INSURANCE SUPERVISION DEPARTMENT

INSURANCE SECTOR IN

Report for 2018

National Bank of Serbia

Contents:

1. Introduction ...... 4 2. Activities of the in 2018 ...... 4 On-site examinations ...... 4 Off-site supervision and examinations ...... 6 Licences, consents and other supervisory regulatory activities ...... 7 Development activities ...... 8 Professional exams ...... 9 3 Insurance market ...... 9 3.1. General indicators ...... 9 3.2. Market participants ...... 12 Insurance undertakings ...... 12 Other market participants ...... 13 3.3. Insurance portfolio structure ...... 13 3.4. Balance sheet total and balance sheet structure ...... 15 Balance sheet total ...... 15 ...... 15 Structure of assets ...... 16 Structure of liabilities ...... 16 4. Performance indicators ...... 17 4.1. Capital adequacy ...... 17 4.2. Quality of assets ...... 18 4.3. Investment of technical provisions ...... 19 4.4. Reinsurance ...... 20 4.5. Profitability ...... 20 4.6. Liquidity ...... 22 5. Social responsibility and protection of citizens’ rights ...... 22 6. Conclusion ...... 23

2 Insurance Sector in Serbia – Annual Report 2018

List of abbreviations

mn million bn billion Q1 first quarter (1 January – 31 March) Q3 three quarters in one year (1 January – 30 September)

3 National Bank of Serbia

1. Introduction

According to law, the National Bank of Serbia (NBS) is entrusted with supervising the major part of the Serbian financial sector. At end-2018, the financial sector under the NBS’s supervision included 27 banks, 20 insurance undertakings, 17 financial lessors, seven voluntary pension funds, 12 payment institutions and one electronic money institution.

2. Activities of the National Bank of Serbia in 2018

Activities of the National Bank of Serbia in 2018 were focused on safeguarding the insurance sector’s stability, creating conditions for its further development, and strengthening the supervisory function with a view to protecting the insured, insurance beneficiaries and injured parties.

On-site examinations

In order to maintain insurance sector stability, the NBS carried out eleven on-site examinations in insurance area in 2018 (seven insurance undertakings, two insurance brokerage undertakings, one insurance agency undertaking and one bank), of which seven according to the plan and four ad hoc examinations. Based on the examinations carried out in 2018, including the procedures completed in late 2017, in which the supervisors identified non-compliance and irregularities in the operation of supervised entities, the NBS issued five decisions on corrective measures and imposed seven fines. Seven examinations were discontinued after the entities implemented supervisory measures or in cases where no non-compliance or irregularities were detected. In the examinations carried out in 2018 in insurance undertakings, the supervisors identified omissions in the performance of insurance business, i.e. in the set-up and operation of the governance system, undertakings’ market conduct and especially in their meeting of the obligation of providing transparent information to policyholders/insured persons, the sale of insurance services, application of insurance tariffs, as well as in the segment of profitability of operations, calculation of the insurance premium in accordance with the adopted tariffs, valuation of undertaking’s assets, accounting records of business changes etc. Based on the supervision of profitability of individual types of insurance, it was established that one undertaking operated with losses in carrying out its main insurance business – underwriting motor vehicles and “kasko’’ insurance, which had a bearing on its overall business result. It was found that such operations were the consequence of inadequately calculated insurance premium, as the undertaking lowered its tariffs to beat

4 Insurance Sector in Serbia – Annual Report 2018

competition in the market. In examination of insurance undertakings, the supervisors also focused on market conduct – compliant and fair sale practices and proper informing of clients about insurance services prior to concluding insurance contracts. In one undertaking the insurance supervisors carried out a follow-up examination of previously imposed measures and in another they detected insurance distribution via unauthorised sale channels; incomplete, insufficient and non-transparent informing when underwriting accident insurance for pupils and students; omissions in the implementation of business policy regulations (tariffs) when setting insurance premium; inadequate risk assumption and adjusting insurance to a child’s age; and other irregularities. The supervision of implementation of motor third party liability (MTPL) insurance tariff showed that one insurance undertaking calculated the insurance premium at the lower premium rate than initially determined, specifically in case of buses and special purpose vehicles. In supervising the operations of other entities (insurance brokerage and insurance agency activities), significant results were achieved in examining the insurance distribution channel through banks, which also directly helped to improve the sale of insurance in the form of services linked to banking products. Namely, on-site supervision of bank operations in the part of insurance agency activities showed that a certain number of banks offered insurance services to their clients and concluded insurance contracts in a non-transparent manner, especially in cases where the conclusion of an insurance contract was a precondition for a specific credit service. Supervisors also detected other practices: a bank carrying out insurance agency did not include insurance costs in calculation of the effective interest rate when insurance was used as collateral or as a hedge against credit risk; did not show insurance costs in credit documents; information for policyholders was in most cases presented with insufficiently clear and precise data about the insurance contract etc. With a view to protecting the rights and interests of insurance and banking service users, the NBS sent a letter to all banks carrying out insurance agency requiring that, prior to conclusion of an insurance contract, loan agreement and credit card agreement, consumers must be adequately informed, in a manner which will enable the average consumer to fully understand his rights and obligations arising from the insurance contract and its economic consequences, especially in cases where the conclusion of an insurance contract is a precondition for accessing a specific credit service. The supervisors further examined the distribution network of insurance agents and the sale of MTPL insurance, primarily via licensed dealers, where it found certain omissions. In examination of insurance brokerage activities, supervisors found no major irregularities in the supervised entities, except in the fulfilment of obligations under the Law on the Prevention of Money Laundering and Financing of Terrorism. On-site examinations of the set-up systems for money laundering and terrorism financing (ML/TF) risk management identified certain omissions in the alignment of

5 National Bank of Serbia

insurance undertakings’ obligations and internal regulations with the new Law on the Prevention of Money Laundering and Financing of Terrorism with regard to the customer due diligence procedure (checking whether the customer or beneficial owner is an official), meeting the legal obligation of reporting to the Anti-Money Laundering Administration regarding authorised persons and persons from top management responsible for the implementation of this law and data on the execution of suspicious transactions, organising periodic internal audit etc. In two cases, the supervised entities were fined. By carrying out targeted ad hoc on-site examinations, the Republic of Serbia fulfilled its