Turkish insurers face severe strains, warns Fitch Ratings

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Turkish insurers face one of their toughest operating environments in a decade, with earnings and capital adequacy likely to come under severe pressure in 2022-23, Fitch Ratings says in a new report.

According to Fitch analysts, the effects of macroeconomic deterioration, soaring inflation and continued motor vehicle liability insurance (MTPL) price caps could push some insurers below minimum regulatory solvency levels, forcing them to raise capital or be taken over by more powerful competitors. .

Turkish CPI inflation reached over 70% in May 2022 and Fitch expects it to remain very high (end 2022: 60%, end 2023: 55%). Sustained inflation at such high levels will have significant negative implications for insurers, driving up the cost of claims and potentially leading to reserve shortfalls across longer-term lines of business. It will also erode customers’ disposable income, weakening their ability to purchase insurance.

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Fitch adds that insurers are unlikely to be able to raise their rates enough to cover rising claims costs. They are constrained by price competition and, for MTPL insurance, by regulatory price caps.

MTPL is the non-life sector’s largest line of business in terms of net premiums written, and has been the main drag on the sector’s underwriting performance in recent years. Price caps prevent insurers from charging enough for the risk they take on, forcing them to write MTPL policies at a loss. High inflation will compound this problem, and we do not expect MTPL prices to be liberalized in the near future.

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Turkish insurers’ ratings are under pressure from Fitch’s negative outlook on the Turkish sovereign (B+/Negative) and Turkish banks’ ratings, reflecting insurers’ exposure to challenges affecting the Turkish economy, their holdings of government bonds and Turkish banks and their bank deposits. .

Source: Fitch Ratings

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