OREANDA-NEWS. There is a significant risk that some Turkish non-life insurers with high exposure to motor insurance have not set aside enough reserves to fully cover future claims, Fitch Ratings says.

Inadequate reserving would put further pressure on already slim solvency ratios and could lead to firms needing to strengthen their capital in 2016. For subsidiaries of large international groups this could be achieved by a capital injection from their parent. But smaller companies would struggle and this could drive more M&A in the sector.

Motor third-party liability (MTPL) claims reserves account for about 65% of the non-life sector total and the segment has been loss-making for each of the last ten years. The losses reflect inconsistent interpretation of regulations by the courts and the lack of an agreement between courts and insurers on how to calculate compensation.

Regulatory changes in the last couple of years have resulted in an increase in the overall level of required reserves. Since 2015 insurers have been allowed to set reserves based on their own actuarial estimates, which has resulted in significant variation in reserve levels across the industry. An increase in the minimum wage at the start of 2016 adds to the risk of inadequate reserving because death and disability compensation is directly linked to the minimum wage.

This will increase pressure on solvency ratios, which we expect to have been close to the 100% minimum on average in 2015 and which are likely to remain around the same level in 2016. There is a risk that some companies will dip below 100%.

Smaller local insurers with limited financial flexibility could struggle to close the reserve gap and this could lead to an increase in M&A activity. It may also increase the share of foreign capital, which was 72% in 2015.

In the medium-term, regulatory changes announced since the start of 2016 should help the sector gradually recover. Changes include a new standardised method for calculating compensation and rules that require claimants to file claims with insurers initially, rather than going directly to the courts. These should help insurers manage risk better through more accurate claims reserving and pricing, which should eventually improve underwriting results.