The Economy and the Insurance Industry in 2020
Quarantine measures caused a major decline in production, widespread unemployment and a sharp decline in confidence indices.
Global Economy
The Covid-19 outbreak started in China and rapidly spread across the entire world. Measures taken to counter the pandemic by countries around the globe ranked among the top agenda items during the first half of 2020. Social mobility was severely curtailed. Social isolation became the norm. Countries closed their borders and restricted activities in some sectors of the economy. This situation had serious effects on economies around the world. Quarantine measures caused a major decline in production, widespread unemployment and a sharp decline in confidence indices.
At the start of the year, international forecast institutions expected that the global economy would expand by 3% in 2020. These projections were revised downward to a 5% contraction following the outbreak. According to OECD Economic Outlook, Interim Report September 2020, global economic activity recovered faster compared to June estimates. While revising its 2020 contraction forecast up to 4.5%, OECD lowered its global growth forecast for 2021, from 5.2% positive growth down to 5%. Downward revisions were made in 2020 GDP estimates for India, Mexico, Argentina and South Africa, countries most affected by the pandemic in the recent period. However, expectations towards the US, European and Chinese economies have improved. In Fitch’s Global Economic Outlook Report for September, the global GDP contraction forecast for 2020 was lowered from 4.6% to 4.4%; meanwhile, growth projections for the next year were raised from 4.9% to 5.2%. Fitch lifted its 2020 expectations for the US and Chinese economies by pointing out that they outperformed June estimates. In contrast, Fitch expects the Eurozone and the UK to contract more sharply compared to the June forecast.
Significant financial stimulus measures were introduced globally to repair the damage inflicted by the coronavirus pandemic on employment, supply chains and production capacity. During the year, central banks of many countries reduced interest rates in hopes of softening the pandemic’s economic devastation on supply chains and production capacity. Nations around the world, including emerging markets, implemented asset purchase programs, liquidity support, lending and other economic assistance programs on an unprecedented scale for sectors and households affected by the pandemic. The Federal Reserve (Fed) announced that interest rates will be maintained at the current level until inflation exceeds its 2% target by a moderate amount for a specified period.
In Europe, it is not clear how relations with the UK will be managed post-Brexit, which is scheduled to be finalized at the end of 2020 according to the agreement between the European Union and the United Kingdom. Conflicts remain between the two parties on many issues, especially the future of trade relations and the issue of Northern Ireland. After the passage of the Internal Markets Bill, which violates certain clauses of the Brexit agreement signed between the parties, by the UK Parliament at the end of September, EU officials decided to commence legal action on the grounds that the agreement was violated. The bill in question is criticized for granting commercial power to British ministers over Northern Ireland, which was previously agreed to remain in the customs union under the Brexit agreement. As a result of these developments, the GBP/EUR exchange rate declined from 1.12 at the end of August to 1.10 at the end of September.
China dealt with the negative macroeconomic impacts of the outbreak relatively faster than other countries. Chinese industrial production rose in August. In addition, China recorded an increase in retail sales, although it was a modest rise of 0.5% on an annualized basis. Although investment expenditures in China declined by 0.3%, the pace of contraction slowed.
Gold prices started to rise sharply in March due to pandemic related concerns and a flight to safe investment options. However, gold prices remained mostly flat through the first half of September. The price of gold per ounce fell rapidly due to the appreciation of the US dollar and stood at 1,886 USD/ounce at end-September.
OPEC+ stated at its meeting that member countries do not have to comply with crude oil output cuts. Due to macroeconomic expectations falling short because of the pandemic, the high stock levels caused downward pressure on oil prices. While gold prices fell as a result of the appreciation of the US dollar in September, oil prices remained under pressure due to OPEC+ members’ failure to comply with production cuts and the ongoing weak macroeconomic outlook.
At the start of the year, international forecast institutions expected that the global economy would expand by 3% in 2020. These projections were revised downward to a 5% contraction following the outbreak.
At the start of the year, international forecast institutions expected that the global economy would expand by 3% in 2020. These projections were revised downward to a 5% contraction following the outbreak.
Turkey’s Economy
Negative expectations emerged for the global economy due to the onset of the epidemic in first quarter 2020. However, the economic outlook started to brighten toward the end of the year. OECD revised up its projection for the Turkish economy, from a 4.8% contraction to 2.9% negative growth for the year. In addition, OECD raised its 2021 growth estimate for Turkey from 3.9% to 4.3% positive growth.
