in 2000 the external (macroeconomic and international) environment influenced the individual segments of the financial sector differently. The banking system experienced a major expansion in response to the economy’s demand for funding, while the expansion experienced by insurers and funds was based on the restructuring of retail deposits. At the same time capital markets (taken in the narrow sense) and their players, investment firms and funds, were adversely affected by the faint spirit of international investors after the first quarter, which was due in part to international, and in part to domestic economic and market processes.

 

The ongoing intensification of fusions is an important trend in international developments taking place among others in the financial sector, which results or may result in mergers of subsidiaries in the Hungarian market as well. This process mainly affected the banks. Partly as a result of the strengthening of the dollar and partly due to the decline of prices that also affects mature stock markets foreign portfolio investors, who assumed a significant role in the Hungarian market, gradually started to turn away from this market, or from emerging markets in general, from the middle of the year. Previously favored iT and telecom companies that used to drive the markets now turned out to be overvalued and suffered a major price drop in the second half and at the end of the year. On the international level this lead to the revision of investment strategies and prompted a rearrangement of portfolios.

 

Taken by themselves domestic macroeconomic indicators showed a favorable picture for the most part, though important signs of uncertainty started to appear. The growth of the GDP was fast even by international comparison, 5.2 percent in real terms. The rate of growth decreased from quarter to quarter as a result of the gradually increasing base. The average annual inflation rate decreased from 10 percent to 9.8 percent, which was a drop smaller than it had been expected. At the same time the month to month indices that better indicate changes in inflationary trends suggested an increase, and the core inflation calculated by the National Bank of Hungary also started to grow. The rise of oil prices and the increase of the producer price index in turn created an inflationary shock on the supply side, which theoretically could put a brake on growth. Simultaneously, the quick growth of the economy, the higher level of employment, and the retail consumption demand, increasingly financed from debt, strengthened the inflationary pressure.

 

 

Financing the current Balance of Payment

(in millions of EUR)

 

For the time being the quick growth did not result in the deterioration of equilibrium indicators. The deficit of the state budget grew by only 5.8 percent in nominal terms to HUF 449 billion compared to the HUF 424.1 billion deficit in 1999. Due to the fast pace of growth this meant a decrease of the deficit in proportion to the GDP (from 3.7 percent to 3.4 percent). The EUR 1.92 billion deficit of the Balance of Payment was HUF 0.55 billion less than a year ago. However, the favorable deficit indicators in the first part of the year were weakened by ever increasing monthly deficits toward the end of the year accompanied by deteriorating terms of trade.

 

Foreign portfolio investors with decisive share on the stock market became net sellers in the second half of the year. At the same time Hungarian companies expanding in the region engaged in small, but gradually growing capital export. As a result of these developments and the amount of incoming direct investment, which is comparable to previous years non debt creating items contributed by EUR 0.5 billion only to finance the deficit of the Balance of Payment, in contrast to EUR 2.5 billion in 1999. The proportion of debt (bond) financing increased relative to capital, which is not unfavorable by itself, although it creates debts. The fact that the purchase of Hungarian government bonds by foreigners is steadily on the rise is sign of confidence exactly as if their investments were directed at stocks, however, the effect is not the same with respect to the country’s debt portfolio. Debt financing generates debts, while capital investment does not.

 

 

Financial assets of households

 

The uncertainty related to the future expectations also had an effect on the capital market in the second half of the year. Foreign investments of domestic institutional investors (including banks) appeared typically in government papers, although investment funds keep a relatively big proportion of international stocks as well. institutional investors’ domestic capital market demand also contributed to financing the government budget, in this case the Hungarian budget, in 2000 as well. indeed, in comparison to the previous years the proportion of government papers in the portfolio increased everywhere, except for funds. Retail demand was highly influenced by the fact that the demand for non-financial savings, especially for real estate, was rising, and consumption also increased (by 3.6 to 3.8 percent). Because of that the growth of financial assets slowed down, while the shift from financial assets to capital market assets, typical of the previous years as well, and within that from direct forms of investment to indirect investments mediated by institutional investors, continued.

