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The Actuary The magazine of the Institute & Faculty of Actuaries

Italian promise

The Faculty and Institute list of members shows only three fellows working in Italy compared with 11 in France, 13 in Germany, and 23 in Switzerland. This lack of attention was once justified by the underdeveloped state of the Italian life and pensions industry, but recent years have seen dramatic growth and change.
Life premium income increased by 90% over the past two years and at a compound annual rate of 22% over the 1990s, and this growth seems set to continue and has increased the attraction of Italy for UK insurers. CGU is the biggest locally established British company and became the fifth-biggest life company by premium income in 1998, helped by its bancassurance co-operation with Unicredito Italiano. The Prudential, which withdrew from Italy by selling its operation two years ago, has publicly stated its intention to re-enter, and a number of others are taking a keen interest.
Ten years ago the life sector was small, making up only 26% of the total insurance market and with life premiums as a percentage of GDP far below levels seen in other G7 economies. Life business involved mainly unexciting, traditional products such as endowments and deferred annuities; these contained high loadings and were purchased mainly to exploit tax breaks. A form of profit-sharing had been introduced, but not one that bears much resemblance to that used in the UK. It was a tariff market, with all companies selling identical products designed by actuarial professors for the companies’ association, ANIA. With the vast majority of assets invested in government bonds, there was little variation in bonus rates, and competition was only possible in the area of distribution.

There are three main distribution channels for life business in Italy: insurance agents, banks, and financial salesmen.
Agents are the main source of business for traditional insurers and generally sell both life and general insurance. Larger companies tend to have exclusive agents, while the newer players use multi-tied agents who have agreements with a number of companies; there is no real equivalent of the UK independent financial adviser.
Bancassurance started more slowly than in France and Spain, but is now the most important channel for life sales, accounting for 42% of premium income and a considerable percentage of new business in 1998. Bancassurers have mainly sold lower margin, simple, transparent single-premium products directly through their branch networks. In contrast to the situation in the UK and France, most bancassurance arrangements are still partnerships between banks and insurers, with both parties holding significant equity stakes.
The third channel, which accounts for 13% of the life market, consists of the networks of qualified financial salesmen who sell mutual funds, life insurance, and other financial products. Despite being structured in a similar way to UK direct sales forces and often exclusively tied, they effectively occupy the same market space as IFAs in the UK as the most effective advice-based channel.
Alternative channels such as direct marketing and telesales have had limited impact in general business and life. Some companies, such as the Allianz subsidiary, Genialloyd, are attempting to sell life business via the Internet. It is probably too early to judge the success of such ventures, but with the growth of
e-commerce it would be unwise to dismiss its potential.

Current market conditions
The life market has been gradually evolving and liberalising throughout the 1990s. Until 1993 up to 30% of all life premiums had to be ceded to the state reinsurer, but this arrangement contravened EU directives and ended, although the recapture of existing reinsurance positions has caused a major dispute between the companies and the government. The share of the market accounted for by bancassurers has steadily grown and this has led to lower margins and an increasing proportion of business being single premium.
A key turning point in the market’s evolution was the implementation of the Third EU Life Directive in 1995. The critical provision for Italy was that products did not require prior approval, effectively ending the tariff market. Things did not change overnight, as the established players had little incentive to move from the highly profitable market tariffs and invest in new product development. Smaller companies chasing market share came up with innovations such as smoker/non-smoker term assurance, but the effect of the new-found freedom on the whole market was limited.

Drivers of change
An important driver of change has been the sharp fall in bond yields accompanying European monetary union. Direct investment in government bonds had always been the main form of personal savings for Italians, but when bond yields fell from around 12% to only 4% in the space of a few years it created an opportunity for new products. Derivative-backed index-linked products proved extremely popular, as they combined the security of guarantees with exposure to equity growth. They were an important driver of growth in 1997 and 1998, but their lack of flexibility, and a setback when the regulator ISVAP ruled that they required a 4% solvency margin, has somewhat reduced their attractiveness.
The lower bond yields also started to make the margins on traditional products look commercially unsustainable as projected returns on policies became very low. Companies started to modify traditional products and look for alternatives permitting more investment in equities. The first unit-linked products were launched in 1996, but initially the impact was quite limited. From 1998 onwards unit-linked has been a major success, particularly for companies selling through banks and financial salesmen.

