The American Repossessor

By Tai Adelaja Russia Profile

It’s Survival of the Fittest as a Depressed Auto Market Does Away With Small and Inefficient Insurers

Russia’s auto insurance market is still reeling from the aftermath of the global economic turmoil as insurance premiums continue to grow on the back of accelerated auto repair costs and slow sales of new cars. It’s a tough time to be in the insurance business, and only the largest and healthiest companies are likely to survive it. In the long term, that may be good news.

The decade-long period of insurance market growth changed with the recession, as GDP dipped 7.9 percent while unemployment reached 10 percent. The backbone of the auto-insurance business – easy-to-get car loans – was hard to come by and the number of cars sold nationwide was down 49 percent last year.

The liquidity squeeze has forced Russian auto insurers to deplete financial reserves amassed in pre-crisis boom years. Many bona fide market players have had to limit the scope of their insurance offerings while beating off heightened competition from a host of others who sell cheap policies to undercut the market, Industry executive say. In addition, the number of accident claims received by insurance companies keeps rising and the cost of repairs is skyrocketing.

As the domestic lending market contracted last year, the auto insurance market slumped 25 percent or by 44 billion rubles compared with pre-crisis 2008. “Dumping,” or the sale of junk policies on the auto insurance market, became widespread as a 30-percent drop in the value of the ruble led to a significant increase in average insurance payments, analysts from Expert Rating Agency said. With the crisis raging and financial markets imploding, domestic banks cut back on car loans while many Russian consumers and companies tried to skip payment for mandatory automobile insurance, the agency said.

Before the global financial turmoil, insurance business in Russia was a success story, boosted by growing personal incomes and unrestrained spending on cars and mortgages. The auto insurance market expanded on the back of availability of easy credit facilities especially after the introduction of the Mandatory Third Party Motor Liability Insurance (OSAGO) in 2003. In January 2009, Russia joined the international Green Card system, which covers third-party liability and eliminates the need to obtain local insurance before driving around the country.

Despite some positive developments, the nation’s insurance market is still in its infancy and many Russians have only just recently started to insure their property. The insurance industry represents only 2.3 percent of the country’s GDP, which is just a quarter of the rate in EU countries, according to a recent study by the Center for Markets in Transition (CEMAT) at the Helsinki School of Economics (HSE). Russia’s Property & Casualty Insurance market also trails far behind those in Western countries – just 15 percent of commercial property is insured nationwide and only five percent of private households have insured their property. The picture gets even blurrier when Russians’ conservative attitude toward taking insurance policies is taken into account. Consumer confidence in insurance companies has also suffered in part because of the appearance of “one day” companies that operated in the 1990s.

The auto-insurance segment, however, remains the main growth driver in the nation’s insurance market, with the Comprehensive Car Insurance Policy, or KASKO, on new cars making up the lion’s share in the portfolios of the leading insurers. In 2008, just before the crisis rocked the domestic financial institutions, Comprehensive insurance for new foreign-made cars made up 96 percent of the insurance portfolio at insurance firm Rosno, while the share of vehicles older than 3 years old was 84 percent. The picture was the same at Ingosstrakh, the nation’s largest insurer. Guta-Strakhovaniye, another leading insurer, said up to 75 percent of the company’s revenues came from KASKO.

Experts say, however that due to poor regulation and the lack of experience, the domestic auto insurance market is still characterized by poor quality of service, a lack of specific insurance products targeted at the needs of certain categories of consumers and a low level of training of insurance companies. “The majority of the market players organized what looked like financial pyramids – deliberately setting tariffs lower than statistically reasonable in an effort to attract more customers, and paying off some clients’ claims from premiums received from newer clients,” analysts from Expert Rating Agency said.

The crisis has also given birth to insurance companies selling suspiciously cheap Third Party Insurance Policies, or OSAGO, forcing bona fide players to ask themselves whether the game is worth the candle in a market where auto insurance comprise over 50 percent of all offerings. In April, Russia’s largest insurance companies – ROSNO, RESO-Garantia, Alfa Strakhovanie and Ingosstrakh – signed an agreement on counteracting unfair insurance brokers and creating a black list of brokers found to have scammed consumers, the Kommersant business daily reported. Rosgosstrakh Group head Danil Khachaturov said that losses from insurance scams had cost his company between 130 and 150 million rubles. “Other members of the agreement may have seen approximately the same figures or even more.” He added that the participants of the agreement are intending to publish “black lists” of dishonest brokers. Kommersant reported that in March the Russian Union of Consumer Protection received multiple complaints about purchasing fake policies from insurance brokers.

The nation’s insurance market also remains highly fragmented, with about 800 insurance companies jockeying for market share. Most of them have very low capitalization and are specialized in one or two insurance products (Auto and Third Party Liability (TPL) insurance). Furthermore, the top 20 companies hold about 60 percent of the market and the number of professional brokers is very low, as is the level of insurance awareness and trust in insurance among citizens. State Duma Deputy Alexander Koval, who is also president of the All-Russian Union of Insurers, said he expected about 100 insurance companies to go under in 2010. Koval said insurers that experienced shortfalls in premiums last year could be in for unpleasant surprises.  “By December last year, there were 722 insurance companies registered in Russia and 60 percent of them showed a reduction in revenues,” Koval said. “Most of these are small regional companies.”

Koval said the crisis has forced many companies to drastically cut down on budgets with the result that they have been buying fewer insurance products. Many individual clients have also stopped paying for insurance, either because they had lost their jobs or had had their wages slashed, he said. The situation, he said, is such that only big national players will survive the crisis. Some of the smaller insurers have already indicated that they can no longer offer motor cover as the premiums that they collect are not enough to pay the claims, he said.

George Alikoshvili, CEO of Intouch Insurance, said the stagnation in the auto insurance market will probably extend deep into 2012. The slight increase in auto insurance policy sales seen early this year, he said, was spurred by the government-sponsored cash-for-clunkers program adding that it would be illusory for market players to put high expectations on the program, which he said has mainly benefitted AvtoVAZ. “Insurance is a secondary sector which depends on other industries, which are now in decline,” Alikoshvili said. “Growth is possible only if for example, we raise the rates for the mandatory insurance policies or impose additional mandatory insurance.”

Alikoshvili said the economic crisis is a blessing in disguise as it is expected to contribute to the acceleration in consolidation and the removal of some of the smallest players from the market. “This is paradoxical but the longer this [crisis] goes on, the better for the health of the market,” Alikoshvili said. “Insurers have finally started to look at the efficiency of business processes, the accuracy of actuarial calculations and have adopted more conservative underwriting procedures with carefully chosen partners. It is obvious that weak and inefficient companies will have to leave the market and professional, financially stable companies will stay