Foreseeing a large-scale financial crisis is something that not many can claim genuine credit for. While some have insisted they knew all along that an economic downturn was on the horizon, there are only few examples of companies preparing for such a devastating event. There is no more obvious an example of a country burying its head in the sand than that of Cyprus.

While the Mediterranean island became a heaven for international investors over the last decade, successive governments during this period have been blamed for not updating the regulatory framework and curbing excessive spending in order to prepare for any eventual downturn.

The country’s insurance industry has seen steady growth for a number of years, but as with the rest of the economy, was badly affected by the financial crisis that struck in 2012. However, Trust Insurance Cyprus had the good foresight to take a cautious approach in the boom years leading up to the crisis.

World Finance spoke to Christos Christodoulou, the company’s CEO, about the long overdue reforms the country is undergoing, how the insurance market is growing, and why Trust Insurance Cyprus is set to play a leading role in its future.

The chance to start anew
When the crisis hit Cyprus in 2012, many of the country’s leading financial institutions faced a catastrophic collapse in the value of their assets.  However, such a scenario could have been avoided, if political leaders and heads of those financial institutions had not been so profligate during the preceding years.

As a result of the crisis and the €10bn bailout it received from the EU, the newly installed government has begun to implement a number of structural reforms to its economy. Christodoulou believes that things are likely to get worse before they get better, but sees this as an opportunity to learn from past mistakes.

Cypriots are hard-working people, the island still has very strong competitive advantages to offer as a service centre, we have bright minds and excellent professionals and I am sure at the end we will make it

“Cyprus is going through significant changes as a result of the latest bail in and public finance issues. We expect that the financial crisis will slow the economy, or even decrease it. Nevertheless we should take this as a challenge to correct some incongruities. After all it’s the right time to build some new solid foundations for our economy.”

He adds that the coming year is likely to show just how much more reform is needed.

“2014 will show how the economy will behave. If the economy behaves as expected and no more taxes will be implemented, I think we are looking at a couple more years of recession and then things will start to pick up again. If more drastic measures have to be taken, such as higher taxes, then it’s a different story.”

According to Christodoulou, when Cyprus gained EU membership in 2004, the government should have instigated sweeping reforms to the market to bring it in line with its European counterparts.

“These corrective measures are long overdue. In 2004, when we joined Europe, we should have had reforms. Cyprus had to compete in a new environment and the parliament failed to realise that changes were necessary. A small nation joining a big society of nations couldn’t just stay behind. However, we failed to do the necessary changes at the time and so the financial crisis was inevitable.”

He adds that the reforms – many of which are being pushed forward by outside forces – mean that finally the government can tackle issues like employment, which they would have previously been too scared to do.

“Now some third parties are coming in and forcing these changes, such as facing down the unions. Also, slowing down the pace of increasing staff costs, which was not related to productivity. No one has the political courage to connect staff costs to productivity.”

Despite the unprecedented financial situation the country is facing today, Christodoulou sees light at the end of the tunnel.

“Cypriots are hard-working people, the island still has very strong competitive advantages to offer as a service centre, we have bright minds and excellent professionals and I am sure at the end we will make it. And not only that but with the momentum of gas findings the Cyprus economy will flourish again in the years to come. It’s just that we have to make the cycle. The earlier we turn things the better. This is why Trust is investing, and will continue to invest in Cyprus. We believe in the island, and its people. After all we share some very important values and this cannot be ignored.”

Internationally-led productivity
Cyprus’s insurance industry has long been linked to that of the UK. When the country was granted independence from Britain in 1960, the market itself was operated from London for a number of years. However, since 1969, a local industry has sprung up and now there are around 30 insurance companies on the island.

“Awareness of insurance has increased and the level of services offered is higher. They are now comparable to the more developed European nations, like the UK. This is a drastic change in the insurance industry. The quality of service is very much comparable to other regions,” Christodoulou explains.

There is however, still an international presence. “A lot of international companies started here, and there are also a lot of companies owned by or affiliated with international groups, and that helps local companies to develop faster. In Cyprus, insurance accounts for between four and five percent of our GDP, whereas in other countries across Europe this figure is about nine percent. So there is room for development, and that is the reason why there is interest from international companies to set up in Cyprus.”

Although the rest of the economy has suffered a difficult 18 months, the insurance industry has had a less stormy time. Christodoulou says the growth rates have slowed, but only by between three and five percent. “We do not think this is significant. In fact, the insurance industry is steady.”

The industry however, is facing a number of reforms in the coming years, nonetheless the Solvency II rules. “The biggest challenge – even greater than the financial crisis – is Solvency II. A lot of companies have lost assets through the bail in, such as the drop in real estate prices and the shareholding in the banks. The likely consequence of the financial crisis is that companies that were preparing for the Solvency II capital requirement rules will now struggle to meet them, forcing a level of industry consolidation.

“The capital requirements of Solvency II will push a lot of the companies to merge. We expect to see over the next few years in the industry changes with regards to who the key players are. There will be a lot of consolidation. The industry has been preparing for the past three or four years for Solvency II. However, now with the financial crisis, I am not sure whether some companies will be facing worse problems, as a result of their assets decreasing.”

Covering a number of bases
Established in 1990, yet only starting domestic operations in Cyprus in 2009, Trust was relatively unscathed by the financial crisis because many of its assets were based abroad. Although the new regulations and the crisis have placed great pressure on the industry, Trust was well prepared for both.

“We have been preparing for the last four years. We have a risk management team preparing our procedures and the structure of the company so that is in line with Solvency II. Most of our assets were abroad, so we were not affected so much by the financial crisis in a way that would slow down the growth of the company.”

We see the financial crisis as an opportunity to grow and become a leader in the Cyprus insurance industry

In fact, the company sees the crisis positively, “We see the financial crisis as an opportunity to grow and become a leader in the Cyprus insurance industry. We’ve invested heavily in technology, we keep investing in our people and try to be innovative when it comes to products and services.”

Currently focused on the general, travel and health insurance sectors, Trust is increasingly signing up more corporate clients. This is seen as a huge opportunity because the banks that usually offered the services are scaling back their operations. Trust also hopes to enter the life insurance business in the future, says Christodoulou.

“However, we need to have a separate company to do that, so currently we’re looking in the market to see if there are any potential companies that we could buy or to start our own company.”

As part of the international Nest Group, Trust has a strong financial backer and broad network within the global insurance industry. They hope, however, to persuade Nest that Cyprus should be the hub of its global insurance operations.

“Our plan is to convince the Nest Group to consider Cyprus as their insurance centre. Nest owns eight insurance companies. We want to show that we have the know-how and expertise that can be transferred to other countries.”

Having the financial security that comes from being part of a recognised international group of insurance companies like the Nest Group means that Trust is able to court new customers with confidence.

“Currently in Cyprus, an insurance company has to be financially strong in order to inspire security to its customers. Trust is financially strong, as it is part of the global power of Nest Group. We are a financially sound organisation, unaffected by the economic crisis. We have convinced the market that we can sustain high growth rates, but at the same time be able to respond to how the market changes.

“At the same time, we offer innovative products and are trying to be unbeatable with regards to customer service. Day by day we are proving to customers that we are the next generation of insurers.”