Pensions provision
The most important fundamental driver of growth has been the increased need for private pensions provision. Italy has had one of Europe’s most generous state pension systems and not by coincidence one of the largest government debts. In order to enter and stay in the EMU, Italy has had to cut back on state pensions and encourage private provision, although political opposition has slowed the process. Private pensions have taken a long time to get going but can now be expected to grow steadily, although insurers are competing directly with banks and cannot expect to achieve the margins they have been used to on life business.

Role of the actuary
The role of the actuary in an Italian life company has always been more limited than that of a UK counterpart. The actuary has been seen as a specialist who calculates mathematical reserves and performs a few other well-defined tasks. There have been few actuaries in senior life company management positions.
The end of the tariff market and the other changes in the operating environment have opened up new areas for Italian actuaries and new statutory responsibilities have been introduced in both life and general business. As well as product design, profit testing, and embedded values, there are opportunities for actuarial involvement in general business and in asset liability management. There is a new generation of Italian actuaries, keen to embrace new techniques and adapt them to local circumstances.
Asset liability management is underdeveloped in the Italian insurance market. Traditional products potentially present considerable risks, since they combine onerous long-term guarantees with guaranteed surrender values. This was looking like a serious problem when interest rates fell below 4%, the rate guaranteed on most in-force business, although the rise in bond yields in 1999 eased the situation. The regulator ISVAP reduced the maximum permitted guaranteed rate from 4% to 3% and then again to 2.5%.
Until recently all Italian actuaries were educated at either Rome or Trieste universities. Since Italians generally attend their local universities, this has meant that Italian actuaries are either Romans or Triestini, whereas half the companies are based in or around Milan, with the rest spread among various other cities including Bologna, Florence, Rome, Turin, Verona, and Trieste (where Generali has its headquarters). This means that the centres of the actuarial profession and insurance industry are different, which at times has created a shortage of actuaries in Milan. Courses have now started at Milan and Florence universities and this should make it a truly nationwide profession.

The future
New actuaries will certainly be needed. The future for the life market looks very promising, with further growth highly likely, but continuing change is certain and there will be many new challenges. Tax changes in 2000 will generally be beneficial, abolishing the 2.5% premium and significantly increasing the tax deductibility of premiums for certain types of business.
With Generali’s takeover of INA, the four largest life companies by 1998 premium income have become part of the same group. This helps to keep Generali within sight of the European giants such as Axa, Allianz, and Zurich, but it will also have a significant effect on the local market. Generali is bound to rationalise its operations and this will put pressure on the traditional players like Fondiaria, SAI, and Toro, which are now a long way behind Generali in size and do not have its international spread.
Bancassurers, including seven of the top ten companies, are subject to other competitive forces. They are streamlined organisations with much lower distribution costs, but depend on the customer franchise inherent in very costly bank branch networks. The banking sector has been very fragmented but is undergoing a period of dramatic consolidation, with a small number of national super-banks emerging, capable of competing on a European scale. Insurance is an important source of revenue for these banks and they are bound to look for ways to increase the profitability of their subsidiaries.
The market share of financial salesmen has stood still in recent years, but they appear to have an important role to play in the future as the main advice-based channel, particularly for up-market clients.
International companies will be attracted by the growth prospects. Allianz is the biggest foreign insurer and has invested heavily in the market, particularly through its subsidiary RAS; the Swiss companies Zurich and Wintherthur also have important businesses. The preferred entry route for new foreign insurers may be cross-border; this can give an opportunity to streamline processes and leverage existing scale. Dublin appears to be a particularly attractive location for trading cross-border into Italy and a number of players, including some major Italian banks, have been setting up subsidiaries in the International Financial Services Centre in Dublin. The going may prove tough for those without access to controlled distribution, since the independent distribution available is very limited.
The Italian market is bound to continue to change in the coming years and there are significant opportunities for UK actuaries to add value their training and experience gives them skills that are vital to the local market, but in extremely short supply.