OSAGO market, July 1, 2003 to December 31, 2007: the market on the brink

Brief

Adjustments will kill the market
According to Expert RA analysts, if new adjustments related to a simplified procedure of registering road traffic accidents (RTA) and a system of direct compensation of losses take force without an adequate increase of tariffs, the OSAGO market annual un-profitability factor by January 1, 2010 would be 97.7%, by January 1, 2011 – 107.9%, which would be inevitably followed by the OSAGO market comprehensive crush.

A system of direct compensation of losses will encourage insurers to pay to their clients maximum possible compensation for damage to property, life and health. At the same time, a simplified procedure of registering road traffic accidents will drastically increase a number of small RTA claims and cases of insurance fraud. Consequently, insurance companies would have to increase their expenditures.

Un-profitability over the edge
Increased un-profitability may bankrupt not only small insurers in the most in-profitable regions, but the large market players as well, selling OSAGO policies all over the country.

By January 1, 2008 annual un-profitability factor at the OSAGO market was 72.3 to 77.8% (depending on the calculation method). According to Expert RA, by January 1, 2009 the lower border of the annual un-profitability factor would cross the critical line (net-rate securing current insurance OSAGO payments, 77%), and reach 77.5% (considering different calculation methods the actual annual un-profitability factor may be even closer to 80%).

By January 1, 2008 the lower border of the annual un-profitability factor for certain tariff territories and types of transport neared or exceeded a critical level: in towns with Кт=1.3 the indicator amounted to 76.3%, in towns with Кт=1 – 76.8%, in settlements with Кт=0.5 – 85.1%, trucks – 77.9%, buses – 88.2%, trams – 149.4%, taxi – 174.4%, trolleybuses – 195.1%.

Expert RA forecasts the OSAGO market in 2008 to reach 82.5 bln rubles, in 2009 – 91.9 bln rubles, in 2010 – 101.4 bln rubles. Consolidated payments (without considering a simplified procedure of registering RTA and a system of direct settlement of payments) in 2008 would achieve 47.5 bln rubles, in 2009 – 54.7 bln rubles, in 2010 – 61.9 bln rubles. If the system of direct compensation of losses and the simplified procedure of registering RTA comes to force in March 2009, Expert RA envisages payments of 60.1 bln rubles in 2009, 74.3 bln rubles - in 2010.

6 mln insurance cases were claimed between July 2003 and March 2008, a settlement was reached in 5.6 mln cases (including the first quarter of 2008 - 462 and 449 thousand cases). The insurance payments for the whole analyzed period amounted to 127.9 bln rubles (including the first quarter of 2008 – 10.8 bln rubles). Average premium in line with signed insurance contracts in the period reached 1 997 руб, average insurance payments - 22 688 rubles.

What is to be done?
The only way out is to increase OSAGO tariffs. Besides, territorial adjustment factors and basic insurance tariffs for un-profitable transport categories are to be corrected.

A new adjustment factor has to be introduced in Russia due to high inflation – to correct OSAGO tariffs annually considering inflation for spare parts and garage services. The RF government should index the factor annually on the basis of corresponding official statistics.

The main market indicators

The OSAGO market within the period (July 2003 to March 2008) amounted to 282.0 bln rubles (consolidated insurance premium for signed insurance contracts between January and March 2008 amounted to 16.9 bln rubles).

Source: Expert RA based on Russian Union of Motor Insurers (RUMI) data

141.2 mln insurance contracts were signed during the period (7.8 mln in the first quarter of 2008).

6 mln insurance cases were claimed between July 2003 and March 2008, a settlement was reached in 5.6 mln cases (including the first quarter of 2008 - 462 and 449 thousand cases).

Insurance premium structure by types of motor vehicles from July 2003 to December 2007 Source: Expert RA based on RUMI data

Territorial structure of insurance premium from July 2003 to December 2007 Source: Expert RA based on RUMI data

The insurance payments for the whole analyzed period amounted to 127.9 bln rubles (including the first quarter of 2008 – 10.8 bln rubles). Average premium in line with signed insurance contracts in the period reached 1 997 руб, average insurance payments - 22 688 rubles. Within four and half years of OSAGO car insurance premium amounted to 222.4 bln rubles (83.6% of consolidated insurance premium), trucks – 29.9 bln rubles (11.2%), buses, trolleybuses and trams 5.2 bln rubles (1.9%), trailers – 3.5 bln rubles (1.3%). July 2003 to December 2007 insurance premium in towns with Кт=1.3 was 72.2 bln rubles (27.2% of consolidated insurance premium), in Moscow – 53.2 bln rubles (20.0%), in towns with Кт=1 – 49.2 bln rubles (18.5%). Insurance payment forecast is based on a linear trend, without considering contributions in the second half of 2003 and the whole 2004. OSAGO contributions increment goes down. Insurance payment forecast is based on a linear trend without considering payments in the second half of 2003. * Except OSAGO insurance and co-insurance contracts, registered abroad and temporarily used in the RF, and except insurance for a period of transporting to the registration place. Changed level of payments in the RF subjects shows notable increase of OSAGO un-profitability in the Russian regions. In 2007 the OSAGO payment level in the RF 64 subjects increased by 50% (in 2004 there were only 12 regions with such payment levels).The level of payments in 2007 increased by 77% in the RF 7 subjects (there were no regions with such high payments in 2004 at all).