According to TÜİK data, Turkey’s unemployment rate increased by 0.4 points on an annual basis to 13.4% in June. Meanwhile, the labor force participation rate decreased by 4.3 points to 49% in the same period. Based on seasonally adjusted data, industrial production rose 4.4% in June, compared to the same period of the previous year. In the same period, output fell in the mining and quarrying sector by 4.9%, while rising 5.1% in manufacturing and increasing 1.4% in electricity generation and distribution. Thanks to a rebound in consumer demand from the post-outbreak low, production of durable consumer goods jumped 19.2% in July.
Driven by a low interest rate environment and deferred demand, home sales posted a record-breaking increase in the latter half of 2020. Residential housing sales jumped 54.2% (170 thousand units) year-on-year in August. Mortgage sales accounted for 44.6% of total home sales. In the first eight months of the year, home sales increased 42.6% on an annual basis and totaled 1.02 million units. Mortgage sales skyrocketed by 263.7% to 473 thousand units, while other sales fell 6.3% to 551 thousand units in the same period. August also saw an increase in white goods sales in parallel with residential housing sales. In August 2020, domestic white goods sales went up 20.9%; meanwhile, white goods exports contracted 9.3%. Total white goods production expanded by 11.0% on an annual basis during the same period.
According to Automotive Manufacturers Association data, automotive production rose 44.3% in August due to robust domestic demand. In the same period, automotive exports contracted by 21.5% to 42,865 units.
According to foreign trade data published by the Ministry of Trade, Turkish exports rose 4.8% on an annualized basis to USD 16.1 billion in September; meanwhile, imports jumped 23.3%, to USD 20.9 billion. As a result, Turkey’s foreign trade deficit increased by 193%. The negative impact of the pandemic weighed heavily on exports and tourism. Gold imports fueled the increase in imports in the recent period. According to New Economy Program estimates announced at end-September, Turkey’s current account deficit is expected to amount to USD 24.4 billion by year-end 2020. At this level, the current account to GDP ratio will be -3.5% at year’s end, compared to 1.2% at the end of the previous year.
Insurance Industry
The insurance industry had a quite good year in 2020 despite the pandemic. Total premium production had realized as TL 82.6 billion with an increase of 19.3% when compared to previous year. Within the total, the premium production of non-life insurance was TL 68.1 billion with an increase of 17.7% and life insurance premium production was TL 14.4 billion with an increase of 27%. On the private pension side, continuing to write success story, the pension investment funds continued to grow without slowing down. As per 31st January 2021 data of Pension Monitoring Center, the number of whole participants exceeds 12.6 million in BES (Private Pension System) and Automatic Participation the overall size of the total fund reaches TL 170 billion with the contribution of the state. Furthermore, the increase of the awareness for insurance by our citizens attracted the attention of the investors into the industry. With the help of the trust ensured by the insurance companies, BIST Insurance Index listed in one of the best performing indices among other BIST Indices with a performance of 72% during 2020.
In 2020, the branch with highest premium produced was land vehicles liability branch with TL 20,487 million. In the motor vehicles branch which is including the comprehensive insurance a premium of TL 10,737 million, in disease health branch a premium of TL 10,009 million and in fire and natural disaster branch a premium of TL 10,585 million were generated.
When the branches other than life are examined one by one, it has been observed that disease/health, fire and natural disasters, and general losses branches which are among the branches with a market share more than 10% were effective in the increase of the growth rate of the industry. Of the said braches the recorded growth rates for disease/health, general losses and fire and natural disasters have been recorded as 20.79% (5.4% in real terms), 35.50% (18.23% in real terms), and 25.32% (9.35% in real terms) respectively when compared to the previous year.
Despite the growth seen in the insurance industry in 2020 in real terms, automotive insurances, which is the driving force of the industry has been contracted in real terms. Last year a growth rate of 8.64% was recorded for traffic insurance and 14.15% was recorded for comprehensive insurance due to the conditions of pandemic which has been effective in our country since March of last year. On the contrary the real premium production was recorded a decline of 5.2% in traffic branch and 0.39% in comprehensive insurance.