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WARSAW-Poland is fine-tuning its insurance legislation in preparation for opening its market to foreign investors in 1999 and a possible entry into the European Union sometime in the next century.

This revision has run parallel with the creation of the country's first-ever exclusively reinsurance company and the preparation of legislation to permit creation of private pension funds.

Revision of existing insurance legislation involves a long consultative process with all sides of the industry, including the Polish insurers' association, Polska Izba Ubezpieczenia, and the Polish brokers association, Stowarzyszenie Polskich Brokerow i Agentow. The revision is not drastic, but is just a fine-tuning of existing 1995 insurance law, says Anatol Adamski, director of the Insurance Department at the Ministry of Finance, which regulates the industry.

According to Mr. Adamski, the government is analyzing four aspects of the insurance industry: commercial business practices, regulatory matters, the role of agents and brokers, and additions to bring Poland's insurance market in line with those in Europe. Mr. Adamski declined to provide specifics.

Foreign investors may own a maximum of 49% of a Polish insurer or broker. Initially, this restriction was to be removed this year.

But the Polish government extended it by two years to protect the nascent domestic insurance sector.

Minimum capital requirements for life and non-life insurers are low, ranging from $4 million to $5 million.

Mr. Adamski says that the 1999 date for full market opening is firm. "We are planning to have the new insurance codes ready by the end of 1998 to prepare for the market opening the following year," he said.

The Polish insurance market generates an annual gross premium volume of about $2.5 billion, says Domynyk Szymanek, managing director of Warsaw-based broker GPH International S.A. But, just two companies-Powszechny Zaklad Ubezpieczen, Poland's largest insurer, and the Warta Insurance & Reinsurance Co.-control 80% of this market. Another 25 insurance companies, most of which are poorly capitalized, control the remaining 20%. Brokers only handle about 10% to 12% of insurance premiums.

As a result, broker involvement "can only go up," Mr. Szymanek said. Insurers and bankers remain confident of growth in the Polish insurance market, given that last year gross domestic product grew by 5.5%.

The problems faced by medium-sized and small insurers in obtaining reinsurance triggered the creation of the country's first reinsurance-only company, Polskie Towarzystwo Reasekuracyjne, or PTR. The government and legislators also hope that a domestic reinsurer will stem the outflow of funds overseas in the form of reinsurance premiums.

Created in October 1996, PTR has assets of $23.1 million, less than half the $50 million the government had hoped for when the company was in the planning stage. The shortfall is due to the last minute withdrawal of some prospective shareholders, Mr. Adamski said. The government is planning to issue an additional $30 million of shares in PTR later this year, perhaps as early as next month. This share issue will be open to all investors, foreigners included, Mr. Adamski says.

The state also retains a 37% stake in PZU, which alone controls 64% of the domestic insurance market and was partly privatized in 1995. Nearly 20% of PZU shares are expected to be offered to private investors and employees this year.

PTR's current shareholders are the Polish government, through the Ministry of Finance, with 19.19%; state-owned bank Bank Handlowy w Warszawie, 19.19%; the state copper company, KGHM Polska Miedz, 19.19%; PZU and PZU Life, each with 19.19%; power utility Elektrim, 1.91%; Warta Insurance & Reinsurance Co., 1.91%; insurer Energo Asekuracja, 0.19%; and Polisa Insurance & Reinsurance Co., 0.04%.

There will be no obligation for direct insurers to reinsure through PTR, says the company's marketing manager, Malgorzata Stobienia. PTR also will develop specialized niches in industrial insurance and credit risks as well as risks that may be difficult to place on the international market. When Poland opens its insurance market in 1999, foreign investors can view PTR like any other company, Ms. Stobienia said.

PTR also will be used to create a retrocessional market through a plan to retrocede a portion of its business to other central European reinsurers. Details of this plan were unavailable.

Meanwhile. government authorization for the creation of private pension funds, known in Poland as open pension funds, could become a reality before scheduled general elections this fall. Prime Minister Wlodimierz Cimosiewicz said early this month that he expects the Council of Ministers to approve draft legislation for the funds by the end of March. The legislation should be presented to the country's parliament, the Sejm, in April.

"This is the first concrete announcement of a timetable," says Jacek Krol, legal counsel at the Warsaw office of U.K. law firm McKenna & Co., which has been advising the Polish government on pension reform.

Discussions on a complete overhaul of the social security system have been under way since the collapse of communism in 1990, Mr. Krol explained.

The only social security-related matters that are likely to be approved before the coming elections are private pension fund authorization and an authorization for the government to use privatization revenues to meet existing liabilities of the social security system, such as payment of outstanding pensions.

Membership of the planned open pension funds will be mandatory for all individuals entering the labor market, though Poland will maintain its state-run social security system, Mr. Krol said. Employees in open pension funds will be obliged to pay an as yet undecided proportion of salary into the fund. Employers will not contribute to the fund but will continue to pay into the government's social security system, though at a lower rate than at present.

Individuals older than a certain age-between 45 and 50 years, though the precise age is still undecided-will stay in the government-sponsored pension system. Those below this age will be obliged to join the new funds, while individuals at that transition age may choose between the two.

Another private pension option under study is a system of so-called voluntary-sponsored pension funds that employers may create for their employees. Contributions to these funds will be paid by the employers only. However, employees of privatized companies will be able to make an initial contribution to the voluntary funds, Mr. Krol explained.

Other details, such as tax breaks on fund contributions, have yet to be worked out.

Polish government officials and their advisers have studied other private pension systems for ideas. Chile's experience over the last 10 years was particularly useful. "We learned by their mistakes," said Mr. Krol.

The most important lesson has been that private pension plans in emerging economies must exist alongside a state-sponsored system, which can continue to cater to lower-paid workers. In Chile, as a result of the privatization of the social security system, only 52% of the workforce has a pension.

Administrative costs of the private pension system in Chile also are high. "In Chile it is very easy to shift between funds. Under our law, this will be restricted because it makes the administration much more expensive," according to Mr. Krol.

Another problem that makes the Chilean system more expensive has been the creation of specialized pension fund administrators, Administradoras de Fondos de Pensiones, or AFPs. The Polish idea, based on current recommendations for amending the Chilean system, is to allow all existing financial institutions, such as banks and insurance companies, to manage these funds, Mr. Krol said.

Once the funds are up and running, Poland will need to establish investment rules because the small size of the Polish capital markets may be too small to absorb the funds.

Mr. Krol said he thinks the best idea would be to start with the voluntary-sponsored funds and see how the market reacts before moving into compulsory open funds.