Dynamics of insurance premium Dynamics of insurance pay-outs (excluding coming into effect simplified procedure of registering road traffic accidents and a system of direct compensation of losses) Source: Expert RA based on RUMI data

Source: Expert RA based on RUMI data

Un-profitability

Dynamics of the annual unprofitability coefficient Source: Expert RA based on RUMI data

Our study calculated annual un-profitability factors as ratio of total payments, change of reserve of claimed but unsettled losses (RCUL) and change of reserve of real but un-claimed losses (RRUL) to earned premium.

The annual un-profitability factor is assessed on the basis of data for previous 365 days.

RRUL was calculated in two ways. The first option assessed RRUL as 10% from earned premium and was considered as a lower border of an annual un-profitability factor.

The second option assessed RRUL including funds to cover possible deferred losses (compensation for damage to life and health), in line with traffic police statistics on RTA-related killed and wounded for the 4.5 year OSAGO period. The second option corresponds to a higher border of an annual un-profitability factor.

Forecast of the lower boundary of unprofitability coefficient (excluding coming into effect simplified procedure of registering road traffic accidents and a system of direct compensation of losses)

Source: Expert RA based on RUMI data

The annual un-profitability factor lower border forecast is based on a linear trend without considering data by January 1, 2005. The annual un-profitability factor higher border cannot be forecast mathematically.

According to Expert RA, by January 1, 2009 the annual un-profitability factor lower border in Russia would exceed a critical level, corresponding to a net-rate to secure current insurance payments for OSAGO contracts (77%), and make 77.5% (the forecast does not consider possible legislative changes, which might seriously influence the OSAGO market un-profitability), due to different methods of assessing RRUL the annual un-profitability factor would be even higher.

When a simplified procedure of registering RTA and a system of direct compensation of losses become effective, OSAGO payments would sufficiently grow, since after approval of the adjustments we may expect increased amount of small claims and insurance fraud. The system of direct compensation of losses would also encourage insurers to increase payments to “their own” clients.

Growing un-profitability of the OSAGO market, strengthened by new adjustments, may bankrupt insurance companies and crash the whole OSAGO system, if tariffs are not correspondingly increased.

Annual unprofitability coefficient in the regions as of January, the 1st 2008

Source: Expert RA based on RUMI data

The annual un-profitability factor for RRUL tariff territories was calculated using the first option.

Dynamics of annual unprofitability coefficient in the regions with low correction factor (excluding coming into effect simplified procedure of registering road traffic accidents and a system of direct compensation of losses)

Source: Expert RA based on RUMI data

Forecast parameters of the annual un-profitability factor are based on a linear trend. According to the forecast, by January 1, 2011 the annual un-profitability factor in tariff territory with Кт=1.3 would reach 91.5%, with Кт=1 – 92.0%, with Кт=0.5 – 115.3%. That means: almost all the companies in these tariff territories would be losing in their OSAGO operations.

Low adjustment factors at the tariff territories proved to be insufficient to develop a sustainable OSAGO market. As a result it would be impossible to buy an OSAGO policy in certain regions of Russia, since insurance companies would cut their operations there.

Annual unprofitability coefficient by types of motor vehicles as of January, the 1st 2008

Source: Expert RA based on RUMI data

The annual un-profitability factor for RRUL transport means was calculated using the first option.

Public transport, taxi and trucks feature very high indicators of un-profitability. It is especially so in case of insuring trolleybuses and taxi – by January 1, 2008 their annual un-profitability losses increased 170%.

Buses and trucks form a special transport group with un-profitability exceeding maximum permissible value (77%). The indicators imply: tariffs are inadequate. Contributions for these types of transport amounted to 36.6 bln rubles (July 2003 – December 2007), or mere 13.8% of the whole market.

Dynamics of annual unprofitability coefficient by some types of motor vehicles (excluding coming into effect simplified procedure of registering road traffic accidents and a system of direct compensation of losses)

Source: Expert RA based on RUM data

Forecast parameters of annual un-profitability factors are based on a linear trend, without considering a simplified procedure of registering RTA and a system of direct compensation of losses.

Expert opinions on the market main indicators

According to Expert RA, when a simplified procedure of registering RTA and a system of direct compensation of losses become effective, a number of small RTA claims, volumes of insurance fraud and payments for individual insurance cases would dramatically grow up (a system of direct compensation of losses would encourage insurers to increase payments to “their own” clients). It will result in a dramatic increase of payments and un-profitable OSAGO.

The Expert RA OSAGO market forecast is of special interest, since a system of direct compensation of losses and a simplified procedure of registering RTA come into force on March 1, 2009.

The annual un-profitability ratio forecast determined RRUL using a traditional formula (0.1 share of earned premium).

According to Expert RA, if OSAGO tariffs are not adjusted in the near future, and a simplified procedure of RTA registering and a system of direct compensation of losses become effective in December 2008 and January 2009, the annual un-profitability factor in the OSAGO market would amount to 97.7% by January 1, 2010 and 107.9 – by January 1, 2011.

Implementation of a simplified procedure of registering RTA and a system of direct compensation of losses without changed tariffs would divide the OSAGO market players into three groups. The first group - 5-6 federal level insurers – would operate at the OSAGO market for several years more, making up for their OSAGO losses by profits in other types of insurance. They would be fully aware of the OSAGO business un-profitability. The second group – the most numerous one with chiefly average level companies – would return their OSAGO licenses immediately or after 1-1.5 year. The third group – mostly small regional companies – would be generating OSAGO losses. In the end they would go bankrupt with corresponding payment delays, worsened service quality and, consequently, disillusioned insurance policy holders and discredited insurance market. The scenario would dramatically impact the insurance market acceleration, which would be slowing down. The OSAGO crisis may hinder further development of retail or other awaiting segments, like insurance of individual property and personal insurance.