C Risk Management and Insurance Review, 2008, Vol. 11, No. 2, 377-396

THE HUNGARIAN INSURANCE MARKET: ECONOMIC

TRANSITION IN THE INSURANCE SECTOR
Bertrand Venard
Martin Halek
Mark S. Dorfman

ABSTRACT
This article analyzes Hungary’s insurance sector as an important part of the
country’s economic transition from a centrally planned economy to a market
economy. It details the historic economic development of the Hungarian insur-
ance market from a state monopoly to a competitive insurance market where
foreign-owned insurance companies have a dominant market share.

INTRODUCTION
Former communist countries in Europe faced difficult choices over the past 15 years
as they moved from centrally planned economies to market economies. Without the
benefit of comparable transformations, some economists and politicians might have
believed the countries’ paths involved moving from one clear state to another. On the
contrary, a series of intermediate phases characterized the transformation pursued by

Bertrand Venard is Professor, Audencia School of Management, Research Fellow Financial Insti-
tution Center, Wharton Business School, 8, Route de la Joneliere, BP 31222, 44312, Nantes, Cedex
3, France; phone: 240-373-453; fax: 240-373-407; e-mail: bvenard@audencia.com. Martin Halek is
Assistant Professor, School of Business, University of Wisconsin, 975 University Avenue, Madi-
son, WI 53706; phone: 608-262-1848; fax: 608-265-4195; e-mail: mhalek@bus.wisc.edu. Mark S.
Dorfman, Retired Professor.1 This article was subject to double-blind peer review.
1
Our friend and distinguished colleague, Mark Dorfman, passed away in December 2006. This
article is one of the last he was working on and, hence, we would like to dedicate this work
to him. Mark’s expertise in the areas of risk management and insurance was well recognized
by his academic peers and insurance industry professionals worldwide. He was the author of
numerous research articles and a widely used academic text, Introduction to Risk Management
and Insurance, published by Prentice Hall. Mark also took on the responsibility of improving
our academic community as exemplified by serving as President of the American Risk and
Insurance Association from 1984 to 1985. Mark was always ready to help or give advice to
others, in particular younger faculty and graduate students. In the latter part of his career, Mark
helped train insurance executives and professionals in transitioning economies in order to aid
the countries’ insurance market transformations. Mark is sadly missed by all of us who were
fortunate enough to know him.
377
378 RISK MANAGEMENT AND INSURANCE REVIEW

these countries as they passed from a communist political and economic framework to
a market economy.
The Hungarian transformation provides an interesting case for analysis because of its
relative success. First, the wealth of the country has increased significantly since the fall
of communism. From 1991 to 2005, Hungary’s gross domestic product (GDP) in U.S.
dollars increased three-fold. Second, in 1996, Hungary was recognized as a developed
country by the Organisation for Economic Co-operation and Development (OECD) and
then permitted into the European Union in May 2004. Acceptance to both organizations
reflects Hungary’s recent economic and political progression. Finally, the creation of an
adequate legal system, an ambitious privatization program, and a developed financial
services industry have all encouraged private initiatives and attracted more than 40
billion euros of foreign direct investment (FDI) stock. In fact, FDI equaled approximately
50 percent of Hungary’s GDP in 2004 (ME, 2005).
This analysis focuses on the Hungarian insurance sector as one part of Hungary’s suc-
cessful economic transition and integration from a centrally planned economy to a
market economy. The transition of the Hungarian insurance market presents a thought-
provoking case of revolutionary change from a bureaucratic monopoly with inefficient
performance to a competitive, albeit oligopolistic, insurance market.
The article is divided into five sections. The first section describes Hungary’s economic
background. The second section focuses on the history of the insurance market. The third
section discusses the life and the nonlife sectors of the Hungarian insurance market. The
fourth section presents the integration process of the Hungarian market with a focus on
regulatory issues. The fifth section concludes the article.

ECONOMIC BACKGROUND
This section of the article presents background needed to understand the complex and
severe problems that many of the former communist countries faced in developing
private insurance markets. A description of postcommunist economic challenges is
followed by a detailed analysis of Hungary’s economic environment since World War
II. Finally, recent economic indicators are presented showing a stabilizing Hungarian
economy since the turn of the century.
Each of the former communist countries had a different political and economic history,
leading to differences in starting points of economic transformation (Kornai, 1980). For
example, even during the central communist planning period, Hungary was allowed
some latitude in its economic development that was more liberal (approaching a non-
planned market in some limited ways) than other Soviet-bloc countries.2 When the
communists were in power, communist countries in Eastern Europe, such as Hungary,
Czechoslovakia, and Poland, attained different levels of economic development as their
respective national wealth varied significantly (Lavigne, 1999). These significant dif-
ferences did not allow for much standardized transition among the countries during
the subsequent fall of communism in Central and Eastern Europe. Countries varied in
regards to the pace and level of introducing eventual market economy reforms.