 

However, capital market supply did not increase last year, the portfolio restructuring occurred, on the one hand, between domestic and foreign assets, on the other hand, among various groups of investors. Of institutional investors only funds appeared on the demand side of the stock market, in addition to that the retail stock portfolio increased, with a price loss of HUF 34 billion only during the fourth quarter. Private placements, that constituted the majority of issues after the end of the wave of privatization, decreased by 24 percent, the HUF 386.6 billion placement in 1999 was followed by HUF 294.6 billion in 2000. its internal structure suggests that it is really used as funding from the capital market, i.e. for capital increase by corporations (78 percent of the total of private placements). However, the fact that a significant part of that originated from the loss financing capital increase of banks and investment enterprises (this is not ‘natural’ loss following foundation) presented a problem. in addition to that nominally HUF 5.6 billion worth of public placements were made on the stock exchange, supplemented by HUF 1.8 billion worth of public placements over the counter. The magnitude of public placements did not change, in 2000 HUF 26.7 billion worth of bonds were issued for the public, 38 percent of which was Matáv and 36 percent was CiB placement. HUF 15.8 billion worth of bonds were issued privately, which also corresponded to the volumes typical of the preceding years. Due to the buy-backs continuous public placements hardly increased the net bond portfolio and practically functioned as bank deposits.

 

Secondary market processes were not less favorable than during the previous years, though there was no spectacular growth either. The investors’ mood was determined by the decrease of the transaction volume in the second half of the year and the declining prices of stocks during the most part of the year. All in all the volume stock turnover did not decrease significantly, merely by 0.4 percent, however, the monthly turnover gradually decreased toward the end of the year (indeed, this trend continued into 2001). However, longer term analysis suggests that it is a correction following the previous growth above the Central European average and also exceeding corporate performance, which was negatively reinforced by the investors’ reading of international developments and domestic macroeconomic indicators. The BUX, which is neither representative of the Hungarian economy nor of the Hungarian Stock Exchange, fell by 11 percent in HUF, or by 20.6 percent in USD. During the year a single new listing was countered by eight de-listings, most of which occurred as a result of loss making corporate activities and lack of turnover. in the meantime acquisitions and buy-outs were going on at the stock exchange, initiated partly by domestic (Pick, Zalakerámia, etc.), and partly by foreign (BChem) investors. Part of the acquisitions took place on the BSE, and part on the London SEAQ, which handles 50.7 percent of the turnover in Hungarian stocks.

 

The government paper market was also characterized by trendless movements. Following the growth of yield in the first half of the year, in the third quarter the yields returned to where they were in the beginning of the year. However, subsequently as a result of the fact that the decline of inflation came to a halt and the central bank’s interest rate was raised first the yield moved upward significantly by 100 to 220 basis points, then following a temporary phase of stagnation started to dip again. As a consequence of the yield changes during the year the yield curve turned out to be quite flat, its intensity declined, which indicated that investors had become uncertain with respect to inflationary expectations.

 

Credit institutions were able to substantially intensify their activities even amidst market uncertainties and, especially the banks, realized major profitability gains. The balance sheet total of credit institutions grew by 15 percent in nominal terms during a year, reaching HUF 8,978.8 billion at the end of 2000. Within that the balance sheet total of cooperative credit institutions grew faster, 18 percent in one year. However, the intensification of activities is not indicated by the balance sheet, rather by the dynamic increase in lending: the banks’ credit portfolio exceeded by 34, that of credit institutions exceeded the 1999 year end value by 45 percent. At the banks, in line with the trends already familiar, the growth of retail lending, representing only 5 percent of the assets and rather sensitive to the business cycle, was the fastest at 44 percent, while corporate lending grew only by 28 percent. Considering the rather cycle sensitive nature of bank financing, in case the growth of the economy slowed down, the quality of the loan portfolio is expected to deteriorate. (The growing uncertainty around macroeconomic perspectives may indicate such a change, however, these trends are not clear yet.) The resources for the expansion of lending were primarily secured by the rearrangement of the asset portfolio in addition to a 16 percent nominal increase in deposits.

 

However, in contrast to earlier periods, within that rearrangement the most important factor was less and less the continuously decreasing lending from the Central Bank. its role was gradually taken over by the withdrawal of interbank, and especially foreign interbank deposits. Although the consolidated foreign exchange position of banks inside their balance sheet was typically almost closed, indeed it somewhat even tightened further in 2000, a major realignment took place among foreign exchange assets in accord with the above mentioned developments: while the share of central bank and interbank foreign exchange deposits declined the loans extended to clients in foreign exchange increased by 2 percent, within which the portfolio of corporate foreign exchange facilities grew by 45 percent. This meant increased foreign exchange exposure in financing investments.

