Become a leader or sell yourself dear?

The insurance market development, the first half of 2007

The authors:
A. Yanin
head of insurance companies rating service

N. Komleva
expert of financial institutions ratings department

A. Maloletnev
expert of financial institutions ratings department

P. Samiev
director of financial institutions ratings department

Trends of the first six months

The process of cleaning the Russian life insurance market from “grey schemes” has practically been completed in the first half of 2007, and the market has basically turned into a classic one. Still, at the period the life insurance market might have reached better results — a number of large international companies started much slower than expected. The 2007 second half indicators at the life long-term insurance market are envisaged to be much better than the first half, due to tenser competition and extended presence of many companies in the regions.

As to the regional aspect of the insurance market development, the results of insurance companies in the first half of 2007 confirmed the forecasts of the Expert RA analysts about regional insurance retail growing faster than in the capital — the population revenues in the regions have been high enough to start thinking about purchasing an insurance policy.

Our experts have noted positive tendencies in the relations between insurers and state bodies. In the first half of 2007 the state combined policy of being rigorous to standard violators and closely cooperating with insurers, while developing important normative acts. For instance, the regulating bodies made a concession to the insurers’ community by increasing a list of assets accepted to cover insurance reserves.

We have also noted an improved crediting cooperation between banks and insurance companies at the period. Presently no banks at the market operate with one insurer on deliberately unfavorable conditions for clients.

In 2006 Russian insurers collected 406.8 bln rubles in insurance premium and paid 162 bln rubles in insurance compensation (without obligatory medical insurance). The official market increment in 2006 amounted to 16.25%. At first glance, unimpressive official figures conceal the real market dynamic growth — the process of cleaning the Russian insurance market from all sorts of tax-saving schemes was completed exactly in 2006. Certain insurance types have gone through real boom period: for example, mortgage insurance was assessed by Expert RA to grow by 240%. Insurance retail made active steps forward, too, but, same as in the past, the largest contribution was collected in obligatory types of insurance.

Due to quantity growth and structural changes at the Russian insurance market in 2006 Russia has become a super-attractive market for foreign players and a territory for competing world insurance giants. Global insurers consider the Russian market as pretty perspective field for investments — against the background of almost zero growth at the Western insurance markets even 16% (official Russian statistics) look attractive, saying nothing about real 20%-25% (without pseudo-insurance distortion). No wonder, foreign investors rush in to penetrate the local market in front of the competition. They envisage profits to be much higher than the country risks of Russia . The symbolic events at the beginning of 2007 have shown the market trend to be implemented even before the expected time. We refer to purchase of ROSNO and NASTA by leading foreign players (Allianz SE and Zurich Financial Services accordingly). Soon other big deals with foreign companies will to be signed — foreign investors are ready to pay big money for Russian insurers.

Foreign “invasion” to Russia has accelerated a number of key processes at the local market. The past year was, probably, the first in the modern Russia insurance development to bring to surface a non-price competition factor. For the majority of types of insurance tariff competition has become too difficult — an insurer can not reduce tariffs any further without endangering its financial status. The market leaders in 2006 clearly understood — tariff wars would lead to nowhere. Service quality comes to the forefront with assurance — considering foreign competition the level of service has become nothing less but the issue of survival. Leading insurers pay special attention to retaining old clients, rather than to attracting new ones - the complicated task demands new methods and principles of operation, client-targeted activity.

Investing in quality and development of servicing infrastructure demands significant resources. Resources of foreign companies have been practically unlimited (you only have to balance your losses and gains), but Russian insurers need to look for sources of financing, which is not easy. The only realizable way of financing insurance business (without losing control over your business) is still funds of the company owner, but the resource is close to depletion — owners of insurance companies have been less and less willing to make large-scale investments to their own companies. Pretty soon the market leaders would face the need to look for the development money at the market. The obvious way is to make IPO, but according to the results of 2006 it is still for the future.

To unite insurance businesses is a way to promising and accessible development. Enlargement of insurance companies makes it possible to increase accessible insurance capacity and financial stability, and improve the quality of service due to a scale effect — by uniting resources of several companies. Insurers seem to have understood — to survive in a new aggressive and competitive environment you need consolidation and enlargement. It is more difficult for small insurance companies to find market niches: insurance facilitators have been falling out of demand, the segment of insuring large business has long been divided, and you can not outpace the retail insurance market leaders without developed branches, a smooth system of settling losses and a well-known brand.

