The main objectives of this paper take into consideration the diversification alternatives of life insurance in Romania, in the content of the results obtained on the insurance field. They are mainly designed and developed like products that offer security and financial comfort in opposition to some unexpected events, life insurance products offer besides, the option of some financial income savings and investment on the internal and foreign capital markets. Moreover, there is the possibility to develop life insurance products through bancassurance system that is no longer an innovation for the Romanian financial market. These products assemble under the same umbrella either banking services or insurance ones, and they are focused on savings and protection and also investment. 

1. Results Obtained on the Romanian Life-Insurance Market

The year 2004 has signified for eight Central and Eastern European (CEE) Countries – Poland, The Czech Republic, Hungary, Slovenia, Slovakia, Latvia, Lithuania and Estonia – the concretization of the European integration efforts, by receiving the status of European Union (EU) member, starting with 1st May. For other two countries, Romania and Bulgaria, these approaches will continue till 2007, while Croatia and Turkey are on the negotiations agenda for a further integration.

At the European level, insurance market has recorded significant growing both in the life insurance - 14.5%, but also in the non-life insurance - 22,8%. That growing was affected by the decline of the life insurance markets from Spain and Great Britain.

The results that were registered in Romania in 2004, show that the weight of life insurances in the total market in Romania was 21.7%, that represent a low level compared to the average registered in the European Union – the countries in the EU have an average of about 63% while the new states that joined EU have an average of about 35% on the insurance market. However, in Romania where the  inflation rate in 2004 raised 9.3%, the real growing rate of gross received premiums was 18.96%. In the Romanian life insurance market, there are 22 insurance companies, from which ING Life Insurance is still the leader of life insurance in 2004, with a market share of 40,6% on the total gross premium. 

Table 1:

 The Evolution of Written Gross Premiums on Total Insurance Activity

and on Structure, in Romania, in the Period 1998-2005

Source: Processing from the ISC Annual Report for 2001- 2005.

From Table 1 and Figure 1, it can be seen that the highest percentage on total insurance market in Romania, of 78%, still belongs to non-life insurance, increasing from 2002 and with fluctuating evolutions in the analyzed period.

Figure 1:

 Structure of Gross Written Premium on life and Non-life Insurance,

in Romania, in the Period 1998-2005

For a level of the GDP per capita of 2.193 EUR[1], in Romania, the penetration degree registers a level of 1,54%, shown in Figure 2. Even though increasing from previous years, the insurance penetration in Romania remains low compared with the ones registered in Central and Eastern European countries – which are between 3% and 5%, with the European Union average of 8,35% or with the worldwide average of 8,06%.

Figure 2:

Insurance Penetration on the Whole Insurance Market and the Life Insurance, in Romania, EU 25 and Worldwide, for 2005

The insurance density in Romania has achieved a level of 56 EUR/capita, of which gross premium from life insurance – 13 EUR/capita, and from non-life insurance – 43 EUR/capita, while in the European Union states[2], the insurance density represents 2.460 EUR/capita, and on worldwide a level 518 EUR/capita.

The gross written premium by the first ten insurance companies providing life insurance in the same period (from the 22 insurance companies that had activity in life insurance domain) represent 93% of the total insurance gross premium received on this insurance industry. ING Life Insurance remains the leader of life insurance, with a market share of 38%. The first three insurance companies (ING Life Insurance, AIG Life and Asiban) hold together a share of 57% of life insurance market.

2. Life Insurance – Long Term Alternatives of Savings

Life insurance represents a long-term savings alternative that includes also the financial protection that other financial products don’t.

In practice, the life insurance products have different names and are quite multiple, according to the clauses that each of them includes. So, in the case when that insured person is alive at the end of policy, he will receive indemnity (the guarantee amount according to the premium paid) plus the participation to insurer’s profit, the entire amount or life annuity. Moreover, it could be attached, to the option of the insured person, lots of clauses, like:

·         If the insured person decease till the end of insurance period, the beneficiaries will receive indemnity plus the participation to insurer’s profit until the moment of decease;

·         If the decease is due to an accident,  some of insurance companies pay twice or three times the indemnity amount, inclusively the participation to insurer’s profit;

·         If the insured person has an accident and suffer a permanent invalidity, the insured person is premium-free for the period left until the end of policy and he will receive an indemnity that represents a percentage from indemnity mentioned in the policy, according to the invalidity grade;

·         It also can be specified an hospitalization clause or a surgical one. Thus, in case of hospitalization of an insured person, this one will receive a sum per each day of hospitalization, as it is mentioned in policy or, if the insured person suffers a surgical intervention, he will receive the mentioned amount, taking into consideration the minimum amount.

