Academic journal article Risk Management and Insurance Review

The Hungarian Insurance Market: Economic Transition in the Insurance Sector

Academic journal article Risk Management and Insurance Review

The Hungarian Insurance Market: Economic Transition in the Insurance Sector

Article excerpt

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 insurance 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 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 successful economic transition and integration from a centrally planned economy to a market economy. The transition of the Hungarian insurance market presents a thoughtprovoking 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 nonplanned 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 differences did not allow for much standardized transition among the countries during the subsequent fall of communism in Central and Eastern Europe. …

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