 

in spite of the intensification of lending involving risky placements the banks’ portfolio improved in 2000. The proportion of problem free facilities increased and that of problem loans decreased whether looking at corporate or retail facilities. Profile stripping also had a role in that in case of retail lending, however, in case of corporate loans the composition of the portfolio improved overall even including the facilities that were eventually written off and sold. Simultaneously the costs of specific net risk reserve creation also decreased from HUF 51 billion in 1999 to HUF 28 billion, and within the specific reserves the part assigned to relatively better categories increased. This had a positive effect on the banks’ profitability. At the same time an eye must be kept on below average portfolios as these did not decrease together with other problem portfolios, rather they stayed stagnant, while the reserves created for them increased by HUF 2 billion in 2000.

 

Similar developments took place at credit cooperatives, however, the major source of the expansion lending was provided by the growth of the deposit portfolio. At the same time the increase of own capital was slow, its 19 percent ratio hardly exceeded the pace of the balance sheet total’s increase. in light of the moderate financial strength of cooperatives, the increase of high exposure placements carries a special risk in their case in contrast to well capitalized banks. The quality of the portfolio is also different from that of the banks’. The 20.5 percent increase of problem free balance sheet items and the 24.8 percent increase of problem items was not substantially bigger than the growth rate of the balance sheet total. The almost 50 percent increase of the special mention portfolio, within which increase 36 percent originated from corporate and 88 percent from retail facilities, suggests growing exposure. This is true even considering that cooperatives employ special classification rules, and irrespective of debtor scoring they classify large placements, just as syndicate loans or major loans, etc. within the special mention category.

 

The expansion of lending and the intensification of other financial and investment services had an extremely positive effect on the profits and profitability of credit institutions, especially banks. The pre-tax profit calculated for the entire sector increased by 160 percent, within which the cooperatives’ profits increased by 22, the banks’ profits increased by 170 percent. The profits of profitable banks increased by 40 percent to almost HUF 110 billion, while the number of loss making banks decreased by nine and their consolidated losses fell by almost 80 percent. Such a profit increase must be definitely seen as transitional. The asset side restructuring that provided the source of lending expansion is a finite opportunity, and the increase of deposits on the liability side fell way behind the intensification of lending, to a great part due to the interest rates.

 

Although the net profit from interest increased, this growth was slower than that of the balance sheet total, as a result of which the interest margin, a decisive element of banks’ profits, decreased from 4.1 percent in 1999 to 4.0 percent. The growth of the net profit from interest was the result of the joint effect of a 10 percent increase in interest revenue and a higher, 20 percent decrease in interest expenditure. Although the banks’ overheads increased nominally by 8.4 percent, the trend of increasing depreciation costs seems to have been broken, and the increase of the costs of personnel is also slowing down. The slower growth of overheads than that of the balance sheet total resulted in a grand scale improvement of operating efficiency after last year’s deterioration, and the decrease of the costs of specific net reserve creation, and the higher profits generated by commission based activities, more volatile than the interest margin, also contributed to improved profitability. in case of the cooperatives the net profit from interest and the profit from commission based activities had a positive, while the 60 percent increase of net specific reserve creation and the rise of overheads had a negative effect on profitability.

 

As a consequence of the above the return on assets increased substantially in case of banks, from 0.58 percent to 1.29 percent, and minimally in case of cooperatives, from 0.97 percent to 0.99 percent. The banks’ return on capital also grew from 6.71 percent in 1999 to 15.4 percent. it was a rather favorable change that the significant increase in the banks’ balance sheet profit largely contributed to the HUF 172 billion, almost 30 percent, increase of the banks’ adjusted capital as a result of recycled profits. Due to the growth of the profit the banks’ capital adequacy ratio improved, and although it deteriorated in the cooperative sector because of the intensification of the activities, its 16.85 value was still above the banks’ 15.57 ratio.

 

The most pronounced feature of investment enterprises is the fact that a new type of market purification, the so called commercial or market type, became dominant. Sixteen enterprises, primarily the independents, who were falling behind in the competition returned their operating licenses voluntarily. Concentration was further intensified by the fact that five banks’ decided about either merging or selling their investment service provider subsidiaries. As a result of the process 48 investment service providers were actually in operation at the end of 2000.

