Profitability and unprofitability of insurers: Paradoxical dynamics, 2008

It is well known that for several years the insurance business has grown unprofitable. But in 2007 combination of the unprofitability components was notably changed - rapidly growing operational expenses took the lead.

Averaged combined unprofitability factor in 2007 went up in all insurance companies in Russia comparing to 2006: from 92.8 to 93.8%. The growth was mostly explained by increased average operational expenses against net-premium from 32.7 to 36.3% throughout all insurers. Operational expenses will keep on growing, average ratio between operational expenses and net-premium in 2008 would reach 40%. Main reasons are: growing lease payments, salaries of employees and management, and high agent commissions.

According to our information, agent commissions in certain companies reach as much as 40-50% with inclusion of the so-called "kick-backs". Their share in aggregate corporate portfolio collections declines, but still remains quite high. Our presumption is that in certain types of property insurance this kind of a bonus to decision-making managers may reach 20-25%. But, according to numerous market players, both on demand and supply sides, there is an optimistic trend to make the share of such bonuses smaller.

Quite unexpectedly, 2007 saw reduced average level of net unprofitability (without operational expenses) from 54.5 to 53.7% among all insurers. We may be witnessing a change of trend: dumping and improper tariffs may at last be substituted by reasonable tariff policy and tariff differentiation; tariffs would reflect real unprofitability in different types of insurance products. In 2007 the majority of companies increased tariffs in different types of insurance (for instance, autocasco). Reduction of net unprofitability may be also attributed to diminished OSAGO share in insurance contributions (15.7% in 2006 to 14.9% in 2007).