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03 August 2004
The prerequisite for a successful and efficient insurance sector is an adequate legal framework which regulates this area in a modern and precise manner. Serbia enacted a new Insurance Law on May 21 2004(1) (Official Journal of the Republic of Serbia 55/04), which replaces the previous Law on Insurance of Persons and Property (Official Journal of the Federal Republic of Yugoslavia 30/96, as amended in 57/98, 53/99 and 55/99), except for several provisions on mandatory insurance and delegation of public authority.
Insurance of Property and Individuals
Property and individuals in Serbia can be insured only by insurance companies (joint stock or mutual insurance companies) established under the new law. Exceptionally, property and individuals can be insured by foreign insurance companies, but only where:
An important innovation introduced in the new law is that foreign natural
and legal persons are no longer obliged to do business in Serbia through associations
with domestic legal persons (as was previously required); under the principle
of reciprocity, they can now establish insurance companies or invest in existing
companies (in which case the Law on Foreign Investments will apply). The only
requirement is that the insurance company must be founded by at least two legal
or natural persons. Foreign insurance companies' compliance with domestic law
is secured by the provision in Article 7 which requires that all insurance companies
be founded in accordance with the Insurance Law.
Types of Insurance
For the first time, the new law provides that insurance companies can deal
specifically in either life or non-life insurance, or reinsurance. For each
of these types of insurance, a special company must be formed. The distinction
between life and non-life insurance, and reinsurance, represents a step towards
harmonization with EU insurance legislation and requires companies to act in
accordance with EU guidelines.
The provisions on reinsurance remain essentially the same as in the previous law, despite criticism from the industry. As a result, all locally registered insurance companies must obtain reinsurance coverage above their self-retention with locally registered reinsurers. The possibility of reinsurance abroad exists, but only if the local insurance company cannot cover the risk surplus which exceeds its risk capacity with its assets, or by ceding it to a local reinsurance company engaged in active reinsurance. Foreign experts initially suggested that the new law should enable local insurance companies to reinsure their risk surplus with both local and foreign reinsurance companies. This solution would strengthen competition in the field and further the development of local reinsurance companies. Unfortunately, these suggestions were not incorporated into the new law and an opportunity to develop the Serbian reinsurance market was thus missed.
A controversial issue during the drafting process was the amount of initial capital required to establish insurance companies. This was increased by an average of 123% and now amounts to:
There are conflicting opinions on the new capital requirements. On the one hand, they should radically reduce the number of insurance companies operating in the Serbian market, which currently stands at between 36 and 40 (just six or seven companies are deemed sufficient to cater for the needs of the market). Thus, the less successful companies will have to regroup or shut down. It is the clear intention of the legislature to impose order in the field of insurance, which should be welcomed. On the other hand, however, the high capitalization requirements are unlikely to attract foreign investors, which will required to deposit a significant sum in order to commence insurance business, even though the overall business climate in which they will operate is far from satisfactory or stable. The legislature takes the view that high initial capital should guarantee that insurance companies will pay damages. Others, however, suggest that the amount of initial capital does not provide certainty in relation to damages payments. They base this argument on the fact that less onerous capital requirements are imposed in other EU countries, indicating that capital is not the sole criterion on which to assess the stability of an insurance company. Greater attention should be paid to the solvency margins, which are crucial to the long-term activities of insurance companies; the current margins are viewed as too low.
The procedure for establishing an insurance company is still lengthy and cumbersome. Numerous documents must be provided. The National Bank of Serbia (NBS) also has discretion to refuse to issue the necessary permit to perform insurance activities if the insurance company has no 'justification for establishment' - something which could prove problematic and may ultimately deter foreign investors from the market.
The new law has made the NBS the supervisory body which regulates insurance activities, dashing hopes that an independent agency would be created for this purpose. Insurance companies are obliged to provide the NBS with a wide array of information, reports and documentation through numerous bureaucratic procedures. The law affords the NBS extensive authority, such as the power to approve many internal decisions of insurance companies. There is undoubtedly a need for supervision of the insurance market, but it is arguable that granting such wide-ranging powers to the NBS may prove problematic. However, Minister Dinkic presented several arguments in favour of the delegation of supervision activities to the NBS. He stated that it would take considerable time and resources to create a new supervisory agency, and that supervision and control of the market would not be able to commence before the end of June 2005. The NSB has thus been appointed as supervisory body for practical reasons, as it has the necessary infrastructure and human resources to undertake regulatory oversight of the sector. Time will tell whether this is an appropriate solution.
The law provides for the creation of insurance intermediaries and
representatives as legal entities. Intermediation in insurance involves various
activities which bring together clients and insurance companies in order to
negotiate on the conclusion of an insurance contract. If an intermediary is
founded as a joint stock company, it must have an initial capital of at least
€25,000; if it is founded as a limited liability company, this amount stands
at €12,500. Only persons holding a special licence issued by the NBS can
perform intermediation activities. Foreign natural persons can also act as intermediaries
if they meet the conditions of the law of their home state and the principle
of reciprocity applies. The only restrictions are that intermediaries can only
act in relation to insurance business and must also have been authorized to
intermediate in reinsurance.
Both natural and legal persons can undertake representation activities on the basis of a representation contract. The initial capital requirements for companies are the same as those for intermediation, with one exception: representatives must always have the equivalent of at least €1,500 in Serbian dinars deposited in their bank accounts (Article 91). The reasoning behind this provision is difficult to establish, and it would be helpful if the legislature could provide clarification on this point.
Again, the administrative procedure for establishing companies which will undertake intermediation and representation activities is protracted and complex. The NBS similarly has extensive powers in relation to such companies, particularly with respect to the licences for intermediation and representation. These may be withdrawn if the NBS considers that the interests of the insured are 'endangered' - a broad formulation which may result in arbitrary decisions.
The new law provides that deposits and investments of financial assets abroad
are permitted up to a limit of 20% of the initial capital, subject to the approval
of the NBS. This provision will not take effect until January 1 2007. With regards
to foreign investments, it might have been more effective to set the limits
as a percentage of reserves, and the precise terms for NBS approval should be
defined in the law.
The privatization of insurance companies with socially owned capital was an
issue which generated considerable debate. The new law prescribes that the Privatization
Law will apply to the privatization of such insurance companies. The Ministry
of Finance will this have the power to commence privatization of such insurance
Insurance companies established under the old law are obliged to reorganize in accordance with the new law, and to harmonize their articles of association and other bylaws with its provisions within one year of its entry into force. They are also obliged to deposit the initial capital as required by the new law by the end of December 2005.
The main objective of the Insurance Law is to bring order to the field of insurance. The level of initial capital required for the foundation of insurance companies has increased substantially, the supervisory powers of the NBS have been strengthened and the interests of the insured are championed. However, the law often provides for cumbersome, lengthy and arbitrary administrative procedures, and the competence of the NBS is somewhat exaggerated. It is thus questionable whether this law will succeed in its ultimate goal of attracting foreign investment. A precondition for signing the Agreement on Stabilization and Association with the European Union is the free flow of services within Serbia and Montenegro. With the law's enactment, formerly unified services in the insurance sector have been formally divided. Time will tell whether the law will succeed despite its shortcomings, or whether it must be amended in order to develop the framework for strengthening and opening up this new market.
For further information on this topic please contact Patricia Gannon-Nikolic or Darko Jovanovic at Karanovic & Nikolic by telephone (+381 11 397 6114) or by fax (+381 11 397 6115) or by email (email@example.com or firstname.lastname@example.org).
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