 

Partly as a result of the enterprises leaving the sector, and partly as a consequence of growing competition the profits of investment service providers decreased by 5.6 percent to HUF 6.36 billion. However, it was a favorable change that instead of the 30 enterprises making losses a year earlier, “only” 19 firms were loss makers at the end of 2000 and the consolidated loss of these enterprises was almost 37 percent less than at the end of 1999. At the same time the profits of profitable enterprises also decreased, which may be explained, in addition to the narrowing market and the enterprises that exited from the market, that in case of brokerage firms with banks in their background, the profits may have been regrouped between the mother bank and the brokerage firm. in terms of profit creation the concentration of the sector lessened, however, still half of the businesses are loss makers or hardly profitable. The merger of the five bank owned brokerage firms had a very small impact on the sector’s total profit, since four of the firms merged suffered losses both in 1999 and 2000 and the profits made by the fifth were insignificant in relation to the sector as a whole.

 

All in all investment services, i.e. the core activities, were profitable, however, the profits generated were 10.5 percent less in 2000 than a year before. Brokerage companies attempted to counterweight that by cutting costs, which also contributed to the purification of the market. All in all costs fell by 11.4 percent, more than the profits from investment services. All cost components decreased, however, the most important change occurred in costs of personnel. The losses resulted from the unfavorable outcome of the results of other investment services and extraordinary profits. The decline in revenue had a negative effect on profitability in spite of the cost reduction, both the return on assets and the return on capital decreased (from 4.1 percent to 3.8 percent and from 12.4 percent to 10.7 percent respectively). This trend also characterized commission agents and corporations, however, traders seemed to show substantial improvement with respect to both indicators, primarily as a result of exits and mergers. in 2000 the removal from the sector of the five brokerage firms merged by their mother banks had a noticeably distorting effect on the profit figures only among traders, and it did not cause significant changes in other consolidated indicators (balance sheet total and capital, etc.). The traders’ profit figures doubled as a consequence of the removal of the merged subsidiaries and showed up in turn in the profitability figures as well.

 

The capital of investment service providers decreased as well, the decrease amounted to 4 percent in respect of own capital and 10.5 percent in respect of subscribed capital. Since the capital of some of the brokerage firms that had received capital injections before and remained in the market decreased, part of the capital used to cover the expansion of activities in 1999 produced losses this year.

 

in 2000 the wealth managed by institutional investors displayed an increase comparable to that of the previous years. The net assets of open end securities’ investment funds and the invested assets of insurance companies grew equally by 27 percent, while the funds’ net assets increased by 61 percent over the last year, as only a fraction of voluntary funds performed payments. No trend-like changes occurred in the business management of institutional investors in comparison to the previous years.

 

Concentration strengthened in the investment funds’ market as well, which could be partly explained by the disappearance of funds below the required economies of scale, partly by the exit of some of the fund managers from the market. At the end of the year there were several funds in business, whose net assets are way below the economically efficient size, therefore, we may expect further fusions in this highly concentrated market. in the increasingly uncertain investment environment fund managers were looking at creating fund families as a way out. Of these the three biggest concentrated 80 percent of the market, and the share taken by the leading fund manager was 50 percent. The leading fund managers are backed by banks or insurers without exception, in terms of the assets managed the biggest independent fund manager ranked at the ninth place. it was an important change that after the exceptionally high growth rate of the preceding years the 27 percent net annual growth of assets was a result of a significant growth of the wealth in the first quarter followed by slightly any growth or even a decline in subsequent quarters. For the time being no significant disinvestments can be detected in the sector, however, if the decrease of net assets (and with that the price of investment vouchers) continues at the current pace, than the fund managers must also expect negative investment. No significant changes took place in the funds’ portfolios, although the earlier dominance of government papers did strengthen a bit.

