Capital weakness in overcrowded Russian market warns AM Best

In a special report entitled Russia’s Insurance Revolution Begins to Gain Pace, the rating agency noted that insurance penetration remains low in Russia but expects written premiums to continue to grow. “The large number of licenced companies has resulted in intense competition, although some insurers are stating that they plan to maintain and develop profitable portfolios, as opposed to attempting to grow market share at any cost. Asset and capital bases tend to be small compared with volume of insurance risk. Increased minimum capital requirements are likely to lead to significant capital injections for some companies. AM Best expects half of all insurers will need to increase their capital bases,” said Carlos Wong-Fupuy, Senior Director, Analytics at AM Best.hideAs of 31 December, 2011, there were 579 registered insurance companies in Russia. This number has contracted ‘sharply’ over the past two decades from more than 4,000 registered insurers, according to the rating agency. It expects this figure to shrink further in the coming years. Yvette Essen, author of the report and Director of Industry Research, Europe & Emerging Markets at AM Best, said the steady reduction in the number of insurance companies reflects the drastic reduction in tax-optimisation schemes, combined with higher capital requirements. “While the insurance sector is fraught with challenges, it is changing radically. There has been a concerted effort to dispel the image that Russia’s insurance market has a close association with tax-optimisation, with a crackdown on such grey schemes in recent years leading to a sharp decline in market participants. Commentators suggest that, considering the size of the insurance sector, no more than 100 insurers are warranted. Small companies exiting the market are expected to have little, if any, negative impact on overall premium growth, as the larger insurers have been increasing their dominance of the market,” she explained. Based on data received from 527 insurers, the total amount of insurance premiums written in Russia during 2011 amounted to 1.3tn roubles (RUB), or $39.7bn, based on exchange rates at December 31, 2011. This represented a 22.1% increase over 2010. Claims totalled RUB 890.4bn, a 15.8% rise over the previous year. However, despite strong growth in total premiums in 2011, the insurance market as a whole remains relatively small. In 2010, it was ranked 19th in the world. Compared with the other BRIC nations of Brazil, China and India, Russia has by far the smallest insurance market. Russia’s total premium volume was just more than half (56%) of India’s, even though both countries have broadly similar levels of gross domestic product (GDP). Despite the relatively small size of Russia’s insurance market, the country easily has the most insurers in the sample of emerging countries. The majority of premiums in Russia’s insurance market are derived from compulsory lines of business—including third-party motor liability (TPML) and medical insurance. Compulsory premiums totalled RUB 716.9bn in 2011. This is 56% of total premiums received during the year. As in many emerging insurance markets, motor insurance is the dominant line of non-life business, accounting for 43% of non-life premium in 2010, according to AM Best figures. This is followed by property, which represented 28% of the non-life market. Motor is also the biggest driver of growth in non-life insurance, reflecting increased car sales and compulsory third-party liability coverage, according to AM Best. The short-tail business benefited from a credit boom in 2006–2008, which resulted in increased customer financing and consumption. Voluntary non-life business has also grown over the last few years, with a 35% increase in premiums written from 2007 to 2011. However, unlike compulsory insurance, non-life voluntary risks contracted during the world financial crisis, with premiums underwritten falling 9.2% from 2008 to 2009, to RUB 404.7bn. This segment has since recovered to reach RUB 519.2bn in 2011. The biggest challenge for the majority of Russian insurers is a need to meet increased capital requirements, warns AM Best. Poor demand for insurance products is another key challenge. “Underinsurance in Russia is widespread, with inadequate amounts of cover being purchased for risks such as business interruption, which is not tax deductible. In general, Russians do not regard insurance as essential, with many being ‘fatalists’,” said AM Best in its report. “As the liability culture in Russia has not developed to the extent it has in countries such as the United States and the United Kingdom, there is little demand for liability coverage, with liability risks representing 5% of total non-life premiums in 2010. Insurers complain that unless the Russian courts make larger awards, there is little incentive for companies to purchase liability cover,” added the rating agency.

Capital weakness in overcrowded Russian market warns AM Best

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