Prospects for 2020
"It's getting increasingly difficult to forecast. For a number of years everyone expecting a recession to happen – something big, or a meltdown – kept on saying: 'it hasn’t happened this year, so maybe it will happen next year.' The doomsayers are now looking at 2020 this way, but I think we’ll see more of the same, a mixed picture for the economy overall. Starting from the two largest economies, the US and China – the trade war outcome is not yet decided. Presidential elections in the US have usually been a good thing for the economy; an incumbent president stimulates the economy to win votes, while a new president presents new policies which also boost the economy overall. The US is in reasonably good shape. China, however, is slowing, but the sheer size of its market suggests that there’s no big crisis expected there. Europe presents a mixed picture. There’s a pick-up visible in Germany, which had been slowing down, but then the last quarter was slightly up. Germany will adapt to changing conditions, it should show slight growth next year. France should do well, Italy less so. The big question is the UK and Brexit; our own estimates are that the UK economy will grow slightly.
"Poland’s growth will slow down, despite the government’s programmes to boost consumption such as 500+, 13th pensions and other handouts. These will initiate growing inflation above National Bank of Poland targets. The World Bank expects headline inflation to hit 3.5% by the end of 2020 – the highest of any advanced economy. Growth next year will be around 3%, not as high as this year. Plans to raise the minimum wage to 4,000 zlotys a month in 2023 will further increase inflationary dangers. So there will be some turbulence ahead in Poland, but no single trend. The world economy will grow but at a lower pace; there is no meltdown coming in 2020.
PPK first tranche – participation rate 'a worry'
The first tranche of Polish auto-enrolment schemes (PPK) has been implemented, covering all companies with over 250 employees. This takes in a total over three million employees, a big part of the Polish economy. Next year, PPKs will encompass firms employing between 50 and 250 people, and in 2021, it will be firms employing up to 50 people and smaller, so a few more million to come.
"There has been a fiercely fought battle between providers of PPK plans. It is a very competitive market, with prices of asset management fees well below the maximum allowed. But participation in PPK plans is a worry. Anecdotal evidence is that opt-outs are high, higher than either the government or the industry had expected. We thought around 30% of employees would opt out, but the reality is 50% or more. In the UK, Australia and New Zealand, opt-out rates are in single digits. But in Poland, there have been constant changes in the pension system over the past 20 years, which have led to a decline in trust. In particular the ‘disappearance’ of 51% of the second pillar assets from individual accounts to ZUS over five years ago, means that trust is low. There has been no massive effort from government or the pensions industry to educate at the local level. The overall sense of putting money away is met with scepticism among many Poles. The government and industry have been disappointed by the final amount of money in the system. People who’ve opted out can re-enlist at a later stage, but a concerted effort is needed, a media campaign involving government, the industry – and agents at the local level, of whom Aviva has over 2,000. The aim is to get employers to know how PPKs can benefit their employees. Otherwise when further tranches are rolled out, participation rates cannot be expected to rise. SMEs need convincing that this is something good for their employees; it's not an easy process, dealing with thousands of smaller employers.
"Aviva predominates in two segments – life insurance and asset management. We are also in the top ten in general insurance. Across life and general insurance, ranked by profit rather than premium, Aviva is a number two insurer in Poland after state-owned PZU. In asset management it is the second-biggest pension fund in Poland, and number five among mutual fund companies.
"Our impact on the economy is significant – Aviva’s companies in Poland employ over 5,000 people, as employees or agents, and Expander, Poland’s largest financial advisor, which is 100% owned by Aviva, brings the total to well over 6,000. Aviva is an investor through several vehicles, all local companies. It is the biggest pension-fund company, and the second-largest investor on the Warsaw Stock Exchange with significant stakes in the Top 100 listed companies, and with smaller stakes held by our mutual fund companies. Our assets across the group total more than 40 billion zlotys, most of which are invested in the WSE, so it’s a big boost to the WSE and in the Polish economy. Aviva also invests in Polish real estate through funds managed from London – mostly in retail malls, offices and other commercial properties, but also residential ones, such as Zlota 44, the prestigious building in the centre of Warsaw, where Aviva was a project investor. So we are significant overall in the Polish economy. We are a big investor in Polish government bonds – the biggest UK investor in the Polish market.
"Polish government bond yields have been going down as everywhere, but they have recently picked up, as inflation and yields go hand in hand. The government is not very active on the market, as the budget is close to balanced; there is one danger to the government’s issuance activity, and that is Poland’s carbon footprint. Poland has a poor reputation; the lion’s share of the Polish economy is still powered by coal; I do expect that institutional buyers of Polish government bonds from some markets will become increasingly demanding as to Poland’s green credentials. Poland has to take this seriously and address its energy balance in the economy.
"Local authorities' finances are in relatively good shape. Every zloty invested in infrastructure should have a multiplier effect. I am not afraid for them – local economies will be booming, increasing their tax base to pay off debt – I don’t see a crisis coming. But local authorities will have to find new ways to balance the books as there are tougher times ahead. We're living in an era of cheap credit; but cheap money will become less easily available. Plus the EU budget for the next seven years will be decided next year. There is likely to be significantly less earmarked for Poland than in 2013-2020, with money going south rather than east, and the UK no longer contributing to the budget. Reduced EU funding for local and regional projects in Poland may hurt the financial health of local authorities, but it's too early to forecast.
FinTechs' presence in insurance
"FinTech is a popular buzzword, but start-ups are still at the fringe of financial services. Their biggest impact has been in payments, PayPay, Revolut or Klarna, a Swedish start-up. These have had a marked impact on consumers and have forced banks to lower their fees. But so far in the world of insurance we have yet to see start-ups making a similar impact. Insurance is a very complex market, above all it has very demanding regulators, who are sceptical of start-ups' ability to handle underwriting and customer data responsibly. In particular, data privacy. Facebook’s attempt to launch its own cryptocurrency, Libra, would have turned the social-media giant into a money issuer – but regulators had serious doubts about the company’s credibility in data protection. Certainly, the big techs will make an impact in insurance, but not on their own. They will likely team up with established players just like Google with Citibank, Apple with Goldman Sachs, or Amazon with Travelers, they will offer aggregator services. None of them will become an insurer, but consumers will be able to buy insurance through them. The scale will affect the market. They will offer price comparison – their size and reach will help, but ultimately, they will remain intermediaries. We will see a lot of start-ups in niches; helping with data analysis, handling fraudulent claims, offering video inspection of damage.
"Innovation is about turning technology into a viable business. The next three to five years will cause huge disruption, changing the way we do business – but in the world of insurance, I see evolution rather than disruption of existing business models.
"Where the useful technology exists, we are piloting solutions. It's still quite expensive – but economies of scale are vital if it is to be affordable to the mass market. A water-leak detector that can close off water at the mains, for example. Sensors, cameras – these will cost a few hundred pounds per household, people are not happy for their premiums to increase, but this is the future, which will see far more tech in it than the way we do business today. One example is video inspections – you call the claims department through video, click on a link – connect the phone to the claims inspectors who will assess the damage in real time. Payments can be made quickly.
"Blockchain-based smart contracts also have a part in the FinTech future. Again, they are not very common yet in the insurance industry. One application that might quickly become popular is flight-delay insurance – this is easy to independently confirm. As soon as that happens – in real time – payment can be made, literally before your delayed flight has even touched down. But where data is not so easily obtained, it will not happen. Look at car insurance – Canadian police, for example, can make available to insurers their records of bad driving. In Poland, the police won't. I think that over time, the use of smart contracts in insurance will grow, as people’s trust in them will increase.