The descending trend of interest rates in Romania reveals some questions with regarding to the population’s savings from the banks and also to the future profits that could be obtained from the banking investments. In the same time, the high taxes on the interest rates could determine a possible reconsideration for savings and for investment opportunities.

Although the banking deposits interest rates don’t cover the official inflation rate, it seems that significant population withdrawals won’t be registered.

The market studies show that the most attractive savings and investment opportunities are considered to be the apartments and houses (40%), long term deposits (39%), other immovables and life insurance, as shown in Figure no 3.

Figure 3:

The Most Atractive Saving and Investment Opportunities in Romania[3]

The banks will remain the first savings destination, in the case of a few alternatives, that are risky and difficult to access. It is possible to make changes in the currency of deposits, encouraging national currency deposits, with interest rates twice or three times higher than foreign currency deposits. Life insurance presents an important potential of growing, but not necessarily like a result of banking saving’s decreasing.

In Romania, the investment portfolio structure of individuals is: banking deposits, 60%; cash, 15%; listed stocks, 9%; other commercial papers, 8%; savings insurance, 3,8%; mutual funds, 0,2%. The preferences of individuals for financial investments, in the European Union, insurance rank on the 2-nd place, with a percentage of 24,5% in the investment portfolio structure, followed by pension funds with 13% and mutual funds, with 10,6%.

A study made by Unicredit Group shows that the population aged 30-39 years old is the more active regarding investments in supplementary pension. Overall, nearly 60% of the people in this category of age already started saving in view of pensioning or to take into account this possibility.

However, presently, in Romania only 7% of the people hold an investment product similar to private pensions as compared to the average of 20% in Central and Eastern Europe. Taking into account that private pensions are not yet in operation in our country, this percentage is not very reduced considering that the first collections based on Pylon 3 of the private pension system will be created in 2007.

The explanation given to this evolution is based on the connection between the modest performances registered on a global level by the insurance market and the unfavorable economic conditions, a high inflation rate, the depreciation of the local currency, the excessive taxation and the reduction of purchasing power of population. Along with these general inconveniences, there can be added the specific ones of the insurance domain, like the legislation.

3. The Implementation of the Optional Component of the Pension System.

In Romania like in all European countries, the data and predictions show a decrease in the birth rate and at the same time, an increase in the aged population ratio of over 65 years. From statistic data is it clear that in 2020 the population aged over 65 years shall reach 22% of total active population, compared to 19% in 1999. As a result it is necessary to balance the ratio between the pension resources and other social insurances with costs, in order to provide credibility and viability of a three pillar system projected for implementation in Romania.

Romania must create a private pension system besides the public pension system that existed until EU accession. Thus, considering EU suggestions in this respect, the public pension system will represent pillar I and private pension system will consist of two components: pillar II – privately managed compulsory component, settled by Law no 411/2004 on privately managed pension funds, modified and completed by Law no. 23/2007; pillar III – privately managed optional component, settled by Law no  204/2006 on optional pensions.

The private pension systems started with the 3rd pillar of facultative pensions (beginning with January 1, 2007) followed by the 2^nd pillar to become operational at the beginning of the year 2008.

Private management pension systems – Second Pillar - is a compulsory system for new employees under 35 years old and is optional for other categories under 45 years old, already insured and contributing to the public pension system.

For privately managed facultative pension systems – the 3^rd pillar, the company managing such funds should dispose of a minimum capital stipulated by law in lei equivalent of 1.5 million euro.

In order to be created, facultative pension funds must have at least 100 participants (unlike 50 in case of managed pensions in the 2nd pillar) and they are to function on the basis of an issuing prospectus named also pension scheme similar to a mutual investment fund offering also invalidity protection – as a means of insurance.

Participants contribute with 15% maximum of their annual gross income and the state offers tax exemption for an amount of up to 200 euro per year for employees as well as for employers. The proposal for an optional pension fund is made by the employer and trade union or employees’ representatives by the work contract or the employer himself or through association with other employers and employees’ representatives. The employer constitutes and monthly deposits the debt owed by each employee who adhered to a facultative pension fund based on the individual adhering act to the prospectus of optional pension scheme concluded with an administrator.

