Russia's central bank purges "pyramidal" insurance sector

Russia's central bank purges
Motorists have been the big driver of Russia's emerging insurance sector.
By Jason Corcoran in Moscow July 26, 2016

The purge of the Central Bank of Russia (CBR) of the country's insurance industry makes the regulator's cleanup of the banking sector look lightweight by comparison, reducing the number of companies working the sector by 80%.

The CBR in the past three years stepped up its assault on the ranks on insurers, resulting in their number shrinking to 300 companies today from 1,500 a decade ago, according to a report provided to bne IntelliNews by the Macro Advisory consultancy. Over the same period, the number of banks has only halved to 650 from 1,300. While the "McCarthyite purge" of the banks has grabbed the headlines, the cleansing of the insurance sector has been much more widespread.

Even with the cleanup, a number of companies in the top 30 are facing financial difficulties and pressure from the regulator to lift their capital levels. Soglasie, whose owner Mikhail Prokhorov is trying to offload, has had to inject capital as has Renaissance Insurance, part of Boris Jordan's Sputnik Group. Zhaso Insurance is also reported to have raised its capital level after it was absorbed by Sogaz, which is owned by billionaire Gennady Timchenko's Volga Group and Bank Rossiya. VSK has recently merged with B&N Insurance, a  subsidiary of B&N Bank.

"Insurance companies, chastened by recent problems are becoming more cautious and better managed," said Mike Winn and Tom Manson, authors of an industry report published by Macro Advisory. "There are clear signs that insurance, like banking, is better regulated and able properly to perform its role in society."

In ruble terms, market growth has held up, with total premiums estimated at RUB876bn in 2013 and RUB949bn 2014, indicating a growth rate of 8.3% in 2014 and 4.7% in 2015. However, when translated into US dollar, Macro Advisory estimates that the effect of depreciation is marked and implies a slide of 44% in premium income.

A typical insurance company in Russia in the years 2005 to 2015 had little capital, was loss-making under international financial reporting standards (IFRS), but was growing fast enough to generate sufficient cash to pay the claims. In some respects, Macro Advisory said these companies resembled "a pyramid scheme" and when growth stopped, the scheme very quickly ran out of money.

"Companies are beginning to be better managed, partly as a result of improving regulations and also because of competitive pressures in the market," the report said.


Despite advances and reforms, the Russian market is vastly underinsured. The level of insurance penetration currently runs at 1.4% GDP, or at about $200 per person on insurance products.

The increase in credit life and accident insurance is largely the result of the growth of mortgage lending. Yet life insurance makes up just 13% of the market, which reflects the distrust the population has in this class following the Soviet period and hyperinflation.

Soviet shadow

The Soviet legacy still looms large in the industry. In the Soviet Union, insurance was a state monopoly. Insurance within the country was carried out by Gosstrakh, which had branches in every republic of the union and representatives right down to village level. Its main products were various types of small value savings products, for which part-time agents – over 150,000 throughout the country – collected monthly premiums. Gosstrakh was predominantly a rural organidation, while lender Sberbank collected urban savings.

One significant legacy of the Soviet system is that to most Russians, even today, life insurance means a savings policy with no risk element. These saving policies were denominated in rubles and in the high inflation of the 1990s, they lost their value. The life insurance industry has found it hard to recover from this experience. The fact that commercial enterprises were not insured has also had a lasting impact. To this day, the number of insured enterprises is low and the industry is finding it hard to increase penetration.

"In the Soviet period, 'insurance' was mostly understood to be about savings schemes, with little reference to risk management," wrote Winn and Mansun. "This has created a lack of understanding and awareness, particularly among older Russians, about the true nature of insurance products. Although this attitude is changing, it is still encountered and needs to be addressed."

Motorists accelerate growth

The crucial moment for the Russian insurance market was the introduction of compulsory motor third-party insurance in July 2004. This had a huge impact on the market. In the first year, insurance companies issued 25mn policies. By 2014, the number had risen to 43mn.

Double-digit annual growth from much of 2005 to 2013 brought foreign players flocking to the market.

"The result was a market where the sole objective of most of the participants was growth and gaining market share," wrote Macro Advisory. "Some observers pointed out that if growth slowed, then cash flow would turn negative but such advice was ignored."

By later 2014, a number of major Russian firms were in trouble due to the slowdown in growth in the motor physical damage sector caused by the serious drop in new car sales following the collapse of the ruble.

Aviva, Zurich, Royal Sun Alliance, ING and Fortis all sold up after suffering huge underwriting losses or because their sectors had been slow to grow.

There are still over 300 companies with licenses but of these only about 150 have a premium income of more than RUB150mn or about $2.5mn. The top 20 companies as a whole generate over 70% of total non-life premiums.

The number of companies is now reducing rapidly, as licenses are withdrawn from the weaker players and this reduction is expected to continue as the market consolidates and as the CBR tightens up capital controls.


Systemic scrutiny

Like with the banking sector, the CBR is paying special attention to the systemically important insurers - with a focus on the top 22 companies. Already, a number of these companies have been publicly required to either increase their capital or to replace inadequate capital. Each of these strategically important companies have been assigned a curator from the CBR who will liaise closely with them on regulatory matters and financial supervision.

The introduction of compulsory IFRS accounting and audit by 2017 is another much-needed reform, since Russian accounting rules were often used by insurance companies to hide their real financial state.

Like with the banking sector, legislation is being prepared to prevent access to the insurance market by unsuitable individuals or corporations. Until now, there has been no "fit and proper" tests applied to potential owners or managers of insurance companies, according to the report.

There have been a number of cases where individuals walked away from their insurance liabilities, extracted cash from the companies which then became bankrupt. There was nothing to stop these individuals starting another insurance company. The new legislation will give the CBR much greater powers to vet potential owners and managers of insurance companies.

"The strategy of the CBR is already showing some positive results," wrote Macro Advisory. "Insurance companies, chastised by recent problems are becoming more cautious and better managed. There are clear signs that insurance, like banking, is better regulated and able properly to perform its role in society."

For more details on this report contact Mike Winn at or see