Review of the insurance broker market: getting closer to a civilized market

General

Out of shadow

Table 1. Level of penetration of insurance brokers to different types of insurance (share of contributions, collected through contracts signed with insurance broker intermediation, in consolidated contributions)
Table 2. Ranking of insurance brokers by volume of broker commission in 2007
Table 3. Ranking of insurance brokers by consolidated amount of insurance premium, collected through contracts, signed with insurance broker intermediation (total), 2007
Table 4. Ranking of insurance brokers by consolidated amount of insurance premium, collected through contracts, signed with insurance broker intermediation (corporate insurance), 2007
Table 5. Ranking of insurance brokers by consolidated amount of insurance premium, collected through contracts, signed with insurance broker intermediation (retail insurance), 2007
Table 6. Ranking of insurance brokers by consolidated amount of insurance premium, collected through contracts, signed with insurance broker intermediation (VMI), 2007
Table 7. Ranking of insurance brokers by consolidated amount of insurance premium, collected through contracts, signed with insurance broker intermediation (motor risks), 2007
Table 8. Ranking of insurance brokers by consolidated amount of insurance premium, collected through contracts, signed with insurance broker intermediation (construction-erection), 2007
Table 9. Ranking of insurance brokers by consolidated amount of insurance premium, collected through contracts, signed with insurance broker intermediation (sea risk), 2007
Table 10. Ranking of insurance brokers by consolidated amount of insurance premium, collected through contracts, signed with insurance broker intermediation (property of legal entities - fire and other risks), 2007
Table 11. Ranking of insurance brokers by consolidated amount of re-insurance premium, collected through contracts, signed with insurance broker intermediation, 2007
Table 12. Chief features of Russian insurance brokers, 2007

Licensing of Russian insurance and re-insurance brokers made the broker market more civilized; specialized reporting №1-broker made the market more transparent with prerequisites for proper information infrastructure. Still, majority of insurance brokers are not yet ready to disclose information on their activity, which testifies to the market immaturity.

By July 1, 2008 115 insurance brokers received an official broker license, with two more companies being under consideration. Insurance broker-insurance companies’ ratio is 0.14. In the developed countries the ratio is 10:1.

Expert RA based its findings on the 33 insurance companies’ data. In 2006 insurance and re-insurance brokers collected about 6% of total insurance contributions (12% of collections of class 1 and 2 companies). In the West insurance brokers help to collect 10-20% (continental model) and over 50% (British-American model) of insurance premium.

Insurance brokers are mostly demanded in technically complicated types of insurance, like sea insurance, space risk insurance, aviation risk insurance, construction-erection insurance etc. In 2007 at least 34.3% of aviation risk insurance collections were received through insurance brokers, construction-erection insurance – at least 10.8%.

According to official statistics, consolidated broker commission in 2007 exceeded 1.9 bln rubles (data from 69 insurance brokers). Average commission of Russian insurance brokers was 13-14% (Expert RA).The commission size varied from 4 to 30%.

Big and small market players

The Russian insurance broker market is highly polarized. It features either small companies (1 to 10 employees), or big ones (20 to 50 employees). Absence of “middle class” among Russian insurance brokers implies poor level of development of the intermediation type.

The Russian insurance broker market is highly concentrated. A great number of insurance broker contracts come to Aon Rus – Insurance Brokers, Marsh – Insurance Brokers, Insurance Broker Malakut. The first two companies are “daughters” of the world leaders at the broker market. According to Swiss Re, 31% of the world consolidated broker revenue in 2002 (without counting life insurance commission) was obtained by Marsh & McLennan, 23% – Aon, 7% – Willis. At the re-insurance broker world market 78% of consolidated commission was collected by four companies.

Insurance brokers: first statistics

Penetration of insurance brokers

According to Expert RA, consolidated broker share of insurance sales in Russia has been within 10% (voluntary contributions + OSAGO).

Expert RA based its assessment on data from 33 insurance companies; insurance collections through brokers in 2006 were about 6%. Large insurance companies were especially active in using brokers (about 12% of insurance premium of 1 and 2 class companies came through insurance brokers). Collections through brokers in 2006 went down from 9 to 6% comparing with 2005, for large insurers from 15 to 12%.

