Russia Deserves Investors' Attention
The Soviet Union is long gone. In the months since the Sept. 11 terrorist attacks, Russia has become a strong ally of the United States, is working closely with Western nations to defeat terrorism, has agreed to a further reduction in nuclear weapons, and now has an active "observer" status in NATO.
Russia will soon be designated as a market economy, and World Trade Organization membership is on a fast track.
The Russian economy has been largely unaffected by the Sept. 11 tragedy. Retail sales have increased 10 percent, foreign trade was up by more than 8 percent, and the economy grew by more than 5 percent last year.
Central Bank reserves should reach $50 billion this year, personal income should grow by 10 percent, and inflation is expected at 12-to-14 percent (down from 18.6 percent in 2001). Russia also forecasts a budget surplus of 2.5 percent of GDP.
No longer an economic backwater, Russia has more than 60 McDonalds restaurants. Ikeas new mega-mall will have 1.5-million square feet of retail and restaurant space, and Walmart is evaluating market entry. More is certain to follow as the consumer sector expands
The pace of activity in Russias insurance sector has increased even faster than its economy. The State Insurance Inspectorate recently reported that for 2001, collected premiums grew to $9.2 billion–80 percent over 2000. Premium should grow five times faster than Russian GDP in 2002, and exceed $12 billion in all lines of business (compared to $5 billion in 2000 and $3 billion in 1999).
Property renewals and the reinsurance market have tightened in Russia, although not to the extent seen elsewhere around the world since Sept. 11. Premiums ranging from aviation to marine, property and liability insurance have increased from 20 percent to more than 100 percent.
Up to 70 percent of the larger insurance contracts are reinsured abroad and premiums are increasing, reflecting Russias dependence on international markets.
Voluntary medical insurance and property insurance programs for dachas (traditional country homes) and apartments are very popular. Car ownership is increasing, auto coverage is coming into its own, and it is now quite fashionable to have insurance.
The industry expects mandatory third-party auto liability insurance to create a billion-dollar surge in premium (and insurance awareness) when it goes into effect in 2003. A Tax Code revision, effective this year, finally allows Russian companies to deduct the cost of property insurance in full.
In a market with only 10 years of operating experience, a less mature capital and surplus position continues to impede Russias ability to grow as fast as it could. In addition, company valuations do not fully account for the potential of this market to outperform comparable emerging markets.
Today, most multinational companies tend to concentrate on the wealthiest 10 percent to 20 percent of the world population. The same is generally true for "exploration" in the global insurance sector.
Developing nations like the Russian Federation, however, are quite likely to grow much faster than Western markets. Given that Russia will provide a significant opportunity for growth, it deserves more of our attention.
Mark D. Mariska, of Stamford, Conn., is a former chief deputy insurance commissioner for California, with 32 years of insurance industry experience. He has been a leading figure in the development of the Russian insurance industry since 1988.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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