All Flags Would Come to Join Our Party

Aleksey Yanin,
Head of department of insurance companies’ ratings

Sweeping growth and qualitative changes at the Russian insurance market attract foreign insurers. A new image of the Russian insurance will be shaped up in tough competitive struggle.

Life insurance payments attained a minimum: next comes only growth

Russian insurers in 2006 collected 406.8 bln rubles in insurance premium and paid 162 bln rubles in insurance compensation (without obligatory medical insurance). The last year market increment officially amounted to 16.25%. The figures do not look very impressive at first sight and conceal the real market turbulent growth — cleaning the Russian insurance market of all sorts of tax-saving schemes has been completed in 2006. Certain types of insurance have really been booming: for instance, according to Expert RA, mortgage insurance in 2006 grew by 240%. Insurance retail has actively grown, too, although, same as in the past, the last year largest collections came from obligatory types of insurance.

Last year’s qualitative growth together with structural changes at the Russian insurance market made Russia super-attractive for foreign players — one of the regional arenas for the world international giants to compete at. Global insurance companies consider the Russian market as very attractive for investments — against the background of almost zero increment at the Western insurance markets even official 16% (Russian statistical data) look attractive, leaving aside real 20–25% (figures not distorted by pseudo-insurance operations). Not surprisingly, foreign investors are eager to penetrate the Russian market and keep themselves secured at it. To their understanding expected profits notably exceed the country risks. The events at the beginning of 2007 have demonstrated the trend being implemented in the market symbolic acts even earlier than it had been forecasted. ROSNO and NASTA were purchased by the leading foreign players (Allianz SE and Zurich Financial Services accordingly). Pretty soon other important deals with foreign involvement may be expected — foreign investors are ready to pay big money for Russian insurers.

Influx of foreigners to Russia accelerated a number of key processes at the domestic market. 2006 may be called the first year in the modern Russia insurance development, when the role of non-price competition has really manifested itself. In most types of insurance tariff competition has become extremely difficult — no further reduction of insurance tariffs without risking your financial status is ever possible. The market leaders have achieved clear understanding of futility of “tariff wars”. Quality of service has been coming to the forefront — foreign competition makes the level of service the issue of survival. Leading insurers direct their efforts rather at holding their old clients, not necessarily attracting new ones — the task looks pretty complicated and demands new methods and principles of operations as well as client’s customization.

The insurance market shows high growth rates again — without schemes this time

Investing to quality and service infrastructure implies significant financial resources. Foreign companies’ resources are practically unlimited (you simply need to find a proper balance between expenditures and revenues), but Russian insurers have to look for sources of financing, which is far from easy. As a matter of fact, the only practicable way to finance insurance business (without losing control of it) is new injections by a company owner, but the resource is close to depletion — owners of insurance companies are no longer willing to make large-scale investments to their own companies. In the near future leading insurers would face the need to attract funds for development from the market. The most obvious option is IPO, but so far the time has not ripe yet, according to the results of 2006.

Merging insurance businesses may present a perspective and achievable way of development. Enlargement of insurance companies allows you to augment insurance capacity and financial stability — effect of large scale due to merger of resources of several companies helps to improve quality of service. The insurance community has gradually come to understanding: consolidation and enlargement are inevitable, if you want to survive in a new aggressive competitive environment. Small insurers have difficulties in finding market niches: intermediary activity is getting out of demand, the big business insurance segment has long been divided, and you can not be competitive in insurance retail without developed branches, reliable system of settling losses and a well-known brand.

As a result, both federal and regional insurers have been active at the market of mergers and acquisitions: in 2006 certain small regional insurers were turned into branches of federal companies; smaller companies were consumed by bigger players; and several insurance groups were set.

Actually, not all insurers have long-termed plans. Owners of insurance companies — in many cases their managers, too — had to think hard in assessing their future: should they keep on remaining independent or gradually prepare their business for selling to foreign investors or stronger competitors inside Russia? Those opted for the second variant started fighting for their market share, doing their best to pile up their portfolio in all possible ways, including dumping and increased commissions — to make a better sale in the long run. Issues of reliability under such circumstances move out of the forefront — why think about some remote consequences of current decisions, if your company sets only short-termed tasks? Such a strategy would allow you to work without losses only at the stage of intense growth of the market — but when the situation gets stable, all the problems of such insurers would immediately hit the surface. As a result, many insurance companies risk disappearing from the market without trace or being sold much below their potential cost.

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