Like in the case of mutual investments funds, pension funds shall be of many types with various risk levels that would address to various categories of people. On the scheme prospectus, it must be stipulated the fund risk level, namely: high, medium and low risk. Likewise, pension funds managers will have certain restrictions regarding the exposures on increased risk financial instruments, such as shares.

As for investment risks, they depend on the type of the chosen fund. When choosing a fund, we must keep in mind the risk-profit ratio. The highest risk level is presented by the share funds that depend on the stock exchange evolution and the most equilibrated risk/profit ratio is for diversified funds. On a long term, however, shares fund is more advantageous.

When choosing a private pension fund, one must consider, firstly, the risk level that everyone is willing to assume. It is recommended the contribution to a single private pension funds and, along with becoming older, one must choose a low risk fund, less volatile, not so profitable, but that is surer. If the youth may choose greater investment funds in shares that could be highly profitable, but with obviously greater risks, the elder should be careful with the money because it will be difficult for them to recover possible significant losses in their portfolio.

The content of the optional pension must comprise, in a compulsory way, the following elements:

·   The amount and periodicity of the contributions;

·   The way of dividing the contributions between the employee and the

    employer;

·   Rules of assets investments;

·   Methods for paying the optional pensions, including the frequency, duration and modalities of actualizing the mentioned payments.

The insurance companies that take out life insurance have already included products of optional private pension in their supply, which have the savings component under the form of a rent or of a pension.

Their existence is an advantage in obtaining some timesaving for preparing the market and gathering experience in the field.

In Romania, their development will be possible only if exist financial instruments in which it may be invested. The interest of the potential suppliers of optional schemes for private pension market is maintained at low level through the existence of a weakly developed financial market, which doesn’t supply adequate instruments for the ensuring of a diversified investment portfolio.

The administration of the pension funds requires the investment of collected contributions from the participants in a more profitable way and respecting the prudential principles, so that the administrator could ensure the pay of a superior amount to the contributions paid by the participants.

In general, pension funds invest:

·   In bonds: in Romania it doesn’t exist a bond market or it is very small;

·   In stocks: the Romanian financial market is not yet developed;

·   On foreign markets, but the law has limited the abroad investments to 20%

    (comprising of bonds issued by governments and foreign central banks, as  

    well as non-governmental organizations).

Under these circumstances, it is hard to estimate in which instruments could a pension fund invest, except for treasury bonds. Nowadays, the majority of insurance companies’ investments are oriented in the direction of government stocks and bank deposits, but these instruments alone will not have the capacity to supply, in the future, for the achievement of a minimum guaranteed yield, as the law requires.

Finding out a quick solution for this becomes more and more necessary in the present conditions of the financial-banking market, characterized by a continuous decrease of the banking deposit interest rate and for government stocks.

An important condition for the success of introducing the optional pension funds in Romania will be a well informing of the public. The people’s mentality must be changed and any question mark linked to the credibility of these funds must also be eliminated, even though some of these question marks are justified, taking in account the various scandals for the financial market in the latest years. The responsibility of the authorities and institutions will be even higher as it will be about public funds privately administrated.

5. Insurance - Face to Face to Banking Account

One of the most significant changes in the financial services sector over the past few years has been the appearance and development of bancassurance. Banking institutions and insurance companies have found bancassurance to be an attractive and profitable complement to their existing activities.

The stimulation of insurance request in Romania by the banking networks can record some success, considering that the most actual clients of banks would accept taking out an insurance.

Bancassurance covers a wide range of detailed arrangements between banks and insurance companies, but in all cases it includes the provision of insurance and banking products or services from the same sources or to the same customer base. Because there is a wide diversity of strategies, there is no standard model for bancassurance, even within a country.

“Bancassurance is the provision of insurance and banking products and services through a common distribution channel and/or to the same client base.”[4]

5.1. Advantages of Insurance to Enter Into Bancassurance

Insurance companies have identified a number of advantages from involvement in bancassurance: Source of new business, from these possible reasons:

•    the bank’s clients are in a territory where the insurer has only a limited presence (if any), e.g. because the insurer’s agency structure there is limited;

•    the bank’s clients may form a very different group (e.g. by age, sex, purchasing habits) to the one which the insurer has previously courted. For example, an insurer who previously concentrated on high net worth individuals (“HNWIs”) can now gain access to a wider range of customers who will not all be HNWIs;

Wider range of products (including banking products): the insurance company hopes to attract further business, from both existing and new policyholders, because of the fact that it can offer a wider range of services than before, i.e. it can give its customers access to banking as well as to insurance services;

