The history of the insurance market in Latvia is not a long one. The state had the monopoly on insurance for more than half the century, and it was only in 1991 that the first private insurance companies were established. In the same year, the State Insurance Supervision Department was formed with the Ministry of Finance being the forerunner of the present State Insurance Supervision Inspectorate.

The first private insurance companies were formed in December 1991. Afterwards, the number of insurance companies increased even more. This process of increase in the number of insurance companies was similar to that of banks. It should also be noted that by summer 1993, the statutory capital of insurance companies stood at a mere LVL15,000. It led to the appearance of many small companies.

First licences were withdrawn in 1994, the main reason being the insolvency of the companies. Insolvency was basically caused by the fact that the companies carried out financial risk (credit, deposits) insurance. Another factor that led to the insolvency of some companies in 1995 was the bank crisis, when companies lost money deposited with the collapsing banks.

On August 24 1995, the Saeima confirmed the transitory regulations in the 'Law On Joint Stock Companies', which set out the following demands:

• by the submittance time for financial statements for 1995, the paid-up share capital of life insurance companies must not be less than LVL600,000;
• the paid-up share capital of other insurance companies should not be less than LVL300,000;
• further, by the submittance time for financial statements for 1996, the paid-up share capital should not be less than LVL1 million for life insurance companies and LVL500,000 for other insurance companies.

Consequently, several licences were withdrawn in 1996. As a result, there are no more 'sleeping' insurers in the market.

At present there are 30 insurance companies in Latvia, of which 21 are non-life insurance companies and nine are life insurance companies. According to the Law on Insurance, foreign insurers may provide insurance in Latvia only after they have established a new joint stock company. The only activity related to insurance for which it is not necessary to establish a joint stock company is reinsurance.

Of 30 insurance companies currently operating in Latvia, shareholders of four are foreign investors (holding 100 per cent shares); in the other four insurance companies, 50 per cent or more of shares are held by foreign investors.

Of four insurance companies in which 100 per cent shares are held by foreign investors, three are non-life insurance companies and one is a life insurance company. These companies have collected 4.3 per cent of written premiums (LVL 26.6 million) during nine months in 1996.

Of insurance companies in which foreign investors hold 50 per cent or more shares, three are non-life and one is a life insurance company. During nine months in 1996, these insurance companies had 42.2 per cent of all premiums and paid 41.7 per cent of all claims to be paid.

Today there is no doubt that insurance forms an essential part of the national economy and is subject to the supply-demand mechanism. The demand for insurance services is negatively affected by the low purchasing power of the population as well as lack of information concerning benefits that the insurance industry may offer to individuals and companies. Besides this, the trust in the insurance system has been damaged by the financial failure of several insurers, as well as some other factors (banking crisis, etc).

At the same time, the insurance market has increased greatly over this period of time. In 1995, insurers received 32.04 million Lats in premiums. This amount represents an increase of 76.9 per cent on the 1994 figure, compared to an inflation rate of 23.1 per cent. Consequently, the size of the insurance market is increasing. The percentage of insurance premiums as part of GDP is also slowly growing, even though it stays quite low - around one per cent.

During nine months this year, insurers have received insurance premiums totalling 26.6 million Lats: this exceeds the amount of premiums received in the previous year by 33.8 per cent.

The amount of claims paid by insurers have also increased. In 1995 it was 10.4 million Lats for all groups of insurance; in the first nine months of this year the amount of claims paid was 7.8 million Lats; compared to the previous year there is an increase of 18 per cent.

The proportion of life insurance in the insurance market in Latvia has decreased from 33 per cent of insurance premiums in 1993 to 20 per cent of insurance premiums during nine months in 1996, that is, 4 7. million LVL in 1993 and 5.4 million LVL during nine months in 1996. The total amount of insurance premiums has increased by 15 per cent. At the same time, the total amount of non-life premiums has increased by 109 per cent.