2
This overall economic head start may help explain the relative speed of transformation of the
Hungarian insurance sector.
 THE HUNGARIAN INSURANCE MARKET 379

At the beginning of the twentieth century, Hungary, which was then part of the Austrian–
Hungarian Empire, had one of the highest GDPs per capita in all of Europe. In 1948,
following World War II, communists took power in Hungary, and the new government
immediately took control of the economy. The communist economic system was centered
on a series of both annual and long-range economic development plans with an emphasis
on industrialization, particularly the development of heavy industry. These plans were
not well matched with Hungary’s resources and capabilities since Hungary’s existing
economy was primarily agricultural, and during the war Hungary’s industrial assets
were severely damaged. Thus, new industries were not able to meet the government’s
high production goals. The mismatch of central plans and Hungary’s natural assets was
typical of Stalin’s concept of making various countries of the Soviet empire dependent
on each other with no country being self-sufficient. The lack of attention in providing
consumer goods was also typical of this era. The overall goal appears to have been po-
litical control rather than economic efficiency. Because Hungary’s economic goals were
never achieved, in the late 1950s and early 1960s the Hungarian government readjusted
its plans. The communists were forced to adopt a certain level of economic pragma-
tism by placing more emphasis on agriculture and the manufacturing of consumer
goods.
Economic transformation slowly began in the 1960s and accelerated in the 1980s (Kornai,
1980). In 1968, the government introduced an economic reform program known as the
New Economic Mechanism (NEM), which allowed limited decentralization of the econ-
omy. Initially, the NEM was considered a success. The production of consumer goods
rose and Hungarians experienced an increase in their standard of living. However, there
were debates regarding the scale of this economic liberalization, with strong opposition
coming from the Soviet Union. The NEM ultimately ended in the 1980s.
As their economy declined through the 1980s, Hungary began turning to Western nations
for trade and economic assistance. Because the Soviet Union was not able to meet the
demands for assistance to its satellite countries, the Hungarian government began to
encourage the formation of private businesses within its borders as well as partnerships
with foreign companies. These reforms were slow at first, but when noncommunists
came to power in 1990 the country accelerated the pace of market economy reforms.
Hungary was among the more ambitious of the former communist countries in this area
as evidenced by its widespread privatization program in which numerous state-owned
companies were transferred to private ownership. For example, legal banking reforms
in Hungary were more dramatic than in many other transition countries (Neyapti and
Dincer, 2005).3 When socialists gained a majority in the Hungarian parliament in 1994,
the pace of privatization and economic reforms slowed. However, in May 1995 the
government passed legislation to accelerate the sale of government-owned enterprises
such as public utilities and a number of major industries including steel and electricity.
Fixed prices, protective trade, and governmental subsidies disappeared as well.

3
One particular noteworthy case is that of the former principal Hungarian bank, Bank OTP.
It transformed from a state-owned bank to a private bank in 1992. A sign of Bank OTP’s
successful transformation was the rapid international expansion of its activities. Bank OTP
created subsidiaries in various regional countries, such as Slovakia, Bulgaria, and Romania.
It eventually had only a 23 percent share of the Hungarian banking market in 2003 (Mission
Economique (ME), 2004b).
380 RISK MANAGEMENT AND INSURANCE REVIEW

FIGURE 1
GDP per Capita and Current Account for Hungary (1991–2005)

Source: Axco Global Statistics: International Financial Statistics produced by the International
Monetary Fund.
Note: The difference between Hungary’s total export of goods, services, and transfers and its total
imports. This calculation excludes transactions in financial assets and liabilities.

The Hungarian economy recovered from both the difficult first steps of transition, which
caused some economic contraction of output, and from the 1998 financial crisis in Russia.
Since the early 1990s, Hungary has sustained impressive economic growth as evidenced
by the economic indicators reflected in Figures 1 and 2. Figure 1 shows that from 1991
to 2005, Hungary’s GDP per capita, as measured in U.S. dollars, has more than tripled.
The same figure also reveals that Hungary’s imports have exceeded its exports in all but
the first 2 years of the same time period. In the most recent years, the difference between
exports and imports has grown. Figure 2 shows that Hungary’s real GDP growth has
averaged about 4 percent per year since 1997. Annual inflation and unemployment rates
have decreased dramatically since the early and mid 1990s. Finally, in 2005, Hungary’s
inflation was 3.5 percent and its unemployment rate was just over 7 percent. Since the
turn of the century, it appears that Hungary’s economy has stabilized relative to the
prior decade.

HISTORY OF THE HUNGARIAN INSURANCE MARKET: A MARKET IN TRANSITION

Before the communists came to power, over 50 insurance companies operated in Hun-
gary. During the communist era, one state insurance entity administered all insurance
transactions for the country. This Hungarian insurance monopoly was abandoned in
July 1986, and Hungary was the first former centrally planned economy to allow com-
petition among insurance companies. At that time, the Hungarian government also
implemented a directive establishing the framework for insurance regulation for the
country’s new competitive market.
 THE HUNGARIAN INSURANCE MARKET 381

FIGURE 2
Historic Economic Indicators for Hungary (1991–2005)

Source: Axco Global Statistics: International Financial Statistics produced by the International
Monetary Fund.

Dorfman and Ennsfellner (2001) reached the following conclusions regarding the success
of Hungary’s insurance market transformation:

Because it had a “running start” and was liberal in its attitude toward foreign cap-
ital, Hungary is the clear leader in the transition process. . . . While its market for
insurance remains concentrated, the dominant insurers are not state owned. Foreign
insurers have been consistent in providing training at their home offices for Hungar-
ian managers, and in sending managers to Budapest. The appearance in Budapest of
international risk management and brokerage firms has quickened the move toward
Western-style competitive underwriting. The cooperative relationship between insur-
ers and the state supervisory office has facilitated the implementation of an insurance
code that is almost in compliance with most EU standards.