Products not otherwise feasible: the economics of the bancassurance operation may allow the insurer to offer products which are not feasible through the insurer’s existing channels. For example, sales costs incurred under existing channels may force premium rates for a product to be uncompetitive, so the product is not sold. The costs via the bancassurance channel may be low enough to make it feasible;

Administration – economies of scale: the insurance company can offer to carry out the administration activities of the bancassurer’s business, if for example the bancassurer is a separate company. Combining the bancassurer’s business with the other business of the insurer can produce economies of scale in administration costs (including capital expenditure). This in turn allows the insurer to improve profitability and to price future products with narrower margins, which helps to make the insurer’s products more competitive.

5.2. Bancassurance in Romania

Banking and insurance products delivered on the bancassurance system don’t represent anymore an innovation on the Romanian financial market. These products combine a banking service with an insurance one, offering saving, protection and investment. Why bancassurance?

-    Because both products are accessible to the client in the same territorial place;

-    Because bank-insurance relationship gives to the client a plus of value, offering complex products, at an acceptable cost;

-    Because, in this way, the potential client has benefits not only through financial expertise of the banking experts, and through the protection of insurance.

In Romania, the examples of alliances between Romanian banks and insurance companies are diverse, one of these being the co-operation between Bancpost and the Garanta insurance company. Within the supporting actions for developing mutual activities, assets of BancPost are insured by Garanta, for which the bank also plays the part of an intermediary agent, remunerated on based on commission. The parts’ activity is based on an intermediation contract, which stipulates that besides the products sold on its basis, Bancpost also offers non-life insurance products associated with credit facilities. Throughout the entire Bancpost network, non-life and life insurance are offered to the present client of the bank, which is considered as a portfolio created and developed on partnership basis. This thing is done with the help of the sales agents, appointed by BancPost to handle the intermediation activity, and with the help of Garanta personnel, which work on full time basis in rented places inside the banks’ branches.

BRD - Group Société Générale has initiated in June 2001 a co-operation partnership with the insurance company Commercial Union - Life-Insurance, now being AVIVA. The clients have the possibility of save money through a financial product, which also brings the protection offered only by a long-term insurance, the minimum period of insurance being of five years. The insurance company offers the documentation for the agreements and for the on-going operations, and the bank administrates and manages the entire marketing activities that are meant to strengthen the fidelity of the present clientele.

The examples do not stop here, the creation of an insurance division in BCR Group, named BCR Insurance, needs also to be mentioned. Allianz Ţiriac Insurance Company, co-operates with the Ţiriac Commercial Bank, ING Bank, with the insurance companies within ING Life Insurance Group, and so on.

Generally, the insurance products are sold by banks at some credit agreements, being used as guarantees for these agreements. Thus, the insurance of the assets accepted as guarantees by the bank throughout the entire credit period or of the assets which are the credit subject for the specific risks of each assets categories, is required. A life-insurance policy is also required for the debtor throughout the credit period, the bank protecting itself for the risk of non-payment is case of the debtor’s death. Also for protection against the risk of non-payment, but of all of the debtors, the banks can take out insurance policies for financial risks, the insurance companies taking over the risk of non-repayment in case of the debtors’ non-solvability.

Conclusions

Although the products range of the insurance companies is various, the life insurance evolution depends on the fiscal facilities offered by the government.

The increased role of pension funds is inscribed in the tendency of changing the population interest from the field of bank intermediation into the financial intermediation sphere simultaneously with the increased level of economic responsibility for each person.

Finally, for both bank and insurer there is a great opportunity to learn and to make improvements in their own operation. Each gets exposure to the other’s distinctive management styles, its objectives and measures and the pressures which it can exert and which it feels. The benefit comes when either company can implement changes as a result of the learning process.

As a conclusion, in Romania, the stimulation of the insurance demand through the banking networks would register some success, having as a premises the fact that most of the present clients of the banks that are not yet insurance owners would finally accept the taking out of the insurance policy. In addition, the clients of the Romanian banking system taken as a whole, represent just a part of the insurance market’s potential. On the other hand, the saving capacity and the possibility of placing some amounts in insurance are limited by the continuous drop of the purchasing power of the population.

Life insurance will never substitute banking deposits, their correspondent on the short term. It is worth to emphasize the advantages that are offered by each class. Certainly, the market will develop to products with high structure, in order to guarantee some level of profit.