Opportunities In RussiaNot Nyet Russia Correspondent
Moscow
When the Soviet Union ended in 1991, Russian citizens were not only free of state supervision of every aspect of their lives, they were no longer insured, in the conventional sense of that term, against lifes many risks. In a flash, Russians were transformed from the most protected to the least insured people in Europe.
Bridging that gap has been the task of the infant Russian insurance industry for just over a decade. Most Russian consumers still have not insured their homes, their moveable property, their health or their lives. Most small to mid-sized Russian corporations avoid insurance unless they are compelled by law.
Still, on July 1, the industry took a big leap into compulsory third-party motorists liability insurance (TPL) for the more than 30 million autos Russians drive. However, there are indications that the transition into a U.S.-type insurance market may be a bumpy one.
Smoothing out the bumps takes capital, as Tom Manson, an insurance consultant with Droege & Comp. Gmbh in Moscow pointed out, noting that Russias short-lived commercial companies dont have it. Droege is a German management consultancy.
One of the biggest opportunities for U.S. insurers in Russia is providing that capital. The big Russian risk is that the capital will be lost, he said.
Mr. Manson estimated the total capital (shareholders funds) of the Russian insurance industry "cannot be more than $2 billion."
But of that total, "a substantial amount will consist of assets of dubious value," he cautioned. "If we assume minimal growth in life insurance, but with non-life growing at the rate of the lowest year in the last three years, and that prudent solvency ratios are applied, then by 2006 an additional $2 billion in capital will be needed," Mr. Manson added.
In June 2001, executives of Germanys leading insurer Allianz thought they had the answer to where that capital would come from. They paid about $30 million for a 45.27 percent stake in Moscow-based Peoples National Insurance Company of Russia (Rosno), with an option to take majority control.
Just 24 months later, after it became impossible to hide the deterioration of relationships between the parent company and its Russian partners, Allianz decided to bail out by selling its stake to Sistema, the Moscow conglomerate which has retained a controlling interest in Rosno.
Although the inside story of the breakup hasnt been made public, some market sources say the German management grew more and more uncomfortable with the lack of control.
Although the details have not yet been confirmed, nor the deal done, sources close to Allianzs senior management say Allianz is withdrawing, although not because Rosno was losing money. On the contrary, in 2002, Rosno collected 10.7 billion roubles ($350 million) in premiums, giving it fourth place in the Russian insurance table by size of revenues. After-tax profits were Rb396.3 million ($13.5 million), up by 58 percent compared to the year before.
Allianz officials wont discuss their intentions for Russia and wont comment on these details.
Another cautionary note has come from Aviva, the leading British insurer. After months of careful study of the Russian market and due diligence on potential Russian investment targets, Avivas management decided against making any financial commitment to the Russian insurance industry for the time being.
That leaves the U.S. giant, American International Group, actively committed to expanding its presence in the Russian market, though not, management emphasizes, by buying into Russian companies.
AIGs strategy is a gradual one, building slowly into the regions from its Moscow base, and avoiding, at least for the time being, almost all forms of retail insurance.
AIGs Maurice Greenberg was one of the most visible lobbyists during the 1990s for opening up Russian insurance to foreign investment. But hes now cautious about exposing his firm to Russian risk, according to market sources.
Igor Ivanov, deputy general director of Reso, one of Moscows top-10 commercial insurers, acknowledged that its not always easy for western insurers to navigate the waters of Russian investments.
However, he thinks the new law on TPL and its implementation may change the situation, making the market more understandable and much clearer about "who is who."
"After the law starts to work, it will become more obvious who are the leaders of the market. Some companies will be more obvious leaders than before; some will become strongerthey will show who has the strongest regional and retail networks," he continued.
Mr. Ivanov said, as Russian consumers are required to buy cover for their cars, they will develop an appetite for other classic insurance covers, starting with their homes.
Robust economic growthone of the strongest in the world at presentis also powering Russian income to be able to afford insurance, he said
If there is a parallel recovery in the west, insurers may start to look again at the accelerating rates of return in Russia, Mr. Ivanov said.
"I think now, with new obligatory types of insurance appearing on the Russian market, the interest of foreign insurers to Russia will be increasing," he added optimistically.
"Europeans are closer to Russia, although theoretically U.S. insurers are richer," he said. However, many European insurers have had a difficult time financially over the last year, which more than anything else influences their interest towards Russian market, he noted.
"As foreign investment into Russia increasesand there is reason to believe that it is starting to happen in the oil and other sectorsthe presence of foreign insurers will also increase," said another Moscow-based analyst, who didnt want to be identified.
Existing foreign insurers prefer to do business with offices of foreign companies here, rather than Russian corporate clients, the analyst said.
These foreign insurers are not quite ready to work with the Russian market because it is not completely understandable to them and there is no established system of evaluation and management of risks, he contended.
At the same time, he said, the risks of Russian corporations are re-insured abroad after a domestic insurer has taken a portion of the risk.
"That means that foreign insurers do get Russian business clients, and it is not necessary for them to make large investments into expansion in Russia," he affirmed. "Such an expansion may be effective only in mass, consumer types of insurance, but whether that will be profitable is still an open question."
"The rate of growth of the market is significant," according to Yevgeny Reshetin, an insurance analyst at Expert RA, a Moscow agency specializing in insurance analysis.
According to the Department for Insurance Supervision at the Finance Ministry, in the year ending December 31, Russian insurance companies collected a total of Rb300.4 billion ($10 billion) in premiums. This was a gain of 8.1 percent compared to the year before.
Government data show that property cover grew by 30 percent during the year; personal accident and medical cover by 11 percent; and liability cover by 4 percent.
Demand for property cover is growing, "partially because property insurance is used for tax optimization. At the same time, there is growing demand for mass insurance products and increased popularity for risk insurance," Mr. Reshetin added.
Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 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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