As Dorfman and Ennsfellner noted, Hungary took two critical steps in the transforma-
tion of its insurance market. First, in 1986, the Hungarian government split the state
insurance monopoly into two companies. By 1988, Hungarian Biztosito and AB shared
the entire Hungarian market where Hungarian Biztosito specialized in nonlife insurance
products and AB specialized in life products. As a second step, in 1989 the Hungarian
government issued insurance company licenses, primarily to foreign companies. Ini-
tially, foreign companies had to be associated with a local partner in such a way that
the local partner controlled the majority of the partnership’s business. This restric-
tion was abolished in 1990. With the market completely liberalized, foreign companies
were able to conduct their business in Hungary without domestic capital ownership
382 RISK MANAGEMENT AND INSURANCE REVIEW

restrictions. Consequently, Hungarian Biztosito was bought by Allianz in 1990 and AB

was purchased by the Dutch group Aegon in 1992. Hence, the Hungarian insurance
market transformed from a monopoly to a duopoly, and then into an oligopoly between
1986 and 1990. Since 1990, the Hungarian insurance market has continued to grow from
a single state-owned monopoly to a market containing multiple insurance companies,
both domestic and foreign owned.
By 2003, 25 stock insurance companies and 36 mutual societies existed in Hungary
(MABISZ, 2004). Despite the gradual increase in the number of insurance compa-
nies and the loss of market share by the former communist monopoly through the
1990s, the presence of the former state monopoly was still felt as its market share re-
mained significant. In 2003, the former nonlife, state-owned insurer still maintained
the highest market share of 42 percent of the nonlife market based on premiums
(54 percent of the nonlife market in 2000). Also in 2003, the former life, state-owned
insurer maintained only a market share of 28 percent of the life market (MABISZ,
2004).
The Hungarian insurance market remains quite concentrated because of the significant
market share owned by the largest companies. The top five insurance companies (life
and nonlife combined) had a total market share of 84 percent in 2000 and 78 percent in
2003 (ME, 2004c). The concentration is more pronounced in the nonlife insurance market
than in the life insurance market. As a comparison to more competitive environments,
consider similar statistics for the United States and France. The top five nonlife insurers
account for 34.1 percent of the U.S. market and 38.9 percent of the French market based
on direct premiums written in 2003. For the life and health insurance market, the top
five insurers account for 25.3 percent of the U.S. market, and 43.3 percent of the French
market (Cummins and Venard, 2007).
Table 1 displays life and nonlife premiums per insurance company in Hungary in 2003.
The dominant insurers are not the same in the different sectors of the Hungarian insur-
ance market. As shown in Table 1, the largest nonlife insurance company was Allianz
with a nonlife market share of 41.65 percent. Comparatively, the largest nonlife insur-
ance company had a market share of 6.8 percent in the United States and 11 percent
in France in 2003 (Cummins and Venard, 2007). The largest life insurance company in
Hungary was ING with a life market share of 27.98 percent. Comparatively, the largest
life insurance company had a market share of 11.7 percent in the U.S. and 10.8 percent
in France in 2003 (Cummins and Venard, 2007).
Market concentration can also increase with mergers and acquisitions of insurance com-
panies. In 1999, Generali merged with Providencia to create the second largest insur-
ance company in the Hungarian market. Table 1 shows Generali-Providencia had a
market share of 11.94 percent of the life market and 20.21 percent of the nonlife in-
surance market in 2003. Even with a relatively concentrated market and the residual
presence of the former Hungarian state monopoly insurers, the transition and trans-
formation of the Hungarian insurance market has been accomplished by increased
competition.
One characteristic of the former communist countries was the small amount of insurance
purchased by individuals and businesses (Swiss Re, 1995, 2001). This resulted from the
absence of private property, the government ownership of factories and transportation
TABLE 1
Life and Nonlife Premiums per Insurance Company in Hungary (2003)

Cumulative Life Nonlife

Market Market Premiums Premiums Premiums Percent Life Country of
Company Share Share (HUF M) (HUF M) (HUF M) Activities Domicile

Allianz Hungaria 27.91 27.91 156,152 16,673 139,479 11% Germany

Generali-Providencia 16.88 44.79 94,469 26,796 67,674 28% Italy
ING 11.22 56.01 62,829 62,829 0 100% Netherlands
AEGON Hungary 10.98 66.99 61,466 36,940 24,527 60% Netherlands
OTP Garancia 10.93 77.92 61,136 29,026 32,110 47% Hungary
UNIQA (AXA) 5.11 83.03 28,561 6,639 21,922 23% Austria
Argosz 2.51 85.54 14,021 47 13,974 0% Belgium
Europa 1.95 87.49 10,887 841 10,046 8% France
AHICO 1.93 89.42 10,816 5,024 5,791 46% USA
Signal 1.59 91.01 8,874 7,073 1,801 80% Germany
QBE Atlasz 1.07 92.08 6,010 213 5,796 4% Australia
AVIVA 0.97 93.05 5,429 5,429 0 100% U.K.
Union 0.97 94.02 5,419 3,864 1,555 71% Austria
Crédit Suisse L&P 0.94 94.96 5,231 4,455 776 85% Switzerland
Dimenzio 0.79 95.75 4,447 4,447 0 100% Hungary
KOBE 0.79 96.54 4,410 0 4,410 0% Hungary
MPE Hungarian postlife 0.79 97.33 4,399 4,399 0 100% Hungary
Grawe 0.72 98.05 4,043 4,043 0 100% Austria
K&H life 0.68 98.73 3,790 3,790 0 100% Hungary

(continued)
THE HUNGARIAN INSURANCE MARKET 383
TABLE 1
(Continued)
384 RISK MANAGEMENT

Cumulative Life Nonlife

Market Market Premiums Premiums Premiums Percent Life Country of
Company Share Share (HUF M) (HUF M) (HUF M) Activities Domicile