Broker share in insurers’ portfolios in 2007 came to 8% (a sample is less representative – data from 13 companies), in certain cases contributions through insurance brokers soared to 70%.

Insurance brokers are mostly demanded in technically complicated types of insurance, like sea insurance, space risk insurance, aviation risk insurance, construction-erection insurance etc. In 2007 at least 34.3% aviation risk insurance collections were received through insurance brokers, construction-erection insurance – at least 10.8%.

Insurance brokers are mostly approached by legal entities. Over 95% of collections through insurance brokers in 2007 related to corporate insurance.

Number of brokers: licensing results

As of July 1, 2007 Russia introduced mandatory licensing for insurance and re-insurance brokers. Out of 1 000 registered insurance brokers (by that time), a year later 113 companies plus two individual entrepreneurs received such licenses. Besides, according to Expert RA, about 20% of insurance brokers started their professional activity after obtaining the license. That means: only about 100 pre-license period brokers stayed in the business.

Registered insurance brokers before mid-2006 may be divided into three groups:

• terminated their activity or conduct it very rarely (over half of all registered brokers);
• active brokers turned into insurance agents after licensing demand, thus refusing to receive a license;
• active brokers opted to remain ones and obtain a broker license. Such brokers often belong to a group of insurance intermediaries, as insurance agents.

By May 19, 2007, several days before the licensing demand became effective, licenses were given only to 19 brokers. The small number of licenses may be attributed to mistakenly prepared documents and to unwillingness of many insurance brokers to receive license at all. The main reason for refusal to give a license was inconsistency of presented standard agreements with the area of insurance broker activity, stated in the law “On organization of insurance business in the Russian Federation”. By July 1, 2008 115 insurance brokers had broker licenses and two more brokers were under consideration. Thus, since altogether there were 830 insurance companies by June 30, 2008, the ratio between insurance brokers and insurance companies was 0.14. Officially before licensing there was only one insurance broker per insurance company, in practice – a bit less. The ratio in the developed countries is 10:1.

The licensing made the insurance broker market – closed and amorphous - restructure and turn into an organized market.

Russian insurance brokers – 2007

Since 2006 insurance and re-insurance brokers have been obliged to send to federal supervision structures a special statistic form – № 1-broker. In 2007 Federal Service for Insurance Supervision (FSIS) received reports from 69 out of 87 registered insurance brokers – the basis for the first statistics on the Russian insurance broker activities.

Geography of operations

Insurance broker concentration in Moscow notably exceeds the one of Russian insurers. According to FSIS, 66 insurance brokers were registered in Moscow by July 1, 2008, which is 57.4% of total licensed insurance brokers. In the first quarter of 2008 Moscow-registered insurance companies amounted to 375 or 44.5% of total insurers.

Insurance broker geography is far from diverse: there is not a single registered insurance broker in many subjects of the RF. Only 26 Russian regions used services of insurance brokers for insurance purposes in 2007. Re-insurance contracts with involvement of insurance brokers were signed in 23 regions of the Russian Federation and in 29 foreign countries. Low level of insurance broker institute at the Russian insurance market results in its concentration in Moscow, as the largest financial center of the country.

Average number of employees

Distribution of Russian insurers and re-insurers by average number of employees significantly differs from normal and shows two types of companies:

• small insurance brokers (1 to 10 employees). The first group consists of regional companies; Moscow companies – part of group of companies, providing wide range of intermediary services (including agent services); recently incorporated companies – started to operate after being licensed;
• large insurance brokers (20 to 50 employees). The second group consists of well-known insurers with many years of the market presence.

Absence of so-called “middle class” among Russian insurance brokers implies poor development of intermediation of this type.

Number of signed contracts

In 2007 69 insurance and re-insurance brokers, presenting their reports to FSIS, signed 111 962 insurance contracts, including 392 life insurance contracts. According to official statistics, in 2006 (the latest data available) 133.4 mln insurance contracts were signed (97 mln – voluntary insurance). In 2007 the same 69 insurance brokers signed 8 299 re-insurance contracts, out of them 2 327 or 28.0% re-insurance contracts with foreign insurers.

Russian insurance brokers mostly intermediated in signing direct insurance contracts – 93.1% of all contracts through insurance brokers, 6.9% – re-insurance contracts.

