A risky undertaking? European insurers begin assault on Russia

By bne IntelliNews March 4, 2008

Graham Stack in Moscow -

With their advanced actuarial techniques enjoying huge demand in Russia as rapid growth leaves companies exposed to bigger and bigger risks, European insurance companies closed four major deals in 2007 in Russia - and opened up one bitter corporate dispute.

The shopping spree started in February, when globally-active Zurich Financial Services Group spent $260m to buy 66% in Russian retail leader NASTA. Only days later, German giant Allianz consolidated 97% of ROSNO by acquiring AFK Sistema's 46.2% stake for $750m. In May, Allianz acquired 100% in Progres Garant for around $100m. The year ended on a high note with French major Axa buying 36.7% of RESO Garantia for around $1.2bn, a record evaluation for a Russian insurance company.

"I think there's always been interest in the Russian market," explains Alex Bertolotti of Standard & Poor's about the breakthrough in 2007, "but once there was a big deal, which was between Zurich and Nasta, that opened the floodgates."

Anastasia Voronkova of Fitch Ratings says the firms chose this year to move into Russia because of improved transparency in the sector as a result of efforts by the regulatory and supervisory bodies. "Then they saw high growth rates and also potential for future growth especially in the retail lines," she says.

There is no mistaking the surge in the insurance sector. Against a backdrop of Russian GDP growth in 2007 of 8.1%, the highest figure since the turnaround year of 2000, the Russian insurance sector grew a whole lot faster than the economy: gross premiums written soared by 27% in the first nine months.

This growth has featured a major expansion of retail insurance, kick-started by the introduction of compulsory motor insurance in 2003, and by regulatory changes that put an end to the use of life insurance as a tax avoidance scheme, which cleared the way for life to start as a market segment with enormous untapped potential.

It is precisely the massive growth and potential of retail insurance that is attracting the attention of European majors. "They're basically interested in retail, you can see in the companies they acquire they are focusing on retail lines, and in particularly motor insurance," says Voronkova. "Foreign investors also demonstrate interest in the establishing of fully owned life insurance start-up subsidiaries, although this segment remains at a very early stage of development."

"I think people are most interested in life, because there's such huge untapped potential, with 144m people, relatively high incomes and very low penetration," confirms Bertolotti.

Opinions differ as to whether 2008 will see similar deals. Voronkova believes "everyone is here who wants to be here," but according to Bertolotti, "the trend will continue into 2008."

Much-needed expertise

Foreign companies are not only attracted by growth, but by the problems that growth is causing for Russian companies - and to which they have the solutions.

The Russian insurance sector is young: only a few years ago did the sector begin to eradicate dodgy schemes and start to grow through real business. With the introduction of compulsory motor insurance in 2003, the companies had to establish new internal underwriting, claims handling, data processing and analytical procedures to cope with the sharply increased volume of contracts, information and staff, according to Fitch. Having established the infrastructure, the insurers are now challenged as to whether they understand the trends in underwriting performance and can forecast them.

This is where foreign companies have an advantage. "Russian companies need to improve everything, especially internal business procedures and loss ratios: they must use results of actuarial work more efficiently, detect sectors which drive loss ratios up, select risks more carefully using the results of actuarial reviews, which are more efficient in motor insurance," says Voronkova.

"Foreign companies will deploy their marketing technologies, and also claims handling and analysis of loss trends with advanced actuarial techniques," she says. "All these advanced techniques applied on western markets can be deployed on the Russian market to create a competitive advantage."

S&P's Bertolutti agrees. "The foreign companies will bring improved business practice, focusing on efficiency of claims processing, better underwriting techniques, and better use of actuarial techniques, because in Russian the actuarial profession is practically non-existent."

Contemporary actuarial technologies are seen as the key to Russian companies coping with the risks of rapid growth, and in this area foreign companies are a universe ahead of even their biggest Russian rivals. "The workload of actuaries in Russian insurance companies is particularly intensive," Fitch's Voronkova says. "However, the role of actuaries seems to be generally underestimated."

Voronkova argues that Russian companies tend not to employ actuaries in senior technical positions and thus fail to derive full benefit from actuarial skills.

Nevertheless, the sudden appearance of major European companies in the sector and the competitive threat they pose is causing Russian companies to step up their modernization. The clearest sign of this was the appointment on January 16 of top Dutch actuary Jacob Westerlaken as CEO of Rosgosstrakh, another of Russia's largest insurance companies. "Rosgosstrakh hired Westerlaken because they did not wish to lag behind in terms of international technologies," says Voronkova. "Of course Russian companies are trying to improve their business procedures, because with market growing and loss rations worsening, there's no other way to manage underwriting profitability."

Deripaska's body-Czech

Against the rash of successful big deals, only an attempt by Italy's Generali to acquire a stake in market leader Ingosstrakh via Czech private equity group PPF went badly awry. Majority shareholder, uber-oligarch Oleg Deripaska, appeared to resent the fact that his former partner Alexander Mamut sold his approximately 38.5% stake to the Czechs without asking him. In October, an EGM to which PPF was apparently not invited, unceremoniously diluted the stake to around 10% by a fourfold increase in equity.

The dispute remains unresolved. After a court decision in December ruled against the dilutions, the company charter was altered in January to restrict membership of the board to persons with Russian citizenship, experience in the insurance sector and with financial or economic training. The EGM scheduled now for March 3 will see if PPF will succeed in asserting their claim to three places out of nine on the board.

After a year of revolutionary changes in the insurance sector, it is perhaps reassuring that some risks remain the same.

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