One of the reasons could be that right now in Latvia there are many newly-established companies. Their managers are not sure of the stability of these companies so they are not interested in concluding long-term life insurance and additional pension insurance contracts. This is proved by the ratio between group insurance and individual insurance contracts concluded during nine months in 1996. In total, 93 per cent of insurers have concluded individual contracts.

Pension insurance is facing a change. So far it has been a small proportion of life insurance (3.14 per cent of life insurance company premiums in 1995). At present a draft of the Law on Private Pension Funds has been submitted to the government for approval. It allows for formation of funds for pension payments in addition to state pensions.

These days, heads of companies are much more likely to insure the assets of their companies as well as liability.

The structure of the insurance market is changing. Insurers do not engage in risky insurance groups such as financial risk insurance. Competition in both price and quality of services is growing. Insurers are offering a wider range of services to their customers.

Up to 1993, insurance companies in Latvia insured mainly 'traditional' risks that were known since the Soviet times. Insurance of other risks had already appeared in 1994, the liability insurance being most important of all.

Even though the general public's attitude towards TPL insurance is negative, the number of policies sold to 'volunteers' is gradually growing. These changes prove that:

• as the choice of services offered by insurance companies grows, the size and quality of the market increases;
• competition is growing not only in respect of lower tariffs (this is quite dangerous and can lead to insolvency problems) but also in respect of the diversity and quality of services offered;
• customers are becoming aware of the fact that insurance does not necessarily mean insurance of property and one's life but also other services.

The proportion of non-life premiums in the insurance market in Latvia has increased from 10.2 milion LVL (67 per cent of the total amount of premiums) in 1993 to 21.3 million LVL (80 per cent of the total amount of premiums) during nine months in 1996.

72 per cent of this amount is insurance contracts concluded with legal entities. In the main, it is the assets of legal entities (32 per cent of premiums) and liability (35 per cent of premiums) that are insured.

Private individuals mostly insure their property (36 per cent of premiums) as well as health (26 per cent of premiums).

The payment of insurance claims in non-life insurance make up 19 per cent of premiums during nine months in 1996. By contrast, in 1993 this ratio was 69 per cent.

A total of 1.2 million LVL has been paid to legal entities, that is, 30 per cent of all claims paid. Most of it was payments for car damages - claims paid in road vehicle insurance to legal entities was 52 per cent of total claims paid. For private individuals, most claims have been paid in health insurance; during nine months in 1996, health insurance represented 37 per cent of all claims paid.

The increase in the proportion of health insurance in Latvia (0.2 per cent of insurance premiums, 0.2 per cent of claims paid in 1993 and 7.4 of insurance premiums, 25.7 per cent of claims paid during nine months in 1996) can be explained by the fact that this class of insurance used to be aimed at tourists, whereas now local people conclude such contracts within the framework of developing illness insurance funds.

The role of reinsurance in the Latvian insurance business is increasing. If in 1994 24 per cent of all gross premiums were transferred to reinsurers (100 per cent foreign reinsurers), then in 1995, reinsurers received 41 per cent of all gross premiums (80 per cent foreign insurers).

A stable interest in insurance services in Latvia can be observed. If in 1993 the amount of insurance premiums per inhabitant was 5.8LVL (12.3 per cent of the average salary in 1993), then at the end of 1995 the amount of insurance premium per inhabitant was 12.8LVL (13.1 per cent of the average salary in 1995). The importance of insurance in the economy of Latvia can be seen in detail in the table.

Attention is paid to investments of insurance companies, their changes, liquidity and structure. According to information held by the State Insurance Supervision Authority on October l 1996, funds are mainly kept with the financial institution accounts (25.3 per cent of all investments) and bank deposits (15.5 per cent of all investments). 84 per cent of all funds have been invested in Latvia, 0.9 per cent in the Baltic States, 3.3 per cent in the CIS, and 11.8 per cent in other countries.

The information of activities of insurance companies in Latvia is published every four months and is available to everybody. Hopefully, such data will be of use to readers as an Investment Guide in Central and Eastern Europe.