury.

- C. Simpler Licensing Requirements for Life Insurance Agents
  - Current rule: life insurance agents must be fully licensed and employed either by an insurance company or a life insurance agency.
  - Recommendation: review employment requirement so affiliation (in lieu of full-time employment) would be sufficient, to reduce fixed costs and expand agency networks and penetration.

- D. Development of New Property Insurance Products
  - Premium structure: MTPL and CASCO lines accounted for 44.3 percent in 2009 compared with 42 percent in 2008.
  - Property business premium share declined to 27.9 percent in 2009 compared with 33.2 percent in 2008.
  - Observation: few homeowners’ policies include catastrophic insurance coverage despite exposure to floods and quakes.
  - Proposed measures to boost catastrophic coverage:
    - (a) make it compulsory for all mortgage loans made by commercial and state-owned banks in disaster-prone areas to carry catastrophic insurance coverage in addition to other perils;
    - (b) develop and make public detailed disaster risk maps for flood and earthquake risks;
    - (c) insure all state-owned housing against natural perils;
    - (d) possibly create a national catastrophic insurance pool or join a regional one for Southeastern Europe.

- E. Consumer Education on Insurance Products
  - Gap: low level of consumer education on existing insurance products, policyholder rights, and protections afforded by current legislation.
  - Recommendation: NBS and government should consider a public education campaign to raise awareness of insurance benefits among Serbian consumers.

- F. Legacy Issues — Funding of MTPL Claims
  - Guarantee Fund performance: has settled all valid claims from policyholders of bankrupt insurers out of annual contributions of member companies.
  - In 2008 the Guarantee Fund received around SDR 450 million in membership fees (out of which only SDR 150 million was spent on new claims) as well as 10 percent of DDOR privatization proceeds.
  - Assessment: assuming current revenue remains the same and no major changes in bankruptcy court pace, the Fund is likely able to continue meeting valid claims.
  - New MTPL Law: calls for creation of a new Guarantee Fund while the existing Guarantee Fund remains in run-off; essential to ensure continuity of funding for liabilities of both funds.
  - Potential funding options: industry contributions, a temporary surcharge on all future MTPL insurance policies earmarked for the Guarantee Fund, and possibly government contributions.
  - NBS action: define minimum annual contribution of the industry to the “old” Guarantee Fund to ensure its ability to offer immediate settlements to policyholders of bankrupt companies with valid claims.
  - Current view: no immediate need for an additional surcharge on premiums or a government budget transfer; fund has met obligations out of current cash flow.

- G. Privatization of Dunav
  - Presence of a dominant state-owned insurer is no longer justified given sector liberalization policy.
  - Recommendation: government commit to privatizing Dunav over the next three years.
  - Interim step: initiate divestment of Dunav’s non-core corporate assets.

- H. Liberalization of the Domestic Reinsurance Market
  - Given additional cost burden from current reinsurance requirements and unusually high premium retention rate for Serbian insurers, recommend government and NBS review current reinsurance requirements.
  - Goal: broaden scope for competition among local and international reinsurers even prior to Serbia’s joining the WTO.

- I. Separation of Life and Non-life Insurance
  - Separation should be considered an immediate policy priority and implemented in accordance with the announced timetable.

### Key statistics and exact figures cited
- Reinsurance surcharge via Dunav Re: 5–7 percent additional surcharge.
- Insurance premium tax introduced on January 1, 2005: 5 percent of gross premiums (non-life, except employer-paid group personal accident).
- MTPL and CASCO share of premium: 44.3 percent in 2009; 42 percent in 2008.
- Property premium share: 27.9 percent in 2009; 33.2 percent in 2008.
- Guarantee Fund 2008 membership fees: around SDR 450 million; SDR 150 million spent on new claims.
- Guarantee Fund received 10 percent of DDOR privatization proceeds.
- Recommended government commitment timeframe for privatizing Dunav: over the next three years.

*IMF staff report content as provided in the supplied source text.*

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