The Russian insurance market, 2006

All-round development

By Kirill Bobylkov

Table 1. Leading companies at the Russian insurance market by insurance premium payments (without mandatory medical insurance), including assumed reinsurance, 2006
Table 2. Russian insurance companies classified by size, 2006
Table 3. Financial indicators of leading Russian insurers (as of 01.01.2007), thousand roubles
Table 4. Life insurance, 2006
Table 5. Voluntary medical insurance, 2006
Table 6. Insurance of travel abroad, 2006
Table 7. Accident and disease insurance, 2006
Table 8. Motor insurance, 2006
Table 9. Insurance of water transport (including liability insurance), 2006
Table 10. Insurance of aviation risks (including liability insurance), 2006
Table 11. Space risk insurance (including liability insurance), 2006
Table 12. Cargo insurance, 2006
Table 13. Transportation carrier liability insurance, 2006
Table 14. Corporate property insurance from fire and other risks, 2006
Table 15. Construction-erection risk insurance (including liability insurance), 2006
Table 16. Individual property insurance, 2006
Table 17. Financial risks insurance, 2006
Table 18. Liability insurance of enterprises – sources of increased danger, 2006
Table 19. Professional liability insurance, 2006
Table 20. Incoming reinsurance, 2006
Table 21. Mandatory medical insurance, 2006
Table 22. OSAGO, 2006
Table 23. Large payments, 2006

The previous year witnessed an all-round real business development at the insurance market. But insurers have to exert their efforts to retain their market share.

At last the insurance market has reached a certain level – to discuss “scheming” is now considered to be “mauvais ton”. True, schemes are still present at the market, but it is currently no more “polluted” than any other leading insurance market with all sorts of tax-optimizing operations also present. But the real market growth looks very impressive - 20-25% annually. Insurance markets in the West do not develop the same way – hence the interest of foreign companies in our insurance market. Annual increment of markets in the USA and Germany does not exceed several percents a year, and Russia with its sweeping growth and positive development forecasts looks extremely lucrative. At the beginning of 2007 main news have been brought to the Russian insurance market by foreign companies. They seem to become the most active market players in the near future, bringing new edge to the competition between the market leaders.

Price is not an issue

Russia’s joining WTO has been widely discussed, especially permission for foreign insurers to open “direct” branches in Russia. Many insurers are of the opinion that this “invasion” would destroy the national insurance market. But a practical view of the situation makes it clear: the Russian insurance market has not been “abandoned” to foreigners, rather it received a boost for a new quality development.

According to Gennady Smirnov, Russkaya strakhovaya kompania (Russian Insurance Company) general director, “presence of powerful control state structures, like Federal Service of Insurance Supervision, Federal Tax Service etc, would not allow “foreign structures" to take full control of domestic insurers (invested by them) without considering the Russian state interests and insurance branch of economy, which is quite proper…” Conditions of access for “direct” subsidiaries are to be discussed, no doubt, but we still have 9 years in store. But the foreigners are already around and ready to play by our rules – the events of the beginning of 2007 testify, that nobody is going to wait for 9 years. At the beginning of the year the two largest Russian companies, ROSNO and NASTA (positions 5 and 13 at the insurance market, 2006) came under control of the two foreign insurance groups, Allianz and Zurich. Before the events the foreign share in consolidated premium of the Russian insurance market was insignificant (several percents), but after the purchase it was assessed at the level of 8.5%. The share is projected to reach 20-25% within the next couple of years.