As a result, last year federal and regional insurance companies were active at the market of mergers and acquisitions: in 2006 certain small regional insurers were turned into branches of federal level companies, smaller players were absorbed by larger ones, several insurance groups were established.

Actually, not all insurers have set their goals on a long-termed development. Owners (and often chief managers) of companies, making plans for the future , had to face a serious dilemma in 2006: to continue being independent or urgently prepare your business to be sold to foreign investors or stronger Russian competitors. Those in favor of the second option joined the “race” for the market share in order to augment their portfolio by all means, including dumping and overstated commissions, and sell themselves dearer at the “peak” of their market share. The issue of credibility under such circumstances moves far away from the forefront — why think about some remote consequences of current decisions, if your company has exclusively short-term plans? Such a strategy allows you to work without losses only at the stage of aggressive market development, but stabilization would immediately bring problems of such companies to surface. As a result many insurers are in danger of ingloriously leaving the market or being sold much below their potential worth.

Leaders of the first six months

78 insurance companies participated in the Expert RA study (the first half of 2007). Their combined share of direct insurance contributions (without obligatory medical insurance) neared 80%.

According to Expert RA, the fastest growth at the period was shown by the life insurance market (50.70%) and the motor risk insurance market (40%). The market of outgoing travelers and the OSAGO market grew up in line with the average market figures (20% and 17.70% accordingly). Zero changes featured the cargo insurance market and the water transport insurance market, negative figures were characteristic of the market of insuring financial risks (-10%) and the market of insuring construction and erection risks (-9%).

Combined amount of insurance premium in the first half of 2007 went up by 20.3% comparing to the same period in 2006. The premium incremental rate was almost doubled (by 11.6% in the first half of 2006 comparing to the first half of 2005, by 20.3% in the first half of 2007 comparing to the first half of 2006).

	Automobile insurance			VMI
	OSAGO			Legal entities' property insurance
	Others			Other types of insurance
	Life insurance			Personal accident and sickness insurance
	Individuals' property insurance			Cargo insurance
	Construction-assembly work insurance			Water transport insurance
	Aviation risks insurance			Financial risks insurance
	Travel abroad insurance

Study of different segments of the Russian insurance market

Captive insurers and bank insurance companies have still been in the lead at the life insurance market. But daughters of foreign insurance companies and large Russian universal insurers have also gained some visibility.

In the first half of 2007 the voluntary medical insurance (VMI) market amounted to about 44 bln rubles. Premium rate of growth (six months) in this particular type of insurance dropped a bit comparing to the previous period down to 13% (instead of 20%). Slow increase of the VMI premium may mean two things: 1) the market begins to show traces of saturation, 2) the type of insurance is not encouraged by taxes.

At the same time VMI contributions have been concentrated in the hands of the largest insurance companies. The combined VMI premium of 10 largest insurers in the first half of 2006 was 54.6%, the first half of 2007 saw the same indicator to be 58.2%.

The VMI market has traditionally been quite stable: within the last three years its three leaders retained their positions. SOGAZ group has been reliably in the lead; ZhASO was the second and non-captive insurance company ROSNO — the third.

In the first half of 2007 combined premium for insurance of accidents and diseases reached 11.5 bln rubles to make annual growth of the premium equal to 16%. The contributions increment in this type of insurance has slowed down a bit: in the first half of 2006 the rate of premium growth comparing to the first half of 2005 was 27.5%.

The accidents and diseases insurance market has been more and more open, its retail segment being very active. Among the market leaders are those specializing on life insurance — Czech Insurance Company and AIG Life. Leading Russian universal insurance companies and groups have significantly strengthened their positions. Rosgosstrakh, Ingosstrakh and ROSNO have incremented accidents and diseases insurance premiums by 60%-90%, AlfaStrakhovanie — even 210%. Comparing to the first half of 2006 the top-ten group was left by UralSib group, ZhaSO and MAKS group.

Notable changes in the list of leaders at the accidents and diseases insurance market have been accompanied by its gradual concentration. The share of top-ten companies in combined premiums in the first half of 2007 amounted to 55.8% (the first half of 2006 — 50.5%).