Revenues of insurance brokers

Consolidated commission of 69 insurance and re-insurance brokers, presenting information for 2007, amounted to 1.9 bln rubles. 1.8 bln rubles were received by brokers for their main operations - other revenues were about 100 mln rubles.

According to Russian broker companies, average broker commission constitutes 13-14% paid for contracts signed with their intermediation. Commission varies from 4 to 30%.

Rankings of Russian insurance brokers

The Russian insurance broker market is highly concentrated. Significant number of contracts, signed through intermediation of insurance brokers, comes to Aon Rus – Insurance Brokers, Marsh – Insurance brokers, Insurance Broker Malakut. The first two companies are “daughters” of the world broker market leaders. According to Swiss Re, in 2002 31% of the world total broker revenues (without life insurance commissions) came to Marsh & McLennan, 23% – Aon, 7% – Willis. As to re-insurance brokers, 78% commissions came to four companies.

Sum total of insurance broker commission (participants of the Expert RA study), amounted to 447 018 thousand rubles or 23.5% of total market commission.

Insurance brokers: introduction

What are insurance brokers?

Within the last 15 years the notion of “insurance broker” has been changed in the Russian legislation several times. Change of notions brought about changing demands to activity of insurance brokers.

The last definition goes as follows: insurance brokers are physical persons (individual entrepreneurs) or legal entities, operating in the interests of insurers or insured persons and providing services, related to signing contracts between insurers and insured persons, and performing such contracts. Insurance brokers are allowed to perform other law-admissible insurance-related activity, excepting operations in the capacity of insurance agents, insurers and re-insurers.

Thus, according to the law “On foundations of insurance business in the Russian Federation”, an insurance broker cannot represent interests of an insurer towards his clients and, consequently, get from insurance companies commissions for intermediary operations (brokers may provide to insures mostly consultation services).

Services

All range of insurance broker services may be broken into different parameters. First, services of an insurance broker differ depending on type of a client:

• services to insurers;
• services to re-insurers;
• services to insurance companies.

The second classification depends on the stage of insurance (re-insurance) contracts:

• services in time of signing insurance (re-insurance) contracts;
• services to accompany insurance (re-insurance) contracts;
• services to settle losses.

Of 69 insurance brokers, presenting information to FSIS, 56 brokers (81.2%) provided only services, related to signing insurance (re-insurance) contracts, 35 brokers (50.7%) – services, related to signing insurance (re-insurance) contracts and their performance.

The last classification depends on type of services:

• consultation services;
• organization services;
• services to work with documents;
• assistance in financial arrangements;
• other services (at brokers’ sites).

In 2007 more than half of Russian insurance brokers received money in connection with insurance (re-insurance) contracts, meaning they provided help in financial arrangements. 10 insurance brokers (14.5% of the total number of brokers) received money from individuals, 36 (52.2%) – from legal entities. 31 insurance brokers received money in connection with insurance (re-insurance) contracts from insurance organizations.

According to FSIS, in 2007 20 insurance brokers (29% of the total number of brokers) provided their clients with other insurance-related services.

Prospects for the future

The following factors are in the way of insurance brokers at the Russian insurance market:
1. Demand side:

• low volume of good voluntary demand for insurance services;
• direct approach to insurance companies, partial substitutes – insurance agents;
• un-profitable taxing of payments for insurance broker services;

• prohibition to get intermediation commissions from insurance companies;
• un-profitable taxing of insurance broker operations;
• low professional level of employees of broker companies.

Strategy of development: new limitations

Insurance strategic development in the Russian Federation till 2012, prepared by the ministry of finance, provides for corrected regulation of insurance intermediary operations:

• status, functions and operative conditions of insurance brokers;
• responsibility for violating statutory requirements;
• requirements to knowledge, qualification, minimum authorized capital for brokers (legal entities), form of financial support to secure operations of insurance brokers.

Thus, the strategy provides for tougher demands to insurance and re-insurance brokers. The strategy does not remove main obstacles in the way of insurance broker development at the Russian insurance market: unfavorable taxing of insurance brokers and their clients, prohibition to get commissions for intermediary operations from insurance companies.