The 2007 insurance market: long-awaited success

The review prepared by:
Pavel Samiev
director, department of ratings of financial institutions

Aleksey Yanin
head, ratings of insurance companies

Growing business: according to Expert RA, the insurance real market (without scheming operations) in 2007 went up by at least 35% (in 2006 - 40%). The real insurance market was growing faster than the officially calculated consolidated insurance premium (official increment in 2007, according to the Expert RA preliminary assessment, should be 25%).

Tougher fight with scheming: in the first months of the coming year licenses may be revoked from a number of insurance and re-insurance companies, tampering with «wrong» re-insurance. Expert RA has placed about 30 companies into the risk group.

Presently insurers with dubious operations in their re-insurance structure, cancel them to make their 2008 reporting clean. As a rating agency, we pay special attention to the process and are ready to drastically reduce ratings to companies refusing to minimize such activities.

The market structure: as might be expected, mandatory types of insurance grow faster than voluntary ones, but the growth should be attributed to increased state financing of health-care system, mostly through mandatory medical insurance – which, actually, is not insurance, but a mechanism for redistributing budget funds.

In the past the market, free from tax optimization, was dominated by mandatory types. To our minds, such a model was extremely useful for the market, economy in general and population in particular. In many countries insurance culture and risk protection were based on imputed or mandatory insurance.

Still, in 2007 the Russian market was developed enough to put voluntary types of insurance at the forefront.

Dramatic growth of mandatory medical insurance premium: 2007 increment is expected to reach 40%, but one should not be deluded about the segment future. The mandatory medical insurance system is definitely in a fix and needs cardinal reforming – the sooner the better.

Foreign activity at the market: 2007 witnessed serious deals with foreign involvement. The most notable ones: Alliance bought ROSNO together with Progress-Guarant, Zurich bought NASTA. The two deals seem quite successful – the two companies claim to be the future leaders. In the case of Alliance-ROSNO there is no need for new business-processes and organizational transformations (the Alliance experience has already been incorporated), but for NASTA integration will be more painful. It does not necessarily imply problems – both Zurich and NASTA before merging had excellent financial and quality indicators, but different business-processes and infrastructure. Successful integration of new principles will justify ambitious plans of shareholders and managers. Our appraisal is optimistic – despite temporary obstacles (like departure of certain managers).

Announcement: RESO-Guarantee is on sale. At the end of 2007 the announcement was made of a record deal (both in absolute sum and in multipliers) to purchase 36.7% stock of RESO-Guarantee shares for 810 mln euro by French company AXA. The rest of shares may be purchased after 4 years to permit AXA to be in full control of the company. So far the deal has many blanks – it is not clear whether the AXA credit (agreed upon by the sides) will be used to re-finance Dresdner Bank credit or for some other purposes (the first option is more plausible), whether the brand will be re-positioned and changed (least plausible before 2011), what will the option conditions be (market share, market place, profitability, combined unprofitability ratio and other ratios). Two things are clear. First, AXA received an excellent chance to become one of the leading insurers in Russia (claiming to be the first) on the basis of a well-known brand and powerful agents’ links (you need to implement the most modern technologies, minimize expenses and provide resources for further expansion). Second, RESO shareholders seriously profited from selling the stock – the asset proved to be very attractive for a strategic investor, therefore the entrance fee was above expectation. So both sellers and buyers were satisfied.

Bank cooperation boom: banks turned into one of the most efficient sale channels. Almost all retail and a number of corporate types of insurance are sold through banks: autocasco, OSAGO, accident insurance, borrowers’ life insurance, title insurance, banking risk insurance – all the above areas are on the energetic rise. In 2006 bank programs or bank risk insurance programs, according to Expert RA, brought 1 bln dollars in premium, in 2007 the figure may reach 3 bln dollars, which tops the most optimistic forecasts of the previous year.

Need to accredit insurance companies: the banking insurance market entry ticket is an accreditation with large and medium-sized banks. In 2007 Federal Anti-Monopoly Service actively criticized accreditation, especially after some small insurers unable to comply with banks’ demands, were left out. The issue is still pending, but Federal Anti-Monopoly Service took a less radical decision, considering official selection of reliable counter-agents through formalizing rules and making them more transparent and market-oriented. As a result insurers and banks would organize their business more efficiently, without violating rights of banks, borrowers or insurance companies.

Accreditation at the Mortgage Crediting Agency has also gained importance – the Agency’s main requirement is credibility rating of international agencies or Expert RA.

Regional expansion turned to be a source of growth and problems at the same time. Regional collections grow fast; branches, formed several years ago, started bringing real profits. But so far many branches have failed to reach breakeven point, their margin is low, they are mostly engaged in unprofitable motor insurance, branches are poorly controlled, their managers periodically move from one company to another, same as insurance agents. Branch chains have the following growth limitations: dumping, high agent commissions, speedy growth of unprofitability, growth of salaries, poorly regulated business processes, general lack of efficiency.

Speedy growth of unprofitability turned into a real threat. Retail business is a source of losses for many companies. Expert RA specialists see increased problems of many insurers related to increased unprofitability. In this connection Expert RA recently revoked Rekon license.

Mandatory licensing of brokers. As was expected, all main re-insurance brokers were finally licensed, although in certain cases it took some time. Some small retail brokers, especially those specializing on automobile sales centers, preferred to turn into agents to avoid regular reporting.

OSAGO law was amended – the market awaits crisis. The market important innovations went as follows: simplified registration of road accidents («European protocol») and direct settlement of losses. The amendments were actively lobbied by the insurance community and would make an important step to respond to needs of the insured. Insurance companies pressed on these innovations expecting higher quality of service and extended responsibility to be correspondingly compensated by increased tariffs. But the legislator decided differently: convenience and responsibility go up without changed tariffs. As a result insurers found themselves stalemated. Obviously, there is no way back, and the legislative innovations would be followed by drastic increase of unprofitability. According to Expert RA, by 2009 OSAGO unprofitability would exceed 120%, since after the amendments take force, one may expect increased amount of small losses’ claims and a wave of insurance fraud. The system of direct settlement of losses would encourage insurers to increase payments to their «own» clients. The OSAGO market players would be divided into three groups. The first one: 5-6 federal level insurers would work at the OSAGO market for several years more and compensate their related losses by profits in other types of insurance through cross-sales. The first group insurers would consider OSAGO as unprofitable business, an inevitable evil. The second group would be the most numerous and include mostly average-sized companies, and after some eighteen months these companies would return their OSAGO licenses. Certain insurers already declared their intention to do so. The third group would consist mostly of small regional companies and progressively generate OSAGO losses. They would finally go bankrupt or (which is as bad considering the whole country) delay payments, decrease service quality which would consequently displease insurance policy holders and discredit the insurance market. The segment crisis may strongly complicate further development of retail services and some new segments, like insurance of individuals’ property and personal insurance. According to Expert RA, within a year at least 10-15 companies may return their OSAGO licenses.

What else may be expected in 2008? In autumn legislators would again consider an insurance draft on responsibility of owners of enterprises with high degree of danger. Several large deals may take place, involving Rosgosstrakh, Sogaz, Capital Insurance Group, ZHASO, Spasskiye Vorota and several other medium and large-sized companies.

Credit programs’ insurance policies (deposits, life and health of the borrower, mortgage risks) would continue to grow dramatically, but the development vector would depend a lot on the regulators’ activities (Federal Anti-Monopoly Service, for one). Officially recommended procedure of accrediting insurance companies by banks is expected to be launched.

The real market increment next year may near 35% – mostly due to retail and medium-sized business, same as in 2007.