Insurance Panorama

Issue №4, September, 2008

Natalya Komleva

Re-insurance for export

The Russian re-insurance market has been in the state of prolonged crisis. Only the international segment of Russian re-insurers has shown positive dynamics. The state should take resolute steps to make the Russian re-insurance thrive.

Consolidated re-insurance premium received by Russian re-insurers in 2007 amounted to 63.6 bln rubles. To compare: the direct insurance market (without OMI) in 2007 was 486 bln rubles. Presently the Russian re-insurance market takes care of motor vehicle risk insurance, state contracts, non-standard risks, sub-layers and small side risks. All other medium and large-sized risks go to the world re-insurance market. Thus, a relatively sovereign Russian insurance market gradually becomes dependent on international financial centers.

For the last couple of years the Russian re-insurance market has been sliding down. In a way it may be attributed to the market making clear of “scheming”. But the process has not been as fast as expected. According to Expert RA, the real re-insurance market in 2007 amounted to 32.0 bln rubles or a bit above 50% of consolidated re-insurance market contributions.

Decline rates of “scheming” at the re-insurance market notably differ from decline rates of life-insurance tax-optimizing operations, which reached its minimum in 2006. Negative dynamics of life insurance contributions took place against the background of new arrivals – foreign insurers, division of business into “life” and “non-life”, notable investments into life-insurance companies. Negative dynamics of consolidated re-insurance premium are not accompanied by either growing investments into professional re-insurers or arrival of new big players. Real increment of the Russian re-insurance market in 2007 is close to zero (0.4%) comparing to 2006.

Closed circle

The Russian re-insurance market current model contains no pulse for its progressive development. On the one hand, demand for local re-insurers’ services is restricted by poor understanding of risk-re-insurance necessity and by institutional barriers to accept risks from abroad. On the other hand, supply at the Russian re-insurance market is limited by insufficient capitalization, domestic re-insurers’ low credibility ratings, inadequate accounting standards and under-qualified re-insurance staff.

Aleksander Korolev, Capital Reinsurance general director first deputy, says: “there are two chief hurdles containing the Russian re-insurance market. First, the market is isolated; second, its capitalization is low. The factors are of mutual influence. By “isolation” we mean lack of connection with external markets. It relates to legal constraints, regulating re-insurance in many countries, problems of ratings, political factors, and low capitalization of Russian re-insurers, which makes them quite insignificant even at potentially accessible markets. Low capitalization of re-insurers is caused, in its turn, by the market isolation and lack of investors’ interest in the business”.

Besides, national re-insurers have stronger competitors from abroad – the latter are better capitalized, more financially stable and professional, with high quality of underwriting. Domestic re-insurers offer better price and better knowledge of the Russian market.

The market of non-professionals

The Russian re-insurance market main players are universal insurance companies. National professional re-insurers are passed by foreign re-insurers and Russian universal insurers due to level of capitalization and inability to operate on principles of “mutuality”. As a result real re-insurance premium has gradually flown from professional re-insurers to universal insurers. According to Expert RA, in 2007 real share of Russian professional re-insurers declined by 13.1% in relation to 2006, and consolidated re-insurance premium of universal companies went up by 10.2%. The total market indicator was 0.4%.

The mutuality principle is a significant barrier in the way of free competition at the Russian re-insurance market. “About 50% of re-insurance premium received by universal re-insurers is based on the mutuality principle. Companies still have plans for incoming re-insurance - therefore mutuality as a market instrument is to be used in the future, too. At least till it comes to somebody else’s big losses or accumulation by obligators”, - says Panaet Paraskevopulo, deputy director of Moscow Re.

Boost from outside

In the near future the international segment of the Russian re-insurance business should become a prime mover of the national re-insurance market. International business of Russian re-insurers develops well above the market average, by both official statistics and real figures (according to FSIS, 2007 premium outside the RF incremented by 28.8%). Main risk-importers for Russian re-insurers are Kazakhstan, Azerbaijan, Uzbekistan, the Ukraine, and South-East Asian and South American countries. Total share of re-insurance premium from abroad in 2007 reached 10.6%.

Positive dynamics imply demand for re-insurance coverage from Russian companies. It is now that the state should neutralize institutional barriers, hurdling growth of re-insurance premium from abroad. Re-insurance is first and foremost an international business with geographic diversification of risk portfolios. Breaking isolation of the Russian re-insurance market should foster its intense development and gradual capital build-up.

China in its time succeeded to resolve the problem of low capitals at the domestic re-insurance market. The Chinese government directed 4 bln dollars (currency reserves) to support national re-insurer China Re and later placed its shares through IPO. The initiative promoted appearance of mid-size private re-insurance companies, redirected streams of re-insurance contributions to the domestic market and attracted premium from the outside insurance markets. Thus China formed large domestic re-insurance market within several years – re-insurance contributions came both from inside the country and abroad. The same scenario may boost the Russian re-insurance market as well.

Main indicators of the Russian re-insurance market: reduced premium and growing payments

Source: Expert RA according to FSIS

Zero indicators of real re-insurance premium growth are explained by development of universal companies and reduced collections by professional re-insurers

Source: FSIS, according to Expert RA

International business is a prime mover of the Russian re-insurance market

Source: Expert RA according to FSIS