B. Nonbank Financial Institutions
The Slovak insurance sector is developing but is still quite small. Assets are
around 8 percent of total financial sector assets, which is broadly comparable to other
countries in the region. Nearly all insurance companies are foreign owned and largely part of
well reputed large insurance groups or financial conglomerates.
While the performance of insurance companies has been good overall, the level
of technical provisions seems too low. In particular, as a result of declining interest rates (which reflects the prospects of joining the European Monetary Union), premia for earlier contracts for life policies with guaranteed capital appear to have been calculated using assumed less prudent (i.e., higher) discount rates. This means that these policies now require higher technical provisions. Technical provisions by third part liability automobile insurance companies also appear deficient since their privatization in the early 2000s, however a highly
competitive market has limited the scope for a needed increase in premiums. The insurance supervisors are aware of these issues.
Private pension funds appeared in Slovakia following the pension system reform
of 2005. As in many other CEE countries, a pension reform was introduced in response to the unsustainability of the “pay as you go” (PAYG) system. As well as reforming the existing PAYG (first) pillar to ensure its sustainability (through such measures as increasing the statutory retirement age), second (voluntary for existing workers but mandatory for new labor force entrants), and third (voluntary) pillars were also introduced. The second pillar is
based on individual accounts in open pension funds managed by private pension fund management companies (PFMCs) and is still in the early stages of its accumulation phase.9 However, there are several issues—including the low rates of return that the second pillar funds have been generating to date—that should be addressed reasonably soon in order to ensure its sound development (Box 2).
9 An “open pension fund” is one where there is no restriction on membership. i.e., membership is not limited to certain employees (e.g. those of an employer or group of employers). The new second pillar is mandatory for new workers, but voluntary for workers that were already in the labor force. As at end-2006, approximately two-thirds of the labor force had opted to participate in the second pillar.