This content is from: Local Insights

Insurance company supervision strengthened

The insurance market in Serbia is still underdeveloped. Mandatory third-party liability automobile insurance accounts for more than one-third of the total insurance portfolio, while the portion of life-insurance is still far below the average of the countries in the region (1.2% in 2002, 3.5% in 2003). The total insurance portfolio in Serbia accounts for less than 2% of the country's total GDP (which in 2004 was $23.9 million).

The new Insurance Act, adopted in May 2004, has made radical changes to the insurance industry in Serbia. For example, the minimum share capital requirements were increased (€2 million for life insurance, €3.5 million for pension insurance, and €2.5 million for third-party liability automobile insurance), existing insurance companies were ordered to separate their life and non-life insurance lines of business, and to separate insurance from re-insurance. The licensing and supervision of insurance companies has been transferred from the Ministry of Finance to the country's central bank - the National Bank of Serbia (NBS). Since then, the NBS has taken steps to create a more sound and stable market for insurance, in particular by increasing supervision of insurance companies, creating new detailed guidelines for the implementation of the Insurance Act, and revoking a number of licences of financially unsound companies (this was the main reason for the decrease in the number of insurance companies from about 40 in 2002 to about 25 in 2005).

On July 19 2005, the Insurance Act was amended further, in line with the NBS's proposals based on its experience gained in regulating the insurance sector.

The rules restricting dealings with and investments in related persons have been tightened further. This move was inspired by the discovery recently that a number of domestic insurance companies were carrying out illegal practices (mostly providing funding to related companies and making purchases from them at inflated prices). The NBS intervened in late 2004 and early 2005 by revoking the licences of about 15 such companies. Now insurance companies cannot enter into loan, guarantee, pledge, deposit or similar agreements, either directly or indirectly, with related persons. The amendments introduce standards of conduct for management, according to which they must act solely in the company's interest, and any transaction with any person must be entered into on an arm's length basis.

The NBS now has even wider discretion in assessing the creditworthiness of prospective investors who wish to acquire an interest in insurance companies. The NBS may now refuse to grant approval if it finds that an investor would exercise its management right in a way that could impair the company's financial standing or the legality of the company's conduct.

The amendments abandon the previous practice of setting the criteria for investment and placements of technical reserves by statute. The NBS now has power to introduce such criteria by regulation. In respect to guarantee reserves, apart from the previously introduced elements that create such reserves (share capital, profit reserves, up to 50% of undistributed profits, revaluation reserves), the NBS reserved the right to prescribe other items that must be included in the guarantee reserve funds. The total amount of guarantee reserves (not one-third of these reserves, as before) must be invested in certain securities (government bonds, securities issued by international financial organizations, bonds and shares that are listed at a domestic stock exchanges, or, if not listed, issued by domestic issuers), deposited with local banks, or invested in properly registered real property in Serbia.

Privatization of state-owned insurance companies will be the task of the newly established Deposit Insurance Agency (the DIA). The DIA is the successor of the former Bank Rehabilitation Agency (BRA), which was in charge of deposit insurance, as well as the management and privatization of state-owned banks, and has acted as the liquidation and/or insolvency trustee for banks in Serbia. In this way, the preparation and supervision of the process of privatization of insurance companies and banks has now been integrated under the DIA's roof. Another aspect of the integrated system is that the DIA will now be acting as the bankruptcy and liquidation trustee both for banks and insurance companies. Until the privatization is completed, all state-owned insurance companies may not increase or decrease capital; enter into reorganizations; make capital expenditures; dispose of or pledge assets; or take or grant loans and/or guarantees (other than in the regular course of business) without the prior approval of the DIA.

Closely linked to privatization is the issue of the split between life and non-life insurance, and between insurance and re-insurance lines of business. The amendments to the Insurance Act extended the term for insurance companies to comply with this requirement until the end of 2007. This will most probably delay the privatization of the remaining state-controlled insurance companies, as foreign investors have already expressed interest in the acquisition of Serbian insurance businesses, but only after the separation between the life and non-life businesses has been completed.

Tomislav Popovic

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