Erste 0.36 99.09 1,987 1,987 0 100% Austria

AND INSURANCE

European Travel 0.31 99.40 1,751 0 1,751 0% Italy

Euler Hermes 0.23 99.63 1,297 0 1,297 0% Germany
REVIEW

MEHIB 0.09 99.72 477 0 477 0% Hungary

TIR 0.09 99.81 508 0 508 0% Hungary
MAV 0.08 99.89 460 0 460 0% Hungary
Agrupacion Funeuropa 0.05 99.94 267 0 267 0% Spain
MP Hungarian Post 0.03 99.97 144 0 144 0% Hungary
D.A.S. 0.02 99.99 95 0 95 0% Germany
Arag 0.01 100.00 60 0 60 0% Austria
Total 100.00 559,435 224,515 334,920 40%

Source: Hungarian Insurance Companies 2004 Yearbook, Budapest, MABISZ.

 THE HUNGARIAN INSURANCE MARKET 385

FIGURE 3
Premiums Written—Hungary (1991–2005)

Source: Axco Global Statistics: The source of the statistics is Hungarian Financial Supervisory
Authority (PSZAF) and the Association of Hungarian Insurance Companies (MABISZ).

facilities, and the broad based social “insurance” program that made the purchase of
life and health insurance unnecessary. The postcommunist period has, as expected,
produced a sizable development of the insurance market in both commercial and per-
sonal lines. Figure 3 shows the historic development of total life and nonlife written
premiums in Hungary. In the aggregate, the amount of written premiums increased
by over 400 percent between 1991 and 2005, as measured in U.S. dollars. Aggregate
insurance premiums measured as a percentage of Hungary’s GDP also increased. In
the early 1990s, this ratio was just over 2 percent, but in recent years has averaged just
under 3 percent. In addition, the density ratio (premiums per capita) increased from
just under US$80 in 1991 to about US$336 in 2005. Figure 4 shows the historic devel-
opment of the density ratio in Hungary. Finally, since 1993, the annual growth rate for
the insurance market’s aggregate written premiums averaged just below 13 percent.
This latter growth rate exceeded corresponding real GDP growth rates and inflation
rates.
Since disposable income was relatively low in communist countries, demand for life
insurance, particularly contracts with significant savings value, was small. During the
economic transition, the life business experienced tremendous growth. The life sector
accounted for only about 24 percent of the entire Hungarian insurance market in 1993,
but in 2003, this increased to 40 percent based on written premiums as shown in Table 2.
At 40 percent, the Hungarian life sector share is equivalent to the average of the 10-EU
members, but is less than the relative life sector share of the 15-EU members, which was
386 RISK MANAGEMENT AND INSURANCE REVIEW

FIGURE 4
Premiums per Capita—Hungary (1991–2005)

Source: Axco Global Statistics: The source of the statistics is Hungarian Financial Supervisory
Authority (PSZAF) and the Association of Hungarian Insurance Companies (MABISZ).

at 62.7 percent in 2003 (ME, 2004c).4 Given this significant growth, Hungary along with
Poland, Slovenia, and the Czech Republic, are the most promising insurance markets in
Central and Eastern Europe. In fact, these four countries represent 60 percent of the total
insurance premiums of this part of Europe where markets tend to be extremely dynamic
(Swiss Re, 2001, p. 10).
While Hungary’s economic transition has overall yielded positive results in the insur-
ance sector, it has also experienced sluggishness (Andreff in Venard, 2001). Some may
logically argue that Hungary’s insurance market still falls significantly short of other Eu-
ropean countries. The macroeconomic importance of insurance, calculated by the ratio
of premiums to GDP, is one-third smaller for Hungary than for most countries of 15-EU.
Insurance premiums reached 2.84 percent of GDP in Hungary in 2000 and 3.08 percent
of GDP in 2005, but averaged 8 percent of GDP for countries in the European Union and
8.4 percent for OECD members (ME, 2001). Figure 5 shows the evolution of this ratio in
Hungary.
A dubious characteristic of transition economies has been the generally inefficient per-
formance of state-owned firms relative to privately held firms. State monopolies in the
communist system were not known for their efficiency and state insurance monopolies
were no exception. The Hungarian case presents an interesting example of a transition

4
15-EU is the acronym for the 15 member countries of the European Union before May 1, 2004.
10-EU is the acronym for the ten new countries accepted into the European Union in 2004.
 THE HUNGARIAN INSURANCE MARKET 387

TABLE 2
Main Insurance Products in Hungary (2003)

Type of Insurance Product Premiums (HUF M) Market Share

Life insurance 224,515 40.13

Nonlife insurance including 334,920 59.87
Car 185,470 33.15
General liability 14,358 2.57
Household property insurance 49,565 8.86
Insurance for entrepreneurs 39,393 7.04
Agricultural insurance 19,882 3.55
Other nonlife 26,252 4.69
Total life and nonlife 559,435 100.00

Source: Hungarian Insurance Companies 2004 Yearbook, Budapest, MABISZ.

