Mario C Grech, Middle Sea Insurance Executive Chairman, speaks to CHARLOT ZAHRA about the company’s negative experience with Progress Assicurazioni SpA, the lessons learnt and the way forward for the company
What are Middle Sea Insurance’s origins? When Middle Sea Insurance was set up in 1981, it was not set up as an insurance agency but as a re-insurer.
The historical reason for this is that the foreign insurance agencies that operated through their agencies at the time, and the Government of the time did not feel the need to disturb the position of that market.
Thanks to the introduction of MSI and mandatory re-insurance, under which the foreign insurance agencies present at the time, the majority of which were British composite companies, had to 30 per cent of all their re-insurance requirements in Malta in order to operate.
I am mentioning this because it has always been Middle Sea’s intention to operate beyond Malta’s shores.
At the time, with the approval of the UK’s Financial Services Authority (FSA), which at the time was the Department of Trade and Industry (DTI), MSI opened a branch office in London at the London Underwriting Centre and write business from The City of London.
In the eighties, around 50 per cent of MSI’s re-insurance business was coming from our London branch office.
How did the liberalisation of the financial services’ market in the nineties affect Middle Sea Insurance’s operations and strategy? Middle Sea’s vision changed in the mid-nineties following a Government decision to de-regulate and liberalise the insurance market and the entire financial services’ sector.
As a result of this, the mandatory re-insurance business was going to cease to exist. In fact, the Finance Ministry had informed us in 1992 that the re-insurance business was going to cease to exist as from the end of 1995.
Since Middle Sea’s core business at the time was going to end soon, it was clear that the company’s vision and strategy had to change. Hence Middle Sea started working to introduce the company in Malta as a stand-alone insurer.
As from 1994, Middle Sea started introducing itself as an insurance to the Maltese public in all categories, including vehicle insurance, life insurance and property insurance, among others.
At the same time, during the same year, MSI set up its specialist life insurance and general investment company, Middle Sea Valletta Life, with BOV as partners.
The current shareholding is split 50 per cent each between BOV and MSI.
Until 2004, insurance contributed less than 0.2 per cent of GDP, while now, the contribution of insurance to the country’s GDP has grown to more than 3 per cent.
MSV has now grown as the largest life insurance company in Malta with 62 per cent of the market, with almost 80,000 policyholders with more than one billion in assets.
In view of opportunities that could arise when Malta becomes a financial services, MSI set up a subsidiary company – International Insurance Management Services (IIMS) – which offers back-office operations both to companies within the Middle Sea Group as well as to external clients.
This company has got a number of foreign companies operating in Malta which use its services.
Although the global recession has hit this company, we hope that the situation will improve once the global and local recession subsides and economic activity recovers.
What led Middle Sea to take over Progesss Assicurazioni in 2000? In 2000, MSI decided to expand into the Italian market through Progress Assicurazioni. The decision was made with utmost prudence and following substantial analysis.
Research made at the time showed at in 2000-2001, the Italian insurance market had coming out of a depression and was set to grow, especially in the RCA (Responsabilità Civile Auto) – the equivalent of the Third Party Only or Third Party insurance.
This opportunity had arisen on the basis on a clean balance sheet as well as on the basis that all pending liabilities and responsibilities that Progress Assicurazioni had written prior to MSI’s take-over date would be the previous owners’ reasonability, so that if there were not enough funds available to cover them, the previous owners would have to make good for that.
During 2001 and 2006, Progress Assicurazioni had registered a profit, and nobody asks any questions as long as the company was making a profit.
How did the Bersani law affect Progress Assicurazioni’s operations? During 2007, particularly in the last part of the year, we saw certain movement in the Italian insurance market that drew our attention.
During that year, Pier Luigi Bersani, who at the time was a Minister in the centre-left Government in Italy, introduced a new law (hereafter called the “legge Bersani” or “Bersani law”) which affected the entire insurance market in Italy, including Progress.
This law, which introduced direct settlement of insurance claims in Italy, was intended to have a positive effect on consumers enabling them to settle their insurance claims faster.
Until then, during traffic accidents, a person who did not have blame went to the insurance company of the person who had blame for that traffic accident to open a claim.
However, the Bersani law reversed all that, thus the person who does not have blame for a traffic accident could now claim directly from his or her insurance company, irrespective of the fact that he or she did not have blame for that accident.
The insurance company would then get reimbursed for that claim by the insurance company of the other driver who blamed for that accident.
However, under the new law, the insurance company would not get back the full amount of the claim, but a national average pre-established by law, which varies from €1,500 to €1,600 according to the geographical location of the claim.
This was based on a study which calculated the total amount of claims made in Italy and divided them with the number of accidents, which resulted in an average claim per accident in Italy.
To this effect, the Italian territory was sub-divided into three zones.
So that, for instance, if you have a traffic claim that costs €5,000, the insurance would only be able to recover back up to €1,600.
They are saying that over a number of years, there will be a number of times when the average works out against a particular insurance company and others when the average works out in favour of that company, that averaging out each other.
However the law of averages and the law of large numbers work against you the smaller you are – and we are very small.
In 2008 we had written €85 million in business, 70 per cent of which was vehicle insurance business and remaining 30 per cent non-vehicle insurance business, which is more attractive than vehicle insurance as it is more profitable.
