Russia looks to insure against the future

By bne IntelliNews November 23, 2006

Nicholas Watson -

The recent run of lurid headlines about Russians settling scores using either a gun or poison would suggest the country's life insurance is doing brisk business. It isn't, though there are signs that it, as well as the rest of Russia's insurance market, soon will.

In terms of gross premiums written, the Russian insurance market grew by just 4% in 2005 from the previous year to a paltry RUR490.6bn ($18.4bn), according to the credit rating agency Fitch Ratings.

Most of that marginal growth was driven by the corporate property, corporate accident and health, and mandatory motor insurance segments. Life insurance, ironically, actually fell by 75% in 2005 in terms of gross premiums written to RUR25.3bn, meaning that just 0.1% of the population has life cover compared with more than 1% in the rest of Eastern Europe.

However, this meagre growth may be misleading. According to market commentators, the actual growth in Russia's insurance business could have been as high as 27% in 2005 if the huge decline in the number of tax-avoidance insurance schemes is stripped out.

According to experts, some 30% of the RUR490.6bn in gross premiums written in 2005 are considered tax-avoidance schemes whereby, for example, employers pay employees part of their salary in the form of life insurance premiums that avoid social security taxes, which are quickly cashed out.

That 30% figure, though, is down from the estimated 45% of the previous year because the government over the past two years has clamped down on these schemes in the life insurance segment, meaning some have been transferred to the property and casualty insurance and reinsurance segments.

While the ending of these tax-dodging schemes has put a damper on the market in the short term, analysts argue that in the long run the government's clean-up of the sector can only benefit it.

Life begins at 2007

Fitch estimates that the tightening of regulatory requirements stipulating the minimum statutory capital and the placement of assets has already forced 14% of local Russian players to exit the market during 2006 and will in turn provide the remaining insurers with new investment instruments and at the same time improve their financial strength.

The next step will be the consolidation among the local players. Fitch believes the market is likely to see large mergers among the top-10 insurers in the short term.

"Two heavyweights Rosgosstrakh, the market leader with a very strong retail position, and Kapital, an insurer with a large proportion of corporate property business, ranked 10th by volume of premiums written in the [the first nine months], have recently announced their 'strategic partnership'," says Fitch.

Consolidation will probably be the best way for these local players to preserve a national presence in the market before the inevitable arrival of big foreign players eager to buy into Russia's economic development - a process that will be kick-started by Russia's entry into the World Trade Organisation (WTO).

As part of its deal with the US over its entry to the WTO, Russia can continue to limit foreign direct investment in its banking and insurance to 50% of total investment in the sector, but has agreed to reconsider this limit within five years of its accession.

Diane Keegan, a representative of the giant US insurance holding AIG, told a conference in November organized by the Carnegie Endowment for International Peace that this is a significant concession on the part of Russia - it had initially wanted to limit investment to 25% of the sectors.

Furthermore, Keegan believes that within five years Russia could decide it has nothing to fear from lifting the limit on foreign investment, which is currently only 3.8%, some 92% of which comes from the EU.

As part of the WTO deal, Russia will also allow the direct presence in the Russian market of branches of US insurers.

"The earlier inability to do this may partly explain US insurers' previous lack of interest in the Russian market," Fitch suggests.

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