Fitch: Price caps may push Turkish non-life insurers into loss

LONDON

The Turkish non-life insurance sector is likely to return to a loss this year, hit by the introduction of premium caps on motor third-party liability (MTPL) policies and rising inflation, Fitch Ratings said in a statement on May 23, as Reuters has reported. 

The sector’s capital adequacy will also continue to weaken, mostly affecting smaller local insurers that cannot rely on parental support, according to Fitch. 

The government’s cap, which was introduced in April, is intended to reduce average MTPL premiums by around 30 percent following a sharp increase over the last couple of years. 

Assuming no impact on the level of claims, the cap would increase the combined ratio for MTPL business to 154 percent from 108 percent in 2016, read the statement. 

This is in line with the combined ratio of 153 percent in 2015, when unprofitable MTPL business contributed to a 600 million Turkish Liras loss for Turkish non-life insurers. 

“The premium cap could therefore largely reverse the sector’s improved performance in 2016,” said Fitch. 

“Pressure on profitability will be exacerbated by rising inflation, driven by depreciation of the Turkish lira,” it added. 

Motor insurance business is particularly exposed to inflation risks because spare parts for repairs are generally imported, warned Fitch.

The government has taken several steps to try and mitigate the impact of inflation and reduce claims costs.

These include allowing insurers to use equivalent locally-produced spare parts, introducing a standardized injury compensation calculation and requiring claimants to file claims with the insurer rather than going directly to court.