FIGURE 5
Premiums as Percent GDP—Hungary (1991–2005)

Source: Axco Global Statistics: The source of the statistics is Hungarian Financial Supervisory
Authority (PSZAF) and the Association of Hungarian Insurance Companies (MABISZ).

from a bureaucratic monopoly with inefficient performance to an oligopoly, and then

on to the current environment with many foreign companies seeking a competitive
advantage in a market economy. Insurers in Hungary are currently facing fierce com-
petition to preserve market shares and are involved in major organizational changes to
improve their efficiency. Some insurance companies have increased their efficiency by
388 RISK MANAGEMENT AND INSURANCE REVIEW

outsourcing components of their production and services. Facing an increase in social

labor costs, insurers outsourced various services in an effort to minimize the impact
of these increased costs.5 For example, some companies restructured their distribution
channels. In these cases salaried insurance vendors were asked to become private en-
trepreneurs. The change of status removed the direct social labor costs for the insurers,
but it is likely these costs were embedded in agency relationships. In general, Hungarian
insurance agents are usually exclusive agents, linked only to one company and paid by
commission (a percent of the premiums).
Hungarian insurers have also attempted to improve performance by reducing fixed
costs, such as office expenses and administrative employee expenses. As an example,
ING, the leader of the life insurance market, had only 230 home office employees,
but 1,803 independent agents in 2003. Therefore, its ratio of vendor to administrative
personnel was 7.8 (MABISZ, 2004). Because increased competition among insurers in the
Hungarian market should continue, competing insurance companies will also continue
finding ways to reduce their costs.

LIFE AND NONLIFE INSURANCE MARKETS

The individual life insurance market in Hungary grew considerably from 1991 to 2005.
Written life premiums increased from US$238 million to just under US$1.5 billion, while
written life premiums per capita increased from US$23 to US$151. These increases
outpaced real growth over the same period as measured by real GDP growth rates.
As a percentage of GDP, life premiums grew from about 0.5 percent in the early 1990s
to 1.39 percent in 2005.
There are many unique individual life insurance products currently offered in the Hun-
garian insurance market. Since 1996 the Hungarian Financial Supervisory Authority
(PSZAF) and the Association of Hungarian Insurance Companies (MABISZ) have re-
ported statistics for the following seven subclasses of individual life insurance prod-
ucts: individual annuities, individual combined life, individual endowment, individual
marriage and birth, individual other, individual unit linked and individual whole life.
Individual combined life and individual unit linked products have accounted for the
majority of the written premiums in the life insurance market. In 2004, written premi-
ums for individual combined life were US$657 million, or 56 percent of the entire life
insurance market. Similarly, in 2004, written premiums for individual unit linked prod-
ucts were US$429 million, or 36 percent of the entire life insurance market (MABISZ,
2004).
The nonlife insurance market in Hungary also grew considerably from 1991 to 2005.
Written nonlife premiums increased from US$579 million to US$1.85 billion, while writ-
ten nonlife premiums per capita increased from US$56 to US$185. Again, these increases
outpaced real growth over the same period as measured by real GDP growth rates. As
a percent of GDP, nonlife premiums did not grow as much as life premiums. Nonlife
premiums as a percentage of GDP were about 1.55 percent in the early 1990s and 1.69
percent in 2005.

5
Here, social labor costs refer to payment by employers of various social insurance expenses
such as pension benefits or health benefits for retirees.
 THE HUNGARIAN INSURANCE MARKET 389

Insurance statistics were reported for the following subclasses of nonlife insurance prod-
ucts: general third party liability, marine, aviation and transit, motor, property, surety,
bonds and credit, and miscellaneous (balancing items, funeral, legal protection, and
various financial losses). Similar to other privatized insurance markets, motor insurance
and property insurance have comprised the majority of Hungary’s nonlife insurance
market since 1991. Motor insurance includes compulsory automobile liability insurance
and voluntary motor “Casco” insurance.6 Property insurance includes fire and natural
hazards insurance, business owners insurance, commercial/industry insurance, crop
insurance, livestock insurance, homeowners insurance, and “other” property insurance.
From 2000 to 2004, premiums per capita more than doubled for both motor and property
insurance. In 2004, written premiums for all forms of motor insurance totaled US$982
million, or 60 percent of the entire nonlife market. Similarly, in 2004, written premiums
from all forms of property insurance totaled US$522 million, or 32 percent of the entire
nonlife market. Paid claims have also increased dramatically for motor and property
insurance in the last several years. In the aggregate for motor insurance, paid claims
increased steadily from US$265 million in 2000 to US$575 million in 2004. For property
insurance, paid claims increased from US$97 million in 2000 to US$176 million in 2004;
however, the marginal increases were not as linear as with motor insurance. Although
none of the other subclasses of nonlife insurance accounted for a significant percentage
of the overall market from 1991 to 2004, aggregate written premiums for general third
party liability insurance more than doubled from 2000 to 2004.

AN EMERGING MARKET IN THE INTEGRATION PHASE

After approximately 15 years of transformation, Hungary is far removed from a com-
munist centrally planned economy. Some authors have even argued that the transition
process is complete (Kornai in Brown, 1999). Hungary has evolved into a dynamic
country attempting to integrate itself within the global economy.
After the communist era, Hungarian leaders focused on the development of their country
and acceptance into the European Union. Every successive Hungarian government since
1989 had one main goal: entry into the European Union. In December 1997, Hungary
was chosen as one of the countries to begin fast-track negotiations to join the European
Union. By 1997, the country largely achieved harmonization with many E.U. standards
(European Commission, 1999). As evidence of its progress, Hungary along with Cyprus,
Estonia, Latvia, Lithuania, Malta, Poland, the Czech Republic, Slovakia, and Slovenia
became EU members on May 1, 2004. Table 3 reflects the status of eligibility for EU
membership for many of these Eastern European countries.
A clear sign of Hungary’s global economic integration has been the significant develop-
ment of attracting foreign investment. By 1993, Hungary accounted for more than half
of all direct foreign investment in Eastern Europe. Between 1990 and the end of 2003,
Hungary’s FDI stock reached 37.9 billion euros, which was the second highest among
all the central European countries. Only Poland’s FDI stock was higher at 64.3 billion