It would be proper to make certain analogies with the banking market – the process of foreign banking groups entering the Russian market last year has been more active comparing with the insurance market. Sufficient part of mediocre banks came to be controlled by foreigners, ready to pay big money for the control. But the state bank-leaders do not seem to be threatened by foreigners. It is different in insurance — the state large companies are no longer there, all the biggest insurers are in private hands. Only captives of private monopolies may be considered as semi-state structures, but they do not play the first fiddle in the insurance market development. And if current owners of insurance companies were offered lucrative price for their business by foreigners, you might expect the business to be sold. Actually, foreigners are ready to pay big money for insurance companies. Look at the scope of activity of leading international insurance groups – they visibly surpass the Russian market volumes. And if foreigners want to be present at the Russian insurance market, they will come, without minding the price. As a matter of fact, the Russian insurers have already started the process to be considered as pre-purchase preparation. “Many Russian insurers focus on the goal, turning their financial accounting to international standards and developing subsidiaries. Thus they build up their capitalization and make themselves more attractive for foreign investors”, — says Aleksey Semenikhin, Yugoria deputy general director on insurance.

What about our own?

Our own insurers – expecting rigorous competition with foreigners, who would fill our market with time-tested and durable technologies of insurance and sales - have been thinking hard about developing quality services. “Our big insurers pay special attention to servicing their clients at the international level. First, due to joining WTO you have to be in line with the servicing, offered by the world leading insurers. Second, tariff rates at the market have reached its reasonable minimum and will no longer be considered the main competitive indicator. Competition moves to the sphere of quality servicing. If you secure such servicing, you may expect to have a significant share of the market”, — mister Semenikhin says. It is difficult to attract a client, but it is even more difficult to hold him. And insurers should do their best to hold their clients. Without high level of servicing and modern business technologies Russian insurers would encounter problems in dealing with the world insurance giants.

To develop in a planned way you need powerful financial resources. As was said, subsidiaries of foreign insurers do have such resources. And Russian companies need to look for new sources for development. The best option for insurers now is to develop at the expense of their owners. But the process can not be endless – sooner or later the owners would wish to fix their profits. Naturally, pretty soon the market would have to attract money from elsewhere. IPO seems to be the best option. Current owners would get certain profits plus funds for development, without losing control of their business. “IPO is a normal goal for a normal company. Thank God, Russian insurers are presently capable of and keen on reaching the goal. No doubt, it is difficult to prove your “purity and transparency” against the backdrop of changing norms and standards, shell companies etc. We need to establish precedents to make it easier in the future” — says Nikolay Markarov, Pervaya strakhovaya kompania vice-president.

Laws are lagging behind

Unfortunately, the insurance market development has not been supported by legislative acts. So far laws are not clear about the process of passing an insurance portfolio, about the insurer’s bankruptcy procedures; the current insurance legislation does not fully accord with the market situation. Obviously, the role of the state insurance structures should not boil down to presentation and revocation of licenses. Russia needs a well-developed insurance strategy. The state presented such a document for a broad discussion, but it was seriously and reasonably criticized by the insurance community.

“The document is really required, but it should focus on different issues: changing and amending legislative acts to harmonize our insurance legislation with that of the European Union, developing insurance legal acts to make tax conditions more stimulating, liberalize currency legislation etc.”, — says Jury Gorbatov, Moskovskaya strakhovaya kompania general director.

There are many examples of the state involvement in the insurance industry development. Favorable tax conditions for life insurance will result in dynamic progress in the sector. The national housing project operating at full swing will be followed by mortgage insurance boom. But the insurance market will expand even without such innovations. “So far people saturate their “material hunger” and buy and change cars, apartments and houses. Now they have something to lose and think about preservation. And all over the world the issue is regulated by insurance companies. Moscow is catching up with Europe and is being followed by the regions. Market segmentation is not an issue now – you have to be able to secure proper supply for the demand, growing for natural reasons. You need quick payments, high technologies and powerful regional networks. The one who is “faster, higher and stronger” will win”, —mister Markarov concludes.

The games are over

By Pavel Samiev

Process of financing is inherent to mighty companies capable of making serious development investments. And mergers, acquisitions and general concentration of the insurance market would only grow stronger.

