Ante Žigman: Liquidity and solvency of insurers could withstand even new shocks

The turbulent months-long period of the coronavirus crisis and lockdown of the economy has reflected on financial markets worldwide, shaking capital markets, the operations of insurance companies, investment and pension funds. The domestic financial market was further affected by the earthquake in Zagreb, which is why the Croatian Financial Services Supervisory Agency (Hanfa), which is responsible for the supervision of financial markets, financial services, and legal and natural persons providing these services, has played a significant role in recent times by implementing a series of measures that ensured the stability of the financial system.

However, the crisis has also highlighted the importance of good corporate governance, which includes quality risk management, care and responsibility towards all stakeholders in financial markets, and transparent operations. Therefore, one of Hanfa’s requirements was a call to issuers whose securities are listed on the Zagreb Stock Exchange to publish all relevant information regarding the impact of the COVID-19 pandemic on their operations, as it is extremely important for companies to timely and transparently disclose all important information during a crisis, in order to protect investors, but also to stabilize the market and maintain overall financial stability. We discussed this, as well as many other issues concerning the Croatian financial market, with Dr. Ante Žigman, the chairman of Hanfa’s Management Board, co-organizer of the 25th European Conference on Corporate Governance, which was held this week in Zagreb under the auspices of the Croatian presidency of the Council of the European Union on the topic of the future of corporate governance in the post-corona world.

How has the coronavirus crisis affected the financial industry in Croatia, what is the state of the fund and pension industry after the first wave of the epidemic, and what can be expected by the end of the year?

– We have behind us the consequences of the quarantine and the earthquake in Zagreb, which is a double blow that, along with shocks from all global markets, the domestic financial sector has faced stably and 'on its feet'. The difference between the last global financial crisis and the one we are facing today lies solely in the causes of the crisis and in the financial and economic conditions. The financial sector has coped well with the burden of the epidemiological crisis because it was not caused by it, and it also faced it well-capitalized. The current negative circumstances relatively mildly affect pension funds as long-term investors with an investment horizon of 30 to 40 years. Given the long-term nature of investments, we expect that the impact of market shocks during the investment period will neutralize when the market recovers. Open investment funds experienced a somewhat more severe impact on their assets when conservative investors significantly withdrew their funds in March. However, stronger exits ceased during April, the situation calmed down, with some types of funds recording a noticeable recovery due to repeated inflows and favorable market conditions positively reflecting on the value of the assets in which the funds invest. The fact is that our UCITS funds did not have significant problems regarding the redemption of shares in the most difficult weeks of the first wave of the epidemic, which positively reflected on investor confidence.

What measures has Hanfa taken to stabilize the financial market and what has been achieved?

– The role of the regulator in this crisis was significantly greater than in previous crises; our response in cooperation with the Croatian National Bank provided certain sectors with an easier and cheaper path to the necessary stronger liquidity. In addition to liquidity measures, we have also implemented a series of specific measures, some of which followed European regulators, while others are exclusively national measures. Croatia is one of nine EU countries that, along with other measures, has implemented a measure regarding the temporary ban on dividend payments for insurance companies and is among the countries with the highest number of measures for the insurance sector. Specifically for Croatia, we issued recommendations for the possibility of contracting a moratorium for existing leasing contracts, aware that certain parts of our economy, especially in tourism and transport, are significantly burdened by such financial obligations and were completely prevented from doing their business. Today, when we look back at the moment of the first signs of the crisis, we can understand how fragile the liquidity of the financial system can become overnight and trigger a series of negative chain reactions on the economy and the lives of citizens. And how important the interventions of both the regulator and the state are at that time. Croatia has had a large number of measures; those in parts supporting the economy are not as generous as in countries with large GDPs, but so far all have been effective, which is reflected in the financial sector’s first signs of stability.

One of the measures was the ban on dividend payments and the retention of profits by insurance companies to avoid jeopardizing their stability. What trends have been recorded? Has there been a noticeable decline in cash inflows, how could the crisis affect them, and is there a danger that the earthquake in Zagreb could shake insurers?

– Retaining dividends is a measure to further strengthen the stability of insurance companies’ operations and maintain the stability of the financial system. According to currently available data and analyses, the most likely scenario is a double blow to the balance sheets of insurance companies, characterized by a simultaneous decline in asset values and an increase in claims for compensation. However, considering the traditional business models of domestic companies and the relatively conservative investment structure, which is mostly in government bonds, the system still possesses sufficient liquidity and solvency reserves to withstand even unlikely but possible new shocks. Earthquake insurance according to the agreed premium amounts to less than 1.1 percent of the total gross premium charged for non-life insurance in 2019, so due to good capitalization and reinsurance, we do not expect that damages from earthquake insurance will jeopardize the solvency of insurers.

For more on how domestic pension funds have fared in the crisis and whether citizens can be calm about the future of their pensions, as well as why Dr. Žigman strongly opposed the idea of the so-called nationalization of the second pension pillar, read in the digital and printed edition of Lider.