6
Casco insurance is similar to collision and other-than-collision automobile insurance found in
the United States in that it covers damage to an insured’s own motor vehicle regardless of
fault. Covered perils include traffic accidents, fire, explosion, malicious acts of third parties, and
damage from falling or blown objects.
390 RISK MANAGEMENT AND INSURANCE REVIEW

TABLE 3
Eligibility for European Union Membership

Functioning Ability to Adjustment

Market Compete Adjustment of Legislature
Political Economy Within of Legal and
Country Criteria in Place the EU Framework Judiciary

Poland ++++ ++++ +++ + ++

Czech Republic ++++ ++++ ++ + ++
Hungary ++++ ++++ +++ +++ +++
Slovakia ++++ ++ ++ +++ ++
Slovenia ++++ ++++ + +++ ++
Latvia ++++ ++++ + +++ ++
Lithuania ++++ ++ + ++ ++
Estonia ++++ ++++ +++ ++ ++
Romania ++++ No No ++ +
Bulgaria ++ No No +++ ++

Note: Range of compliance: ++++ = in full compliance to not in compliance = “No.”

Source: Swiss Re Economic Research Institute based on Wiener Institut für Wirtschaftvergleiche
Research, 2001, p. 20.

euros. In terms of per capita FDI stock in the region, Hungary again ranks second with
3,100 euros per capita. Only the Czech Republic exceeds this total with 3,900 euros per
capita (ME, 2004a).
Hungary’s geographic location and history have influenced its growth of foreign in-
vestors. Until the First World War, the country was part of the Austrian–Hungarian
Empire. Currently, Hungary is bordered by Austria, Slovakia, Ukraine, Romania, Ser-
bia, Croatia, and Slovenia. These countries along with neighboring German-speaking
countries are Hungary’s key economic partners. At present, Germany and Austria sup-
ply approximately 43 percent of the FDI stock in Hungary. The largest foreign investors
in terms of FDI stock from 1990 to 2003 were Germany (31.1 percent), the Netherlands
(14.7 percent), Austria (11.7 percent), the United States (8.2 percent), France (5.2 percent),
Belgium (2.2 percent), and Italy (2.1 percent) (ME, 2005).
FDI has been especially significant in the financial services sector of Hungary’s economy.
Financial services represented 11.5 percent of total FDI between 1990 and 2003. At the
end of 2003, 11.6 percent of total FDI had gone into real estate, 11.5 percent into financial
services, 10.4 percent into the automobile industry, 10.2 percent into trade, and 9.6 percent
into electrical and optical equipment (EIU, 2004, p. 13). At the end of 2003, 82 percent of
banks’ equity was owned by foreign investors, mainly Europeans (ME, 2004b).
The International Monetary Fund (IMF) and the European Bank for Reconstruction and
Development (EBRD) were leading agencies that helped accelerate the privatization
of the Hungarian economic sector (Hanley et al., 2002). Private ownership of financial
 THE HUNGARIAN INSURANCE MARKET 391

institutions in postcommunist countries was necessary in order to put an end to the type
of “subterranean redistribution” that resulted from the tendency of state-owned banks
to extend loans to loss-making enterprises (King, 2000). The Hungarian government
regarded privatization of the state-owned banks as the final step in strengthening and
stabilizing the banking system (Szapary, 2002).
The emerging Hungarian insurance market perhaps best exemplifies Hungary’s global
economic integration motivated by foreign investors. In 2003, foreign-owned insurance
companies had an overall market share of 86 percent. Foreign-owned insurers repre-
sented 82 percent of the life business in 2003, and 89 percent of the nonlife business.
European insurers were dominant in Hungary with a market share of 83 percent in 2003.
Domestic Hungarian insurers do not write much insurance outside Hungary, as they fo-
cus mainly on domestic sales. German and Austrian insurance companies had a market
share of 29 percent in 2000 and 37 percent in 2003. Furthermore, several non-German
firms have strategically located their regional headquarters in Austria or Germany in
order to better facilitate their growing presence in the new Eastern European markets.
For example, until 2002 the French insurance group Axa administered its Hungarian
subsidiary from its regional headquarters in Germany. The purchase of the Axa Hun-
gary subsidiary by the Austrian company Uniqa (in December 2002) has not changed the
importance of proximity relations. The regional headquarters of Generali-Providencia
is in Austria. German and Austrian insurance companies along with other EU insurers
with regional headquarters in Austria and Germany had a combined market share of
54 percent of the Hungarian market in 2003, with a market share of 30 percent of the
life market and 70 percent of the nonlife market. Again, Hungary’s central European
location and historical links may explain the presence of foreign insurers within the
Hungarian insurance market.
As a result of its dynamic privatization program and the impact of FDI, the private
sector in Hungary has experienced strong growth over the past 20 years (Kalyuzhnova
and Andreff, 2003). By 1993, the private sector’s share of GDP was about 50 percent
compared to nearly 0 percent in the 1980s, and by 2004, FDI accounted for almost half
of Hungary’s GDP.

