As a developing market, Hungary has shown itself capable of
delivering life insurers above-average premium income growth.
However, with many developing markets come risks, as Hungary is
now showing as it battles to correct severe fiscal imbalances at
the expense of a drastic reduction in economic growthHungary’s life
insurance industry’s growth rate displayed a marked slow-down
during 2007, a development that became particularly evident in the
second and third quarters of the year, according to data from the
Association of Hungarian Insurance Companies (AHIC). Hungary’s
economic situation suggests that this may be the first sign of
tougher times ahead for insurers.
After achieving a record 39.2 percent increase in gross premium
income in 2006 to HUF420.65 billion ($2.43 billion), growth slowed
to 21.6 percent in the first quarter of 2007 compared with the
first quarter of 2006, while combined second and third quarter
growth in 2007 fell to only 2.1 percent compared with the
comparable quarters in 2006. On an annualised basis, third-quarter
gross premium income of HUF138.72 billion indicates that full-year
premium income in 2007 will be about HUF473 billion, up 12.6
percent and well below a CAGR of almost 19 percent achieved between
1997 and 2006.
Hungary’s life insurance industry’s strong growth in 2006 was
assisted by two key factors, one being introduction of taxation on
interest earnings on bank deposits in September 2006. Because life
insurance policies with a maturity of at least ten years and
pensions insurance policies with a maturity of at least three years
remained exempt from interest tax, this placed life insurers at an
advantage over banks. The result was “a redistribution among forms
of savings”, noted the AHIC.
The second factor propelling life insurance premium income growth
in 2006 was a looming economic crisis in Hungary. Economic
instability was driven by a burgeoning fiscal deficit that,
according to the AHIC, reached 9.2 percent of GDP in 2006, far
above the then-target of 4.7 percent. Hungary also faced a
significant deficit on the current account of its balance of
payments – 6 percent of GDP compared with an average 0.7 percent
deficit in European Union countries in 2006. Hungary joined the EU
The two imbalances sparked fears of a devaluation of the Hungarian
forint, sending savers scurrying into unit-linked life insurance
products, particularly those containing foreign assets. Adding
attraction was the returns many unit-linked products delivered in
2005; the top ten funds each recorded annual appreciation of 30
percent or more.
Unsurprisingly, the AHIC noted that unit-linked products were “the
engine of growth” in 2006 and their sales reflected this. Recurring
premium unit-linked products reflected 95.9 percent growth in
premium income to HUF140 billion, while single premium products
enjoyed a 73 percent increase to HUF107.76 billion. In total,
unit-linked products accounted for 58.9 percent of total life
insurance product sales, up from 44.3 percent in 2005 and 35.9
percent in 2004.
2006 was a great year for insurers but it was also the year
Hungary’s government, pressured by the EU Commission to radically
cut its budget deficit, began tackling economic problems by way of
a budget that put the brakes on economic growth. Measures taken
included raising taxes and cutting state subsidies on gas and
electricity, and were aimed at cutting state expenditure by 40
percent and raising tax revenues by 60 percent.
The measures have taken effect. In 2006 the budget deficit fell to
9.2 percent of GDP and, according to government estimates, fell to
about 5.7 percent in 2007. The 2008 target is 4 percent. Inflation
has, however, risen sharply and according to the Hungarian Central
Statistics Office (HCSO) stood at 7.4 percent in December 2007
compared with 6.5 percent in December 2006 and 3.3 percent in
Austerity measures have hit consumers and, combined with rising
inflation, have reversed an upward trend of real incomes. According
to Hungarian economic research body Ecostat, real wages fell by
2.63 percent between December 2005 and December 2006 and by 9.85
percent in the first ten months of 2007 compared with December
HCSO data reflects lower consumer purchasing power. For example, in
September 2007 retail sales were 4 percent lower than 12 months
earlier and final household consumption was down 2 percent.
Hungary’s GDP growth has also suffered, and according to Ecostat it
fell from 4.1 percent in 2005 to 3.9 percent in 2006 and 1.2
percent in the first ten months of 2007. Hungary’s GDP is forecast
by the EU Commission to grow by 2.6 percent in 2008.
Hungary’s economic situation indicates life insurers face tough
conditions for at least another year. In a market with a working
population of about 6 million served by 19 life insurers, the
smallest ten of which have average annual premium incomes of about
$35 million, consolidation cannot be ignored.