 

The fact that the GDP proportionate premium income of insurance companies increased from 2.6 percent in 1999 to 3 percent in 2000 suggested the growing importance of the insurance sector. Although the number of life insurance contracts decreased by 1.3 percent as a result of the decrease of the number of “CSÉB” policies (today regarded as outdated), this did not result in a decline of the premium income, indeed, income in the life branch increased by 48 percent to HUF 178.4 billion. Unit linked life insurance continued to gain momentum, the number of such policies grew by 67 percent, the share of the revenue associated with them exceeded their 1999 share within the total income of the life branch by 18 percentage points. The number of non-life contracts increased by 2.9 percent, its premium income grew by 16 percent. The share of leading insurance companies decreased slightly in terms of premium income, however, all in all 44 percent of the total premium income was concentrated in the hands of two leading companies at the end of 2000 too, while the five leading companies acquired 84 percent of the total income. At the same time some reshuffling have been taking place among the market leaders themselves.

 

One quite important risk management method and simultaneously a risk factor in the insurance business is reinsurance, where no important changes took place. 10 percent of the premium income in the life branch and 19 percent in the non-life branch are reinsured, typically by financially strong foreign insurers. The reinsured portfolio of small and new insurers is usually bigger. The portfolio of policies received for reinsurance is insignificant.

 

Close to HUF 150 billion was paid in damages, 11 percent more than a year before. Overall the loss rate decreased from 44.8 percent to 38.4 percent, however, within that the loss rate increased from 18 percent to 21.6 percent in the life branch, while in the non-life branch it decreased from 62.9 percent to 53 percent. The increase in the life branch could be explained by the policies’ life cycle. The current level gives no cause for worries.

 

in 2000 the costs increased by 14.2 percent, which was below both the 1999 cost increase and the 2000 increase in premium income. The cost ratio decreased from 35.7 percent to 31.6 percent. The increase of acquisition costs, which grew most dynamically among the various types of costs (by +19.2 percent), signals increasingly fierce competition for clients on the insurance market.

 

According to preliminary figures the pre-tax profit of insurance companies was, in nominal terms, more than double the modest results achieved in 1999 (HUF 18.4 billion). 12 companies closed the year with positive profits. Their consolidated pre-tax profits amounted to HUF 23.1 billion. One company broke even and the consolidated loss of 9 loss making companies came to HUF 4.7 billion. Thus, in terms of pre-tax profit, the polarization of insurers remained, the losses of certain insurers continued to be substantial, occasionally even growing.

 

in 2000, similarly to the previous year, the solvency of insurance companies could be regarded rather satisfactory. According to the preliminary figures, with the exception of two companies, the adjusted capital of all insurers significantly exceeded the minimum adjusted capital requirement, and the overall level of the companies’ recapitalization was 221. The recapitalization level of security capital was exceptionally high (504 percent) in the sector, and only one insurer had an indicator falling below 100 percent (since that time it has been settled), and the recapitalization level of yet another company hardly exceeded 100 percent with respect to security capital.

 

The solvency of insurance associations was also rather good. The associations’ contract portfolio grew by 40 percent, while their consolidated premium income increased by 34.5 percent to HUF 4.3 billion. in contrast to that associations had a 1.1 percent share of the insurance premium income. The three biggest associations concentrated 80 percent of the premium income. Loss payments and services grew by 31.4 percent in 2000, but due to the faster growth of premium income the loss rate decreased from 19 percent to 18.2 percent.

 

The overall picture of the funds’ sector changed somewhat: the wave of pension fund foundation came to an end, and fusions became the main engine of changes both in case of private and voluntary funds. in case of private pension funds 2000 was the first year when voluntary entrants did not join in and only newcomers on the job market added to the membership, whose growth therefore slowed down (+4.6 percent). At the same time membership fee type revenues continued to increase quickly (+25 percent) in case of private pension funds, while the 7 percent increase in the membership of voluntary pension funds, which had started earlier, did not go together with the increase of membership type revenues. Based on inspection experience the reason for that was, that the number of those defaulting on membership fee payment was high and continuously growing in voluntary pension funds. For a good part of pension funds the fact that the amount deducted from the membership fee and transferred to operational reserves covered only a part of the overheads, while the rest was secured by the founders and supporters, continued to present a factor of uncertainty.

 

There appeared to be a difference in the background of voluntary and private pension funds. Half of the founders of private pension funds, including fusions, are either banks or insurers, as opposed to which the role of funds founded by employers was becoming increasingly important among voluntary pension funds. Considering the number of voluntary pension funds the proportion of employer backed funds was 89 percent, but smaller in terms of membership (36 percent) and assets (45 percent). The large share of assets is for a good part due to the contribution paid by employers. Voluntary pension funds are highly concentrated both in terms of membership and assets, the 15 biggest funds gather 75 percent of the members and 70 percent of the assets.

