Best Special Report on Russia Says ‘Insurance Revolution Begins to Gain Pace’

A.M. Best ahs issued a special report – “Russia’s Insurance Revolution Begins to Gain Pace,” which notes that “insurance penetration is low, even when including compulsory lines such as medical cover, which has little or no risk-bearing element. The Russian insurance sector is still young, characterized by a competitive and overcrowded market yet despite being fraught with challenges, it is changing radically.”

Best said it “anticipates that although insurers face challenges, including meeting increased capital requirements and poor demand for insurance products, total premiums underwritten will continue to grow. This reflects the introduction of new compulsory lines of business, economic development supporting state spending and, in the long term, increasing awareness of insurance benefits.”

At the end of 2011, there were 579 registered insurance companies in Russia, which, Best points out, shows that the “number of insurers has contracted sharply over the past two decades from more than 4,000 registered insurers, and is expected to continue shrinking in the coming years.”

Yvette Essen, report author and director of industry research, Europe & emerging markets, said “the steady reduction in the number of companies reflects the drastic reduction in tax-optimization schemes, combined with higher capital requirements.”

She added: “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-optimization, 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.”

Best’s said the “special report examines how the Russian insurance market has undergone significant change since the state’s monopoly ended in 1988. It focuses on regulatory developments, reinsurance trends, the life market, foreign participation and the prospect of Russia being a financial hub. It also examines the balance sheet strength of the ten largest Russian insurers and notes that they have enjoyed rapid growth, although growth can be volatile and influenced by a major contract win—or loss—as well as compulsory risks introduced by changes in regulation.”

Carlos Wong-Fupuy, senior director, analytics, indicated that the Russian insurance market continues to have a low level of risk-based capitalization. “The large number of licensed 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,” he explained. “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.” He concluded that Best “expects half of all insurers will need to increase their capital bases.”

Source: A.M. Best