The Russian Insurance Market – An Overview

John Harrison and Tom Manson

The insurance industry is one of the key components of the financial sector. Together with banking, insurance plays an important social and economic role in developed economies.  In Russia, the insurance industry has faced a number of barriers and as a result, growth in many types of insurance has been slower than many would have hoped. This article sets out the barriers, some of which still have to be overcome and looks into the future where there are many positive signs.

In Soviet times, there were two state insurance companies with a monopoly of business. Gosstrakh handled internal insurance. It was best known to the public because of its life insurance savings products, which were very widely sold through a large network of part time agents who collected premiums monthly door to door. The other main area of business was ‘agricultural insurance’, which in practice required Gosstrakh to administer the system of state subsidies to farms. No state enterprises were insured and there were few private cars, so the internal state monopoly had little experience of most types of property and liability insurance, which make up most of the insurance industry in a market economy.

The other state company was Ingosstrakh, which handled Russia’s international risks. These were insured with the support of the international reinsurance market and therefore Ingosstrakh did have experience of many types of insurance common in the West.  It is significant that when joint ventures with international partners began to be developed in the 1980’s, Ingosstrakh was asked to insure their Russian based risks, not Gosstrakh.

The Soviet government abolished the state monopoly for insurance in 1988. The first result was that it permitted Ingostrakh, with its technically trained staff, to expand beyond joint ventures into the wider market. This it did very successfully and today is one of largest and most profitable companies in Russia.

Gosstrakh (which became Rosgosstrakh on the collapse of the Soviet Union) had more problems. In the economic confusion of the 1990s, the system of agricultural subsidies failed, removing much of Rosgosstrakh’s business. At the same time, the company faced huge difficulty of controlling its myriad of branches in every part of the Russian Federation. Regions began to act independently of the centre to such an extent that it was difficult to see anything other than a number of regional insurance companies.

The most important problem, however for Rosgosstrakh was the hyperinflation that accompanied the removal of price controls. The company’s main retail product was life insurance in which many people had invested their savings. Inflation wiped out the value of these policies and the experience is one of the main reason why there remains consumer resistance to many types of insurance.

The ending of the state monopoly was not accompanied by the introduction of a legal and regulatory framework for insurance so the initial development of insurance was haphazard. Over 1,500 insurance companies had been founded by the time that the first steps in regulation were introduced in 1995. At the high end of the market, many of the developing industrial and financial groups set up insurance companies. Examples which have managed the transition to a better-regulated market include Alfa, Interros and Gazprom.  Most companies at that time acted mainly as ‘captive’ insurers for their owners’ business and most business was not real insurance at all but used schemes to help the owners reduce their tax.  As late as 2005, it was calculated that over two thirds of the income of the insurance industry was derived from tax reduction schemes.

One feature of the market at the time was the very low level of capitalisation of most insurance companies. Whilst regulation had been introduced in 1995, it was not strong enough and companies managed to evade many of the legal requirements for capital.

The real insurance in the period before 2005 was almost totally non-life given the loss of credibility following the loss of savings in the hyperinflation. Motor insurance was growing as more cars were purchased using loans. Otherwise most insurance was either captive property business or linked to international activities such as marine and aviation insurance.

Medical insurance appears to be an important part of the market but the system contains a number of specifically Russian features. ‘Compulsory medical insurance’, which is administered by special ‘insurance companies’ is in fact the means whereby state funds are funnelled into the medical system. As such, it is similar to the Soviet system of ‘agricultural insurance’.  ‘Voluntary medical insurance’ (VMI) is widely provided by employers (who receive tax benefits) for staff.  However, VMI is not insurance: there is no risk. It is better seen as a form of prepayment for primary medical services. Few policies provide any coverage for major illness.

2004 was the year in which the retail insurance industry finally began to take off following the introduction of compulsory motor liability insurance (known in Russia as OSAGO) in July 2003. Within a year of the introduction, Russian insurance companies had sold over 25 million policies; over 800,000 accident victims had received compensation of over 18 billion roubles.

As the market began to take off, international insurance companies began to take an interest in Russia, a market where barriers to international entry were low. AIG and Allianz had entered Russia in the early 1990s: they were followed by others ten years later. However, many of these latecomers did not have a happy time. Many did not understand the haphazard nature of the market with many specifically Russian financial schemes. Many paid too much for companies that had little real business. By 2014, when OSAGO results worsened, many had had enough and exited the market. Currently the share of the market controlled by foreign owned companies is well below 10%.

The irony is that these companies left the market as clear signs of improvement were appearing. In 2012, the Central Bank of Russia took over the regulation of the insurance industry and slowly and cautiously, the Bank is using its experience gained when regulating the banking industry to enforce capital regulation on Russian insurance companies and to improve the overall system of regulation.  The number of insurance companies is falling fast and those that remain are much better managed and regulated.  These are clear grounds for optimism.

On the other hand, OSAGO is causing major problems as organised crime has managed to control claims payments in some regions.  Changes are being proposed but what is really needed is greater control by the centre in ensuring consistency in the courts.

A further problem could arise as a result of the growth in recent years of life insurance based savings products.  In the first half year of 2017, this was the fastest growing part of the market and life insurance has grown to comprise 20% of the market by premium volume. The difficulty is that insurance companies have promised financial returns on these savings product when they mature after 2018 and many observers (including the central bank) fear that they will not be able to achieve what they have promised.

The insurance market today

The Russian market remains small in comparison with more developed economies.  Russia still has a very low level of insurance penetration, even by developing market standards. Premiums amount to 1.4% of GDP, whilst the average for emerging markets is nearly double that at 2.7% of GDP.  In 2014, Russians spent about $200 per person on insurance premiums, this was half the amount spent per head in Brazil, for instance and well below the amount in more developed Western economies.

Premium growth has slowed following the financial crisis and the fall of the Rouble.  Car sales is an important market driver and they are only now beginning to recover. The OSAGO problems have led to stagnating premiums for this class. Agricultural insurance, which had been showing some signs of growth, also stagnated in the first half of 2017.

Yet the Russian insurance market, like the country itself has huge potential and again like the country, under the surface the insurance industry is making progress.  The recent rescue of Rosgosstrakh by the Central Bank has addressed one of the key problems of the market and will allow the former market leader to slim down and will also bring stability to the market.   The Central Bank is accelerating its reforms and they are beginning to make a real difference in such underdeveloped areas such as commercial property and liability insurance, life insurance and medical insurance.  A more professional better regulated industry made up of stronger companies is developing and overcoming the barriers to growth. This is good news.

11.10.17 ©