Respectable Retail Insurance Business Needs a Clean Market

Ingosstrakh starts expansion into a relatively new retail business. The new CEO Alexander Grigoryev wants to reform the company and change the rules of the game in the insurance industry.

By Alexander Ivanter

Ingosstrakh is the second largest insurance company in Russia in terms of combined assets and one of fastest growing ones. Until recently, Ingosstrakh was regarded as a company focused on corporate clients, but that will change. And the company hopes to retain its leadership position in providing insurance against complex risks.

Ingosstrakh holds 75% of ship owner's liability insurance, 55% of ship hull insurance, and more than a third of aircraft and spacecraft risk insurance market. Alexander Grigoryev, an experienced banker put at the helm of Ingosstrakh 2 years ago, plans to expand the retail business of the company as well.

In particular, the company will sell insurance for private real estate, with the target of reaching 6 to 9 percent of that market. However, Ingosstrakh makes a point of not providing insurance to the owners of cheap and shabby housing. “We do not insure dacha slums”, says Grigoryev, highlighting the priorities of Ingosstrakh in retail business. The target customers are high-income people, who will be ready to pay more than the average for real good quality service.

This is also manifest in the car insurance market, where Ingosstrakh holds 6% of third-party liability (this is No 3 on the market; a niche player with upper-middle class target group, the average price of the insured vehicle is USD 23-26 thousand), and 18% of motor hull insurance (No 1 on the market; tariffs for the insurance of second-hand foreign makes and Russian cars are 50% to 100% higher than in other companies, but it provides guaranteed payments of damage and adds a number of VIP services, in particular, its accident expert arrives at the place of the accident).

Healthy Ambition

At the age of 43, Alexander Grigoryev has 14 years of banking experience. In the 1990s, he was the CEO of Mezhcombank, the bank that never left the top 30 rating. After the bank was shut down by the Central Bank on demands from the IMF, Grigoryev managed two successful start-up banking projects. He was at the beginning of the Russian Standard bank, the current leader in express consumer loans. Later, he implemented a mortgage loan project for Delta bank. When the latter was sold to the finance division of General Electric in 2004, Grigoryev left Delta bank, and accepted the offer from the owners of BasEl to manage Ingosstrakh in spring 2005.

Why did a born banker decide to go into another specialty? Considering his work record and immaculate reputation, Grigoryev wouldn’t have had a problem in getting an excellent position in another bank. Personal ambition is probably the explanation. He has always been a CEO, and he does not want to be anything less. Becoming the top manager of one of the largest Russian insurance companies is quite in line with that mentality. Moreover, the new owners of Ingosstrakh Oleg Deripaska and Alexander Mamut are also very ambitious. They set far-reaching targets for Grigoryev: become the leader in all the main segments of the insurance market, and make each business unit profitable. Ingosstrakh is following those directives. All Russian and foreign assets of the company are profitable and margins are higher than the industry average. Last year, Ingosstrakh’s Russian insurance business earned almost RUR 1 billion in net profit (the group as a whole received RUR 1.2 bln in profit, which is more than USD 45 million). When Grigoryev came to the company, its annual take of insurance premiums was USD 750 million. Last year, it was close to USD 1 billion, and this year it will exceed USD 1.2 billion in Russian insurance alone, and 1.3 to 1.4 billion for the whole group.

Ingosstrakh has the strongest positions in sophisticated classes of insurance for corporate clients

Ingosstrakh capitalization is estimated by the company at USD 1.4 billion. Although market analysts say the amount is overstated, they concede that the current growth rates would allow Ingosstrakh to reach a billion in capitalization by the time it is rumored to go for an IPO in 2008. Grigoryev keeps telling the press that the shareholders are not decided yet on the IPO issue (and the company is not short of cash: its equity exceeds USD 300 million), but, he said, ”technically, Ingosstrakh is prepared for an initial public offering”

The brand is very strong (the Interbrand rating agency estimated its value at USD 163 million). It has excellent staff that has exclusive competence in handling complex, industry-specific risks. Add to that a flawless 60 year history of operations on the international markets, which has led to a BB+ rating with Standard&Poor’s, the highest rating among Russian insurance companies. In 2006, Ingosstrakh managed to reduce the cost of international reinsurance by 23%.

Creating a Level Playing Field

Ingosstrakh is one of the most dynamic insurance companies

Grigoryev advocates rigorous supervision over the insurance business to “pull insurance companies into the civilized market with ropes, chains and shackles”. The main component of a civilized market, in his view, is fighting tax optimization schemes and controlling capital and reserve adequacy. There is progress on both counts. According to calculations of Expert RA, the activity of the Federal Service for Insurance Supervision (FSSN) has resulted in the proportion of tax optimization schemes in the total value of insurance premiums going down from one half to one third during last year alone. Besides, two recent orders of FSSN have put strict controls on the procedure for the formation of reserves and capital of insurance companies. Grigoryev hails the development: “For these revolutionary instructions we should put a monument to commemorate the achievement of Lomakin-Rumyantsev (the head of FSSM)“. It is easy to understand why the CEO of Ingosstrakh is so enthusiastic about the change. Grigoryev is sure that in 18 months no more than 300 companies will stay in business out of more than a thousand that provide insurance services today. Once cleared of the weeds, the level playing field will considerably improve the competitive position of the righteous and expensive Ingosstrakh. “The insurance market should go through a cleansing crisis,” says the survivor of many banking crises. “But I do not think it will be a systemic crisis. It will be held in check by the system of collective guarantees”.

Foreign competition is Grigoryev’s only serious fear. He believes that ten years into the future foreign companies will control at least one half of the Russian retail insurance market. Therefore, he says, it is very important to negotiate proper terms of their entry during the discussions between Russia and the WTO.

What is important here is not to allow local branch offices of foreign companies to operate in Russia. Unlike the banking business, it would be next to impossible to impose proper supervision over their activity and real owners, and make sure that they keep their funds inside rather than outside the country. “Otherwise we will have a window opened wide for capital flow outside the country”, warns Grigoryev. “Plus potential insecurity of the consumers of insurance services. Imagine an old babushka from Tambov filing a suit in London.”

The total amount of insurance premiums in Russia is 2.3% of the GDP or a little more than 120 dollars per capita. In this respect, we are far behind the world leaders and even countries with comparable per capita income levels. The growth potential is immense. It is important to make sure that this maturing market benefits Russian rather than foreign insurance companies.