What has happened to the insurance market? Why have all the recent news referred to selling insurance companies? NASTA, Standard-Reserve, Moskva-Re, ROSNO — the list may be continued. The market has reached a certain stage – former owners (usually founders of initial companies) think about the future and see drastic changes in the market situation. The new market brings about new challenges. You have to make energetic steps to build capital, introduce top level technologies and diversify your business to the utmost. Otherwise you will be trampled upon, rolled over and pushed away to the marked periphery, to the area of highly unprofitable programs of no interest to anybody or outward-bound “schemes”. All lucrative pieces would be consumed by large players with gross financial potential. Size is as important as expensive modern technologies. It is no longer enough to be creative to develop your business, you need to optimize all processes, cut all costs, play a downright capitalist.

It is impossible to grow without solid investments – in the mid-term perspective it is impossible even to survive. It is time to understand - the Russian insurance market has opened its doors. “Foreigners” have already come, and their market strategy will be more pressing and aggressive. At first stages they would not disregard even dumping approach. And international financial and insurance groups, which have not yet arrived at the Russian market, will soon rush in. It is difficult to compete with such giants – but possible. There is no need to be afraid of full-scale expansion. The Russian insurance capital has all the chances to survive and take a good stand. It can be done by powerful domestic groups that come into being due to mergers or appearance of large strategic investors. The second option is to occupy a certain niche — regional, industrial, product. This road is quite promising for mid-sized companies. Bur you need precise positioning and high-quality services.

Foreign insurers favor acquisitions as a way of entering our market. So we are still going to see serious billion dollar deals. As to insurance IPO, you may forget about them for a while. The process will start after a while, so far it is more costly and less profitable. RESO-Garantia is the only company that insists on the idea of IPO this year. Without discussing a possible success of this particular operation, we may clearly say: today it is much more profitable to sold oneself out to large investors: bonus for control, reduced expenses, no need to “expose” in public. And, remember, the cost of the insurance business simply gallops up. Average-size companies that couple of years ago might be purchased for 10-20 million dollars at most, currently cost hundreds of millions. It is proper time to sell. Also, it is proper time to buy.

The situation is good since the market is to undergo serious changes in the near future. How many companies would stay in the market? Somehow the question is of notable concerns to many people. By the way, journalists favor it very much. More than 1000 insurers operate in Netherlands, and there are dozens of insurance companies in many other European countries, both in Western and Eastern parts. Does it mean that the insurance market in Netherlands is more (or less) developed than in Poland or Spain? No, the mode of operation is different, that is all. Russia has good chances to develop large regional insurers – to compete locally with federal ones. Currently there seems to be about five hundred really competitive, “non-scheme” and vigorous companies at the Russian market. Considering differently directed movements — on the one hand, mergers and acquisitions, on the other, creating foreign daughters and specialized life-daughters — within 2-3 years the number of companies at the market would hardly exceed 400.

There would be no room for smaller companies. Who would need them? Middlemen are brokers. The sphere of re-insurance is for those powerful and big. Retail insurance is a net of subsidiaries, a well-known brand, tuned up technologies, consistent financial stability, which implies large investments and current expenses. The insurance culture should be built on this kind of approach. A small company is capable of collecting insurance premium, but it usually can not build a reliable system of settling losses. You have to resort to dumping, to paying enormous commissions to agents and, as a result, you either exist on the brink of financial collapsing or you can not provide satisfactory servicing to your clients. Again, insuring corporate clients is done more efficiently by big insurers. For instance, can a small company secure reliable reinsurance protection? It is too dangerous for such a company to hold big risks.

So who is going to survive? Large and medium size companies — it is either federal scope with plans for global presence, or specialized niches and regional markets. Both ways have their advantages. A medium size company may successfully compete with a large-sized one (at a limited space, due to certain specific advantages, flexibility and special offers), but a small one – no way. Either you move up – or you are out. What is left for small insurers? The choice is limited: 1) shareholders make serious investments to capitalize and restructure their company, 2) their company may be sold and 3) their company simply dies. Welcome to the developed insurance market. Welcome to the market for big players. Serious financing is not for small business. We seem to have understood it, at last.