What is the future of Rosgosstrakh?

Tom Manson

On 29 August, the Central Bank of Russia announced the long expected rescue of Otkritie Bank, Russia’s largest private bank. The predominant motive for the rescue was to prevent a major banking crisis, but it is now clear that it is also likely to have a significant impact on the insurance industry.  Over the summer, there had been many reports that Otkritie was acquiring a majority stake in Rosgosstrakh, the former monopoly insurer of Russia’s internal risks and still one of the largest insurers in the country.  At the time of the rescue, it was unclear exactly what the relationship between the bank and the insurer was, but a few days after the rescue, the Deputy Head of the Central Bank confirmed that Rosgosstrakh would receive financial support. Now it has emerged that Danil Khatchipurov, the main shareholder of the insurance company effectively gave the company to the bank for free.

Rosgosstrakh has long been a problem for the Russian insurance.  Until recently, the company was Russia’s largest, dominating the compulsory motor TPL insurance market. However, in common with many Russian insurance companies, the company was undercapitalised. Observers believe that the hole in Rosgosstrakh’s balance sheet was more than the equivalent of $500 million – this hole made the company an unattractive acquisition and explains why the company was effectively given away to Otkritie.  At the same time, the company was forced to underwrite for cash flow, without which it could not survive, thereby destabilising the market.

Were Rosgosstrakh to be allowed to fail, there would have been no major systemic failure.  Most unpaid claims would come from CMTPL insurance and the industry compensation fund, administered by the Russian Association of Motor Insurers (RAMI), would cover these. Otherwise, the impact would be on a relatively small number of people facing comparatively small financial losses.

The real impact of the failure would be on the other members of the insurance market on whom the burden of providing the finances for the compensation fund. There is no doubt that many industry leaders are relieved that Rosgosstrakh has been rescued and will be able to have the financial resources to improve its long-term profitability. This reality was reflected in Vedomosti’s headline: ‘the Central Bank will pay billions for CMTPL insurance’.  The amount estimated by the Deputy Chairman of the Central Bank for the rescue of both the bank and the insurer was between Roubles 200 billion and 400 billion ($3.3 billion to $6.5 billion approx.) of which a significant share would be needed to recapitalise Rosgosstrakh in order to ensure it can pay its growing losses.

It has to be asked why Otkritie bought into Rosgosstrakh when simple due diligence by a competent auditor – and there are plenty in the country today – would have shown the hole in the balance sheet?  Whatever the reason, the growing cash needs of the insurer must have hastened the downfall of the bank.

What of the future?

Rosgosstrakh has needed this substantial cash injection because it has been reducing its premium income from compulsory motor insurance.  This action has crystallised the losses that cash flow underwriting had hidden. Over the summer changes to the management team were announced: in May the former head of Allianz, Nikolas Frei was appointed as General Director and in August, the respected Nikolai Galaguza returned to the company board where he had worked in the 1990s.

The former state monopoly has effectively been renationalised yet few expect it to be able return to its former dominance, let alone to the dominance Sberbank has over the retail banking industry. The company has a recognised brand but so do many of its major competitors and will remain a major player in the market but will need to slim down and clean up, a process that will take time and money.

One potential problem looms: the company is a major player in the endowment life insurance sector. This sector has been growing rapidly and the Central Bank has already cast doubt on the ability of insurance companies to achieve the financial returns they have promised when the first policies mature in 2018. (See ‘Life insurance – a ticking time bomb’, April 2017).  It is possible that more financial support will be needed to protect the reputation of Rosgosstrakh.