Insurance Panorama

Issue №4, September, 2008

Aleksander Maloletnev

Young, fast-growing, low-un-profitable

The mortgage insurance market doubles its volumes every year. To protect it from being strangled at the outset, you should find a golden medium between “exclusive agreements” and total absence of insurer’s accrediting by banks.

According to Expert RA, the mortgage insurance market in 2007 reached 6.7 bln rubles – 117.9% over the same period at the previous year. The market is directly dependent on mortgage crediting. Its dramatic growth should be accompanied by increased mortgage insurance contributions. “This year the mortgage credit market has undergone serious changes: mortgage crediting growth decelerated, even among leading players, some banks rejected mortgage credit programs in favor of short-term credit products”, said Daria Zueva from Ingosstrakh mortgage department”.

The world financial crisis is one of the most important reasons for diminished growth of mortgage credits. Still, according to Ilya Metelkin from Rosgosstrakh mortgage risk insurance, “The financial crisis impacted only the mortgage insurance market development. So far the market showed no other notable changes, related to insurance conditions, principles of tariff forming etc”. According to Expert RA, the 2008 mortgage insurance market may be doubled (up to 13.4 bln rubles), despite indirect negative influence of the world financial crisis.

At the same time insurers are cautious about recent innovations at the mortgage market. Natalya Karpova, Renaissance Insurance executive vice-president, said: “The market has already received a number of proposals from Western insurers (mostly American ones) in view of insuring possible borrowers’ default and credit down payments, but the Russian market, bearing in mind negative American experience, would be cautious about such proposals”.

Tariffs would decline

Mortgage insurance, according to the market players, is one of the less un-profitable types of insurance. Mikhail Korytny, RSK deputy general director, said: “Mortgage insurance tariffs (all risks) average from 0.8 to 1.5% of the insurance sum. It may be higher depending on numerous factors. Individual tariffs to insure real estate (object of mortgage) vary from 0.2 to 0.6% of the insurance sum, title insurance tariffs depend on the cleanliness of a deal and history of property rights for the real estate and range from 0.2 to 0.5% of the insurance sum; life, health and work capacity tariffs depend on age, gender, health condition and average between 0.27 and 2.5%”.

At the same time Aleksander Shaikin from VTB Insurance (department of insurance of property and liability) forecasts: “Average rates would gradually go down due to competitive environment, low un-profitability and gradual reduction of borrowers’ average age (life and health insurance)”.

Mortgage insurance tariffs are influenced by insurance fraud, too. Arsen Shiroyan from ROSNO mortgage insurance center comments: “Unfortunate as it is, crooks penetrated mortgage environment, too. Mortgage insurance fraud presently relates to faked papers or receiving false disability documents. Sometimes people falsify death certificates. Title insurance fraud may cause serious damage. Insurers have gained experience of unraveling riddles in other types of insurance, but immovable property rights constitute a free area for inventing smart schemes involving other market players”.

Anna Tokarchuk from Soglasie mortgage department cites examples of fraud: “Sometimes owners try to sell their lodgings which were under arrest. In other cases owners get credits using arrested lodgings as a pledge. Sometimes communal services or long distance calls were not paid for a long time”. “Cases of insurance fraud justify demands of banks to insure risks of loss of property rights, - says Vera Vyzhul from Moscow Insurance Company mortgage department. – An insurance company may block fraudulent actions only by thoroughly checking documents, related to previous deals with the pledge object and presented by potential insured persons in order to sign an insurance contract”.

Accrediting may be “a plus”

There are two ways for insurers to get access to the mortgage insurance market: get accredited at a bank giving mortgage credits, or at АИЖК. The latter accreditation principles are quite transparent and clear to the market players, but bank accrediting is pretty often vague and non-formalized. Still, according to Elena Venevtseva from VSK Insurance House, “there are no special barriers in the way of insurance companies to the mortgage insurance market. Service and technologies, individual approach to clients, uniform system of branch net management, automatic management of documents, thorough underwriting and flexible tariff policy – these elements make insurance companies competitive”.

At the same time Federal Antimonopoly Service has been trying to cut down the so called “exclusive agreements” at the bank insurance market and reached certain results. Thus, in August FAS started cases against Credit Europe Bank and Absolute Bank and 36 insurers, and in September – against АИЖК and 45 insurers. But often enough accrediting allows banks to select at the market the most credible insurance partners, which partly cover risks of banks and borrowers, allowing reduced credit costs. You have to fight unfair competition, but FAS seems to overdo it, which may cause uncontrollable appearance of non-credible insurers at the mortgage insurance market – as a result borrowers would have to bear additional risks, and banks would raise credit rates or stop giving insurance altogether in favor of collateral and additional pledge. Being licensed as it is does not imply credibility of an insurance company - there are other recognized assessment instruments, like credibility ratings.

The market might allow banks to set proper and sufficient (from their point of view) conditions for insurers, but the demands in question should be absolutely transparent and achievable for any company – besides, at least several insurance companies should correspond to demands of any bank.

According to Roman Varlamov from Capital Insurance mortgage department, “exclusive cooperation” does not necessarily mean infringement of client’s rights. Western Europe considers such a model of cooperation to be the most successful one, because bank-insurer interaction seems to be the most efficient. It helps to minimize expenses (and cut down prices), and secure the best possible service level”.

Table
Leaders of mortgage insurance (including insurance of a pledge, a title and life of a borrower), 2007

¹Mortgage insurance comprises property insurance of the mortgage object, life and health insurance of the borrower and title insurance (mortgage object ownership)