REGULATION OF THE INSURANCE SECTOR

Hungary’s attempt to transform its regulatory system provided another critical step in its
global integration effort. The transformation of Hungary’s legal system to fit a capitalist
economy laid the foundation for the development of Hungary’s insurance regulation
environment. The adaptation of the EU legal framework was also central in the process.
Before discussing Hungary’s regulatory transformation itself, it is beneficial to consider
characteristics of an insurance market, especially contracts and the legal implications
of trust. First, the following describe essential requirements for a functioning insurance
market:

• Specific legal provisions and precedent-honoring court decisions forming a compre-

hensive framework in which insurance transactions can be completed in confidence.
• Actuarial statistics and historical data allowing accurate loss estimates and reliable
rate-making.
392 RISK MANAGEMENT AND INSURANCE REVIEW

• A regulatory authority with the power to enforce an insurance code protecting the
rights of insurance buyers and sellers.
• Marketing channels capable of efficiently connecting buyers and sellers.
• Managerial expertise in insurance company operations.
• Investment outlets for the vast reserves needed to operate private insurance companies
(Dorfman, 2005, p. 78).

Hungary faced an enormous challenge in evolving from a centrally planned environment

to meet the above mentioned requirements. A major factor in the regulation evolution
was the attention paid to the concept of “trust” and the role of enforceable contractual
rights. The United States and Western European countries have a long history of estab-
lishing, enforcing, and relying on contracts when conducting business. Insurance is a
transaction based on trust and is, indeed, a contractual agreement based on the principle
of utmost good faith. However, societies without a history of relying on contracts are
less likely to quickly adopt such an insurance-oriented culture. The central planning
system was not based on contracts or contract law. Mechanisms for the enforcement of
contracts between enterprises were largely irrelevant in the centrally planned economies
as economic exchange was dictated by central planning (Day and Taylor, 2004). Hence,
the concept of the insurance contract was a significant innovation associated with the
transition to a market economy. Early in this transition, automobile and other types of in-
surance were provided without written contracts being distributed to insureds. Initially,
this system worked because parties assumed the provisions of the implied contract were
generally known and accepted. However, a system for insurance contract conflict resolu-
tion, a prominent feature of the Western insurance market, was not available during the
initial transformation process. This absence was an impediment that slowed the societal
acceptance of the new insurance transaction. Establishing a legal system that addresses
commercial issues and that is based on acceptable precedents takes years. An effective
legal system is needed in many venues of commercial activity, but it is especially critical
for an insurance market, because insurance is a form of contract law.
External pressure to change Hungary’s regulatory environment came from its foreign
debt burden, lending policies, and bilateral pressure from the European Union (Haggard,
1995). Although early steps were quite slow, regulatory reforms accelerated Hungary’s
integration into the global economy, especially after the first democratic election of 2000.
Hungary’s successive governments were constrained by their dependence on foreign
capital for economic development. International agencies forced Hungarian government
officials to “free their economy,” especially by eliminating barriers to FDI (Hanley et al.,
2002, p. 131). For example, the Budapest Stock Exchange (BSE) reopened on June 21, 1990.
The legal framework for the exchange was established in the Securities and Exchanges
Act of 1990 (Standifird and Weinstein, 2002). The BSE made significant progress through
the decade of the 1990s in establishing itself as a viable open market institution. In May
2004, the BSE transferred majority ownership to Austria. As a consequence of some of
these external pressures, Hungary is now among the leading transition economies in
terms of progress in transforming its legal framework.
A significant part of Hungary’s insurance market transformation involved the alteration
of its insurance regulation to fulfill the requirements of the European Union. The goal
 THE HUNGARIAN INSURANCE MARKET 393

of Hungarian regulators was to be certain their country was in compliance with EU

regulation and thus, ready for accession into the European Union. Before they became
EU members, Hungary and other candidates had to fulfill a number of general conditions
known as the Copenhagen criteria.7 The involvement of Hungary in this process was
impressive. After negotiating the terms of accession to the European Union, Hungary
achieved favorable results concerning the required criteria compared to other candidate
countries (Swiss Re, 2001). Hungary’s preparation for EU membership accelerated the
adoption of new insurance laws as the Hungarian government pressured its insurance
regulators to act quickly.
The adoption of Hungary’s legal framework to meet EU requirements for the insur-
ance sector was done in two major steps. First, the 1995 Hungarian Insurance Act was
amended to be in agreement with EU standards. For example, strict rules were im-
plemented for insurer investments. In April 2000, a single authority for the Hungarian
financial sector, Pénzügyi Szervezetek Allami Felügyelete (PSzAF), was established. This
was done 4 years before actual membership in the European Union. Since its creation,
the new authority has supervized essential insurance company activities in a manner
similar to Western European supervisors (ME, 2004c). Second, the Hungarian Parliament
adopted a new insurance act in June 2003, superseding the 1995 act. The new act became
effective on May 1, 2004, the first day of Hungary’s EU membership. The new act regu-
lated particular insurance company investments. A large majority of insurance company
investments were in government securities, about 81 percent of all insurer investments
(Mabisz, 2004). Other insurance company investments were divided between bank de-
posits and bank securities (5 percent), shares or common stock (4.8 percent), real estate
and property investment securities (0.8 percent), other securities (4.9 percent), loans to
policyholders (0.7 percent), and others (3.1 percent). The 2003 act also specified new
transparency requirements between clients and insurance companies, and facilitated
foreign-owned insurance company’s activities in Hungary.
A properly functioning insurance market also requires a regulatory authority with the
power to enforce laws, in this case the Hungarian insurance supervisor. One of the first
(and ongoing) tasks the Hungarian insurance supervisor faced was staffing the supervi-
sory office with capable employees. The initial pool of candidates included bureaucrats
from the communist period, emigrants willing to return home as advisors or employees
and people with no previous experience in a government supervisory position. It did not
include many candidates with experience in actuarially based, competitively marketed
insurance. Hence, politics, supervisory status in the central planning bureaucracy, and
former relationships played considerable roles in the initial selection of the supervisory
staff.
Adequate staffing continued to be a challenge for the supervisory office as Hungary
worked toward accession into the European Union, which required specific functional