The insurance market of outgoing travelers is relatively small. Combined insurance contributions in the first half of 2007 totaled 1 bln rubles. The sector has been most dynamic of all individual voluntary insurance segments. The premium increment in the first half of 2007 comparing to the first half of 2006 neared 20% (14% in the first half of 2006 comparing to the first half of 2005). Accelerated growth of the insurance market of outgoing travelers has been directly connected with increased number of Russian citizens traveling abroad. The market is envisaged to keep on growing due to increased insurance tariffs and extended insurance coverage.

The insurance market of outgoing travelers is the most concentrated segment of the voluntary individual insurance market. 59.6% of the combined premium (insurance of outgoing travelers) in the first half of 2007 was collected by the ten largest companies (first half of 2006 — 56.2%).

Leading Russian universal insurers have been the main players at the insurance market of outgoing travelers. Ingosstrakh has been the obvious leader, followed by ROSNO, by-passing in the first half of 2007 RESO-Guarantee. Alfa Strakhovanie, Renaissance Strakhovanie (including Progress-Neva) and UralSib group have shown the fastest incremental growth of premium in this type of insurance.

The market of voluntary motor insurance in the first half of 2007 reached 68 bln rubles. Payments in this type of insurance amounted to 32 bln rubles. Motor insurance has remained to be a main driver of the whole Russia insurance market. Incremental growth in the first half of 2007 reached 40%. Still, the market keeps on saturating to slow down premium increment: in the first half of 2006 the motor insurance incremental rate was 54%.

The motor voluntary insurance market is based on property car insurance. In the first half of 2007 the share of voluntary insurance of the car owners’ liability did not exceed 1%. Besides, the indicator has been slowing down (1.34% in the first half of 2005, 1.05% in the first half of 2006 and 0.93% in the first half of 2007).

Increased OSAGO unprofitability has been accompanied by slow reduction of voluntary motor insurance payments (both property and liability). In the first half of 2005 the level of motor insurance payments averaged 53%, in the first half of 2006 the figure dropped down to 50%, and in the first half of 2007 it went even further down — 47.5%. Reduced payments in motor insurance have two sides: 1) increased insurance tariffs and no-dumping policy of majority of companies, 2) increased share of new foreign cars bought on credit with relatively low level of unprofitability.

In line with the general trend the market of voluntary motor insurance has been getting more concentrated. In the first half of 2006 the share of ten largest insurers in combined voluntary insurance premium was 51%, in the first half of 2007 the indicator went up to 54%.

The three leaders in the motor insurance market retained their positions (comparing the first half of 2007 to 2006), but the distance between them visibly shortened. RESO-Guarantee achieved good results in the first half of 2007 (increased contributions 105%), same as Insurance House VSK (94%), ROSNO (64%) and Rosgosstrakh system (60%).

In the first half of 2007 the combined insurance premium for cargo insurance amounted to 6 bln rubles. But incremental growth of contributions in the first quarter of 2007 comparing to the first quarter of 2006 is equal to zero. And the difference between the first quarter of 2006 and 2005 was even negative. The market stagnation may be attributed to refusal of a number of cargo-carriers to insure aviation or pipeline transport operations due to low frequency of insurance cases — they opt to carry risks themselves.

The concentration level at the cargo insurance market is below the average market level. In the first half of 2007 the share of the largest ten insurance companies in the combined contributions at the cargo insurance market reached 49.5%. Still, the concentration has been growing at this segment of the market, too.

The top line in the list of cargo insurers in the first half of 2007 was occupied by Soglasye. Capital group was the second. Ingosstrakh went up two lines to the third position, comparing to the first half of 2006. The cargo insurance market boasts equal presentation of captive insurers serving oil and gas companies, leading universal insurers for whom cargo insurance is secondary, and specialized companies.

Combined contributions for property insurance of legal entities (fire and associated risks) in the first half of 2007 amounted to 34 bln rubles. The market has grown insignificantly: rate of incremental contributions (six months) came about 2%. At the same time the top twenty market leaders increased collections in this type of insurance by 22%. The situation reflects the shift of legal entities' property insurance contributions from smaller and less reliable companies to bigger financially stable insurers. The market concentration has been growing stronger. In the first half of 2007 the share of the top-ten property insurers of legal entities in the combined contributions at the sector reached 57.9% (comparing to 48.7% in the first half of 2006).

