The challenges faced by life insurance companies in the Baltic States

Abstract

Life insurers are significant participants in Europe’s economy, not least as investors. They are not immune to the after-effects of the crisis. Most noticeably, low interest rates and high capital requirements are impacting on profitability and starting to drive strategic decisions. Herein, we aim to lay out trends on life insurers in the small European Union (EU) Baltic States, specifically Latvia, Estonia and Lithuania, all of which considered small because of the size of their population which is below three million, respectively. Similar to other insurance firms within small EU States, firms within these countries are struggling to balance the pressures of regulation and competition in a way that will yield a successful strategy. There are several differences between the individual EU countries in relation to life insurance. Notwithstanding a single market, there are strong national drivers, which include tax arrangements and pension provision, which affect product design, and the business strategy. Also, while many EU markets have shifted towards unitlinked business, several products which were written when yields were higher still prevail. Moreover, since life insurance liabilities are of a longer duration than the underlying backing assets, insurers are required to fund these liabilities in markets which differ from the ones in which they were issued. Since expectations of life insurance market participants is that life insurers will continue to offer products based on guaranteed returns, insurers need to fund products based on current trends and not without relying on historic prices and rates of return. This since in these markets, insurers cannot pass the investment and interest rate risks wholly to policyholders. This study adds value to the findings of various prominent researchers such as King (1993), Briguglio (1995), Baldacchino (2006), Bezzina and Grima (2012) and Bezzina et al. (2014), who highlight the importance of the use of small States as small-scale laboratories for more complex politics, regulations and policies of larger countries. Moreover, this study helps voice the cries of smaller States, which are many a times dampened by the members of larger States, and allows for an understanding of the impact and implications of challenges to smaller jurisdictions, in this case within the EU. This hopefully will help to strengthen the effectiveness of competitiveness, regulations and common policy within the EU. We base our analysis on the examination of aggregate statistical data of the Estonian, Latvian and Lithuanian insurance sector provided by the Finantsinspektsioon (financial market regulator in Estonia), the Financial and Capital Market Commission (financial market regulator in Latvia) and the Central Bank of Lithuania (responsible for the supervision of financial market in Lithuania), Eurostat data as well as annual reports of the insurance companies in the three Baltic States.