7
Conditions needed to satisfy the Copenhagen criteria included the following: (1) stability of in-
stitutions guaranteeing democracy, the rule of law, human rights, and respect for and protection
of minorities; (2) a functioning market economy, which can deal with the market forces of the
European Union; (3) the ability to meet the obligations of EU membership, including keeping to
the aims of political, economic and monetary union; and (4) the adoption and implementation
of “acquis communautaire,” the body of EU law.
394 RISK MANAGEMENT AND INSURANCE REVIEW

abilities of the supervisory authority. The demands of the European Union went well
beyond the insurance sector requirements. In Hungary’s defense, it is difficult to expect a
country to make quick, dramatic reforms that took almost 50 years for other EU members
to achieve (the first Rome Treaty was signed in 1957). There was also criticism of the
insurance regulatory authority regarding delays in processing court cases (EIU, 2004, p.
8). Although there has been progress since the initial supervisory staff, even today, the
supervisory office struggles to obtain and retain qualified insurance professionals.
Perhaps the most important responsibility of insurance supervision is the regulation
of insurer solvency. There were significant problems faced by Hungary and the other
former communist countries in monitoring and regulating insurer solvency. Clearly,
without valid historical data, actuarial reserves could not be calculated accurately. Data
from former times were not reliable, were inappropriate in the prevailing environment,
or were simply nonexistent. For example, if the number of vehicles quadruples, histor-
ical loss data cannot be the basis of sound forward-looking reserve calculations. Nei-
ther regulators nor the insurers, including the former state monopoly, could be certain
the rates used during the transition period were appropriate. Hence, the enforcement
of rules requiring strict actuarial calculations of reserves was not possible. Moreover,
there were not a sufficient number of actuaries present to estimate reserve require-
ments for the supervisor’s office or the insurers themselves, even toward the end of
the period being analyzed. Ignoring reserve requirements fostered unsound insurance
operations and threatened to delay meeting the standards required for accession into the
European Union.
Hungarian authorities would like the next phase in its transition to be integration into
the Eurozone, sometimes called Euroland.8 Joining the Eurozone is the next logical step
in economic development for Hungary. Indeed, the adoption of the euro seems not a
choice but an obligation for the Hungarian government, although the timing of this
move remains an issue (Watson, 2004). The target date for entry into the Economic
and Monetary Union (EMU) has been postponed to 2010 (OECD, 2004). To achieve this
result, the Hungarian government must satisfy the convergence criteria detailed in the
Maastricht Treaty. Thus, Hungarian authorities are attempting to limit inflation. At the
end of 2001, insurance companies were required to restrain premium increases for this
very purpose. For example, the Hungarian finance minister started negotiations with
insurers to cap the maximum premium increase of the compulsory automobile liability
contracts (Washio, 2001).
Developing a regulatory environment has clearly been a challenge for Hungary. In
addition to attempting to satisfy the legal framework requirements of the European
Union, Hungary’s transformed regulatory system must also be conducive to a properly
functioning market economy. If Hungary succeeds in its goal of joining the Eurozone,
it will symbolize the progress Hungary has made since beginning its economic and
political transition to a market economy.

8
In January 2002, 12 of the 15 EU members completed their conversion to using the euro instead
of their own national currencies. These 12 states make up the Eurozone. They are Austria,
Belgium, Finland, France, Germany, Greece, Netherlands, Ireland, Italy, Luxembourg, Portugal,
and Spain. On the contrary, Denmark, Sweden, and the United Kingdom did not join.
 THE HUNGARIAN INSURANCE MARKET 395

CONCLUSION
This article describes the evolution of the Hungarian insurance market from a state
monopoly to a concentrated yet competitive insurance market. Like all former com-
munist countries, Hungary’s insurance market was initially underdeveloped compared
to Western Europe’s markets. Today it is a dynamic market with many competitors,
and a market largely open to foreign investors. Hungary has integrated into the global
economy as evidenced by foreign-owned insurance companies who have a dominant
share of the Hungarian insurance market. Accession to the European Union is another
indicator of Hungarian success in the integration process.
While past growth of the Hungarian insurance market is impressive, significant ques-
tions concerning the future evolution of this market should be addressed. With 61
insurance companies for 10 million inhabitants, the country has seen an insurance pre-
mium growth of roughly 20 percent per year for several years. New companies were
able to find specific niches in the growing market and existing companies were able
to increase market share. However, how will these market participants react when this
rapid growth slows? Will new initiatives be necessary to induce new insurers to continue
entering the Hungarian insurance market? Will they offer insurance at a lower price to
obtain market share, or will they seek smaller niche markets? Another question concerns
the entry of nontraditional insurance distribution channels. Hungary recently witnessed
the success of a bancassurance group, OTP (Országos Takarék Pénztár)-Garancia. This
group increased its market share from 3 percent in 1992 to 11 percent in 2003. Will this
success lead other banks or other insurance distributors to enter the Hungarian insur-
ance market? Finally, in the event of declining returns in the Hungarian financial market,
how will this impact insurer and insured behavior? For example, how will this affect
the supply and demand of new life insurance products designed to improve personal
savings? These questions make the Hungarian insurance market both challenging for
practitioners and interesting for academic researchers.

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