 

The value of the pension geared savings accumulated by pension fund members in the two pillars exceeded HUF 400 billion at the end of the year, which amounted to 6.2 percent of the gross financial assets of households, as opposed to 4.4 percent at the end of the previous year. The total assets of the funds, amounting to 3.1 percent of the GDP, is not normally managed by the funds themselves, rather by contracted property management firms (brokerage firms or investment fund managers). The investment policy focused on government papers and typical of the previous years did change somewhat in 2000, the share of government papers decreased by 6 percentage points by the end of the year, while the share of stock increased by 3.6 percentage points in the portfolio. Private pension funds had their first chance last year to invest abroad, but the share of such investments is not yet significant.

 

* * *

 

The Supervision regards ensuring the reliability of the system of financial mediation and strengthening the confidence in financial institutions and markets as its fundamental responsibilities. HFSA does not intervene in market processes over and above its supervisory duties, but aims at ensuring transparency, the protection of clients, and to control compliance by market players. We expect prudent operation from market players, that they inform clients in a pro-active manner, helping them to find their ways and exercise their rights.

 

The statutory changes coming into effect from 2001 together with the related changes in supervisory information requirements demand effective adaptation from the entire financial sector. The Supervision not merely control legal compliance, but also extends assistance by issuing recommendations and offering consultation opportunities in order to establishes good practice. We especially find it important to eliminate the still existing imperfections in the registration systems. The safe and up to date operation of such systems not only has an outstanding role in protecting clients’ receivables, but also in ensuring the safe business and risk management of firms. in the course of on-site inspections we have witnessed practices setting an example for the entire sector at several market players. These enterprises provided for the monitoring of management and investment processes not at the legal minimum, but at a frequency and depth which were optimal for the firms’ operation. We also find it important to establish internal by-laws in light of statutory changes and to operate the firms in compliance with such rules.

 

The 2000 developments taking place amidst fierce competition in the credit institution sector could be positively valued. An outstanding increase was noticeable in terms of the 170 percent growth of pre-tax profit of the banks. The banks’ financial position was stable, the adjusted capital kept pace with the growth of exposure as a result of the recycling of profits and capital increases. The consolidated capital adequacy ratio remains to be above 15 percent, indeed, it even increased slightly.

 

Looking at the further development of the credit institution sector, especially the intense lending activity deserves attention. Client scoring must not become a formality and lending discipline may not be loosened even amidst growing competition. in this respect the retail market is especially risky, where several credit institutions try to attract clients by simplified credit assessment procedures and other benefits. in 2000 dynamic corporate lending was not followed by the deterioration of the portfolio. According to the year-end portfolios the quality of the composition of retail loan portfolios improved, however, together with the problem facilities removed from the portfolio during the year the result would have been a deterioration. The improvement was therefore due to portfolio stripping. in the business cycle sensitive retail lending market a halt in the economic growth leads to the deterioration of the loan portfolio. in order to minimize potential losses watchful lending and credit scoring practices are still advisable. The improvement of operating efficiency in 2000 is a trend to be reinforced. Likewise, managing the operating exposure of credit institutions (especially in the fields if iT, accounting and internal audit) calls for increased attention.

 

in case of credit cooperatives one of the most important responsibilities in addition to the above is to choose the right amount of risks. At a significant proportion of credit cooperatives in order to promote safer banking operations further efforts are required to increase the own capital. Strengthening bank security also requires specific and efficient steps.

 

in case of investment service providers the most important risks that effect the entire sector are presented by the shrinking of the market, intense competition, and the resulting reshaping of the sector. As a consequence of these developments both the capital and the profits of investment service providers decreased last year. The cleaning of the market is being completed with the Supervision taking an active role in it, causing the least possible damage to clients. Enterprises that remain in the market shall pay special attention to the clear separation of clients’ receivables and their own assets. The unambiguous definition of allocation mechanisms is also of outstanding importance, together with the establishment of the corresponding allocation practices.

