Whatever the reason, Bulgarians do not go out of their way to get insurance.

Whether because of a lack of disposable income or because of lingering memories of the communist era, when "voluntary" insurance policies were seen as just another way of feeding cash into the inefficient state sector, the most popular insurance products remain those that are mandatory – health insurance when travelling (which is inexpensive) and motor vehicle insurance (which is not).

This defining factor means that Bulgaria’s insurance market still has a large potential for growth, making it an attractive proposition for international insurance groups, but also means that in times of recession and a general aversion to spending more than is strictly necessary, the insurance industry will feel the impact.

It would seem surprising, then, that the general insurance segment posted a net profit of 31.2 million leva for the first three quarters of 2009, compared to a mere 267 000 leva for the same period of 2008, according to Financial Supervision Commission (FSC) data. Premium revenue in the first nine months of the year was 1.03 billion leva, down by 0.2 per cent from the previous year

Life insurance companies saw their profits increase to 25.6 million leva from 14 million leva over the same time span, despite a premium revenue drop of 17.5 per cent to 160.7 million leva.

But the situation is not as rosy as it would seem, because the most difficult challenges – surviving the expected decline in premiums revenue and rising payments on insurance policies – still lie ahead.

Rotten core
The bulk of the profit in the non-life segment came from the non-core operations of insurance companies, of which investment is a key activity, with insurance itself contributing 12.2 million leva to the bottom line.

The third quarter brought a striking reversal over the first six months of the year, when core operations brought a loss of 6.8 million leva.

The reason for that loss, according to insurance executives, are the losses from motor vehicle third-party liability insurance, which has prompted some insurers to consider plans to limit their exposure to the segment and decrease the ratio of third-party liability insurance in their portfolios.

For the first nine months of the year, third-party liability insurance premiums were 277.6 million leva, accounting for 26.8 per cent of the total premium revenue, compared to 227.9 million leva, or 21.7 per cent of the total, for the same period of 2008.

The reason for the growth, however, was not an increase in the number of vehicles insured, which now account for about 80 per cent of the country’s total, as opposed to the European Union requirement of 90 per cent, but the increase in the price of the insurance policies.

Although the amounts paid out by companies on insurance claims fall short of those figures – 150.2 million leva for the first three quarters of this year and 120.9 million leva for the same period of 2008 – executives say that the mandatory reserves that insurance companies have to maintain in order to comply with FSC regulations make the segment unprofitable.

This is the reason why insurers have been clamouring for higher prices on motor vehicle third-party liability insurance. In September, the chairperson of the Association of Bulgarian Insurers, Orlin Penev, argued that this type of policy should cost about 300 euro, as opposed to the current range of 80 euro to 120 euro.

Keen competition on one of the largest market segments has kept prices artificially low, which was hurting Bulgarian insurers on the European market, since they charged much less than the prices in other EU countries, Penev said.

Traditionally, Bulgarian insurers have covered the shortfall by charging higher prices on other types of insurance policies, but the economic downturn has put a dampener on the property market and new car sales, which generated higher net profit for insurers offering property and casco insurance policies.

Property insurance policies became a staple of mortgage loan offers during the property boom, as banks made such policies a pre-requisite for giving the loan, but the ongoing  lull in lending and the falling number of real estate deals have hampered growth. For the first nine months of the year, fire, natural disaster and other property insurance totalled 190.3 million leva, compared to 180.4 million leva.

Casco revenues declined by 10.3 per cent to 450.3 million leva, a direct consequence of the 53 per cent drop in new car sales – the overall increase in the car park age means the premiums paid for insurance decline as well. The insurers’ attempts to draw new customers by lowering prices have not yielded a result, given that for the first six months of the year the drop was 6.7 per cent.