In Malta, €85 million is very large, since it is almost the entire total of the car insurance business in Malta, but for Italy it is just 0.001 per cent of the car insurance market.
Since February 2007, when the law was introduced, and the last interim financial results published in June, the total loss suffered by Progress as a result of the new law in claims that the company could not recover fully was €15 million.
Were there other factors that affected Progress Assicurazioni’s operations during the past two years? Coupled with this problem was the international financial crisis, which hit hard in the second half of 2007 and has progress throughout 2008 and started easing out in 2009.
This has affected the investment side of insurance companies, and this has exacerbated the negative financials results for Progress Assicurazioni SpA.
The situation was made worse when the economic recession hit out globally. When there is a recession, insurance companies are particularly hit hard, as the amount and severity of claims increase.
The company, operates south of Rome, as well as in Sicily and Sardinia, an area which has more challenges to operate than the North, especially where moral hazard is concerned.
As a result of this, the frequency, as well as their severity increased substantially, especially the number of claims registered by Progress during this period.
The Bersani law had such a significant impact on the Italian insurance market that the market performance data that had been collected for the past 20 years had been made redundant.
Hence the introduction of the Bersani law and direct settlement, together with the global recession and the fact that we are operating in a tougher market south of Rome, and the fact that our company was not prepared enough to face the challenges that came on it all of a sudden, all affected significantly the financial performance of Progress.
In 2008, Progress had registered a loss of €24 million after consolidation (€19 before consolidation).
What effective decisions has MSI taken to improve the bottom line of Progress Assicurazioni? During the last annual general meeting in June, I had pledged with shareholders that we would have taken courageous decisions about the future of Progress Assicurazioni and fast.
And we have started taking these decisions.
As from March-April I assumed a more direct role in the day-to-day running of Progress Assicurazioni to take decisions to face these challenges more effectively.
We looked at the progress of our agents in Italy and terminated most of them. Between 2001 and 2006, he agents made a profit. In 2007, they also did a small profit but our reserves were not sufficient to cover the losses incurred overall by Progress.
We had a cursory look at the agents and had to determine whether they were still going to deliver a profit despite of the new law in 2008 and 2009.
We decided to right-size the operation and we are calculating that while in 2008 we underwrote €85 million in business, in 2010 we are calculating that we will be writing only around €15 million in premia.
We also restructured the management of Progress Assicurazioni SpA, changing top people and restructuring the management of so that the claims section has been separated from the agents so that can be monitored more closely in the circumstances that we are currently facing.
Moreover, in Italy it is not easy to raise prices since you need to send an actuarial report outlining the company’s position and the reasons for the rise.
However we have already raised our premier by 15 per cent and on 1 January 2009, we are anticipating that we will be raising our premier by another 15 per cent.
We have also appointed a specialist anti-fraud agency so that it would analyse the claims that Progress receives so that we could control moral hazards as much as possible.
MSI has also appointed a specialist claims management agency to take care of the claims that will be entered from now on so that our staff are not overburdened and can give more time to these claims than normally given to these clams.
What led MSI to increase is share capital to €67 million?
However, the most important think that we did was to check whether MSI had enough reserves to cover all the claims underwritten by Progress till now.
It is important for an insurance company to have enough reserves to cover claims because car claims which involve injuries or a fatality usually take around five years to be settled.
What could happen to our balance sheet as a result of these claims? Hence we decided to buy retro-active re-insurance to the tune of €40 million to cover Progress’s clams from 2001 till December 2008 in case the company’s reserves are not enough to cover them.
For 2009, we also bought another re-insurance to cover this year’s losses in case Progress’s loss ratio is between 105 and 130.
Despite the fact that we have taken action, this has not have had an immediate effect as insurance is not like a power switch that is switched on and off – it takes time to settle down. It was in view of this that the negative situation in Progress persisted in the second and third quarters of 2009.
But with the re-insurance, we have effectively made a safety net around Progress Asscurazioni’s claims till 2008, so that they do not affect the company’s balance sheet.
During the last AGM, I had spoken about the need to restructure the company in such a way so that the performance of a subsidiary company would not affect the morther company’s balance sheet, as it is doing at present.
The Board of Director had two options – issuing a rights issue as we have done, or liquidate part of our balance sheet to cover the losses, thus selling part of our stake holding in MSV or sell it completely.
We have decided to share issue under which each existing shareholder will be getting 2.68 shares for each share it currently has.
MSI’s’s majority shareholding owned by 3 major financial institutions – Munich Re, Mapfre Interacional and BOV, which together have 62.5 per cent of MSI, while the remained is publicly listed on the MSE.
They have decided to subscribe to the share issue according to their current shareholding, that is, 62.5 per cent. The rest will be offered to existing shareholders at a nominal and price share issue of €0.60 per share.
If the public does not subscribe to the whole share issue, then Mapfre International and BOV have agreed to underwrite the remainder of the 37.5 per cent offered to existing subscribers which is not taken up.
The negative results from Progress Assicurazioni are such the profits of MSI’s companies registered in Malta – MSI, MSV, IIMS, and Growth Investments – are not enough to cover for those losses that we are projecting from Italy for this year.