The market of insuring property of enterprises has undoubtedly invigorated which is reflected by increased payments: from 7.2% in the first half of 2006 to 20.4% in the first half of 2007.

In the first half of 2007 RESO-Guarantee has gained the sector leadership by increasing collected contributions in the sector by 92% comparing to the first half of 2006. The second and the third positions were occupied by captive insurers — Capital group and SOGAZ group, operating with risks for large industrial enterprises.

The market of insuring property of individuals in the first half of 2007 reached 7.6 bln rubles and increased by 11% comparing to the same period in 2006. In case of the twenty leading companies the incremental contributions for insuring property of individuals were much higher and equaled 21%. Future will see further progress at the market of insuring property of individuals due to increased revenues of citizens and improved insurance culture of the population against the background of active marketing policy of leading insurers.

The market of insuring property of individuals has been relatively concentrated: in the first half of 2007 the premium share of the first ten insurance companies was 68%. Rosgosstrakh system seems to be a monopolist at the market of ensuring property of citizens due to its extensive net of agents. In the first half of 2007 Rosgosstrakh system accounted for 45.6% of the combined contributions at the sector. Still, other companies try to build up their contributions in this type of insurance. SOGAZ group incremental contributions in the first half of 2007 reached 395% comparing to the first half of 2006, RESO-Guarantee - 326%, AlfaStrakhovanie - 79%, Insurance House VSK — 61%.

In the first half of 2007 collections at the water transport insurance amounted 2.6 bln rubles. The market volume remained practically unchanged comparing to the first half of 2006. Despite relative stability of insurance premium at the water transport market the level of payments between the first half of 2006 and 2007 significantly augmented: from 33% to 47.5%.

Ingosstrakh group has been an obvious leader at the water transport insurance market. Its share of combined contributions at the marker constituted 36%. SOGAZ group and Insurance House VSK have also been at the top of the market segment. The concentration level is relatively high: the ten largest insurers at the market of water transport insurance received 70% of the combined insurance premium in the first half of 2007.

By volume the market of insuring aviation risks is presently comparable with that of water transport: the combined premium for insurance of aviation risks in the first half of 2007 totaled 2.5 bln rubles. Still, as distinct from the water transport insurance market, incremental rates of contributions for insurance of aviation risks are well above zero: in the first half of 2007 premiums went up by 13% (21% in the first half of 2006 comparing to the first half of 2005). The increased collections for insurance of aviation risks were caused by increased insurance tariffs, caused, in its turn, by increased frequency of insurance cases at this type of insurance in recent years.

The market of insuring construction and erection risks, as distinct from all other insurance markets, considered above, showed dramatic negative dynamics in the first half of 2007 comparing to the first half of 2006. The premium collections at the period dropped by 9%, from 4.1 to 3.7 bln rubles. The level of payments for the same period of time went up a bit: from 3.2% to 4.2%. Captive companies have been mostly accountable for the fall: SOGAZ group collections went down by -76%, Capital group — by 59%.

Besides, as distinct from other insurance markets, average-sized specialized insurance companies successfully compete at the market of insuring construction and erection risks with leading Russian universal and captive insurers. In the first half of 2007 the market segment was led by Russian Insurance Center, followed by Gefest. Importantly, in the first half of 2006 the three leaders at the sector were SOGAZ, Capital and Ingosstrakh. The level of concentration at the market of insuring construction and erection risks is relatively low: in the first half of 2007 the share of ten largest companies at the sector amounted to 48% of the combined insurance premium.

The OSAGO market in the first half of 2007 amounted to 34.56 bln rubles and increased by 17.55% comparing to the first half of 2006. The companies, covered by the Expert RA study, collected 85.4% OSAGO contributions. The OSAGO level of payments in the first half of 2007 reached 53.36% (51.36% in the first half of 2006).

Rosgosstrakh system is an obvious leader at the sector with its share of the combined OSAGO contributions equal to 27.2% in the first half of 2007. It is followed by RESO-Guarantee and Ingosstrakh. The OSAGO market boasts relatively high concentration: in the first half of 2007 the ten leaders collected 64.13% of the combined premium. As distinct from other segments of the insurance market, in the first half of 2007 comparing to the first half of 2006 the OSAGO concentration level went a bit down — from 66.41% to 64.13%, which implies highly competitive situation at the market.