 

The introduction of the book of trade should not be regarded as simply being forced upon investment service providers, rather it is a tool that provides assistance for the development of risk management systems wherever necessary, so that enterprises could clearly see what exposure can be undertaken on the basis of their existing capital. The introduction of the book of trade means the introduction of an advanced risk management technique. During the preparation and the reconfiguration of iT systems the Supervision witnessed the sector’s willingness to cooperate. We find it extremely important that investment service providers continue to make concentrated effort to ensure safe daily application.

 

With the exception of investment funds, where even the law requires daily asset valuation, in case of all types of property management activities, whether collective or private portfolios are concerned, special attention should be paid to monitoring the processes with a frequency greater than required by law, and to portfolio valuation, through which the protection of investments and prudent operation may be promoted.

 

The insurance market is developing dynamically and evenly, the sector’s financial position is stable, its cost efficiency and profitability improved in 2000. Unit linked life insurance policies are the engines of the life insurance market that has been smoothly growing for several years now. in terms of the future dynamism of premium growth, the fact that lump sum premium contracts played an important role in the 2000 increase of the portfolio of unit linked life insurances presents a factor of uncertainty. it is questionable whether this relatively big role will persist in the future, or not. Client complaints related to unit linked life insurance indicate that consumer information should be improved, and the contracting parties’ attention must be more efficiently called to the risks undertaken with this form of insurance, furthermore, the costs burdening the investment must be made more transparent.

 

The liberalization of the compulsory motor vehicle liability insurance market did not lead to a significant rise in the premium applied. With the application of the differentiating factors the market selection became more varied, although the easy transparency of the market disappeared. The liberalization of the regulation created several problems that the market has been so far unable to handle by its own means. The Supervision expects advancement in respect of the application of the demerit point system, as insurers frequently commit statutory violations due to inconsistencies and confuse law-abiding contracting parties.

 

The growth of the insurance association movement significantly contributes to the expansion and variety of supply. However, the professional work and the information provision discipline of the majority of insurance associations operating with little capital should be substantially improved.

 

Organizational changes introduced to cut costs and the application of advanced customer services methods promote the improvement of insurers’ efficiency. However, this should not lead to poorer accessibility and the alienation of customer services, especially in the course of loss settlement.

 

insurance intermediation developed into a major independent field, but the quick developments occasionally occurred at the expense of professional work. Following the changes of the statutory background as well the activities of insurance intermediaries must be made more transparent, and insurance brokers, multiple insurance agents, and insurance agents must be separated from each other. The Supervision shall take strict action against unwanted phenomena seen in the course of intermediation.

 

We could witness rearrangements and a different quality of development in the funds’ market, especially on the voluntary pension funds’ market. in case of voluntary funds the developments were determined by cost efficiency and economies of scale considerations, the tax sensitivity of pension geared savings accumulated in the voluntary pension fund sector and the strict and efficient actions taken by the Supervision. At the same time, after three years of operation a stabile segment appears to be forming in the private pension fund market, where the membership is only increased by new entrants on the job market.

 

From the perspective of the funds’ operation one of the most important risk factors is the three-way relationship between funds, property managers and deposit managers (precise administration and registration, authentic and timely information flow, developing procedures). Within that the process of selecting property managers deserves special attention in view of the risks and costs associated with their activities.

 

Having passed beyond the wave of foundation, besides ensuring prudent operation and compliance with statutes, both for the members and the Supervision the focus of attention is shifted from recruiting members to investment activities and their efficiency. For the first time pension funds had to prepare their investment policy and inform the members about it in 2001. Ensuring the preservation of pension geared savings’ value over the long-term had to be articulated as the primary objective in the course of their investment activities, together with ensuring the comparability and comprehensibility of performance indicators.

 

Strict compliance with the requirements concerning the publications of figures that are to be made public by law is an important duty of the funds. This not only requires that the funds provide information including the prescribed content at the required intervals, but also calls for increased attention to make the information provided easily comprehensible and clear for the clients.

 

Cost efficiency and economies of scale remain central issues in relation to the funds’ activities. The rationalization and optimization of these, furthermore long-term thinking and planning are essential prerequisites of the funds economically efficient operation in the future.

 

Current developments forecast fast changes in every sector, but especially on the capital market and in the field of investment services. Adaptation to these calls for similarly quick response capabilities, which in turn require monitoring and analyzing processes, modeling potential scenarios and the applicable strategies as their foundation.