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Russian insurers face premium and reserving risks…

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July 24 2014 001

Chris Waterman and Anastasia Litvinova of Fitch Ratings

Russian insurers face premium and reserving risks, Fitch Ratings warns,  By James Brewer

The Russian insurance sector remains over-reliant on loss-making motor business, where new rules have made it even more difficult to turn a profit, according to an analysis by Fitch Ratings. In general in the sector, capital is said to be heavily exposed to premium and reserving risks.

Anastasia Litvinova, a Moscow-based analyst for the ratings agency, told a market briefing at its Canary Wharf headquarters, that motor lines have been a key drag on underwriting performance.  Fitch rates seven of the leading Russian insurance groups.

Motor has a 40% weighting in the business mix at a time when some observers, as reflected in a comment from the audience during the briefing, say that the insurers should be branching out into more sophisticated and imaginative products. The reliance on motor – many of the 400-plus companies in the country are involved substantially in that line – has produced “hardly any growth” within the broad property and casualty arena, said another insurance professional present.

Motor third-party liability is exposed to recent changes in claims limits favouring policyholders, while pricing is officially regulated.  Further, the motor damage sector was at risk from a recession in the sales of new cars, down 7.6% in the first half of 2014, said Ms Litvinova. In regard to contractors’ all risks insurance, insurance costs were no longer covered under government-sponsored building projects.

Among recent decisions affecting the motor sector, Zurich Insurance had sold its retail business in Russia, and Allianz had discontinued sales outside Moscow and St Petersburg.

The “creeping expansion” into insurance by banks had continued, with Sberbank establishing a non-life subsidiary.

Gross written premium of Russian insurers in 2013 is put at more than $28.3bn.

Figures cited by Ms Litvinova indicated that overall growth in non-life premium written in 2013 was 7%, compared with 22% the previous year and 18% in 2011. Non-life commercial business had flattened out, with 10% growth in 2013 following 31% growth in 2012.

Ms Litvinova said that compulsory lines have been the key driver for growth, and the financial flexibility of the companies was limited. Domestic companies which are privately-owned dominate the sector. Because of their shareholding profile, their access to fresh capital from outside the industry is limited.

Profitability had been underpinned by investment, and despite the growth in business volumes, capital was heavily exposed to premium and reserving risks, said the analyst.

Since September 2013, regulation has been taken over by the Central Bank of Russia, and supervision tightened, while staying more focused on the asset side.

Fitch expected in 2014-15 that new motor third-party liability tariffs might help to improve underwriting performance, subject to their adequacy for the new limits. Significant differences by pricing and reserving discipline were likely to continue, and less disciplined players did not appear to have solid capital resources.

Ahead of imminent announcements by the US and Western Europe over the Ukraine crisis, it is thought unlikely that new sanctions would target Russian insurers directly.

In an overview of developments in neighbouring Kazakhstan, Ms Litvinova referred to dynamic insurance growth, with bancassurance the key driver. Retail lines were expected to continue to grow, in line with consumer lending, but profitability of non-bancassurance business was likely to continue to deteriorate.

The briefing was chaired by Chris Waterman, managing director in Fitch’s Europe insurance team.

On July 25, Fitch Ratings affirmed Russia’s long-term foreign and local currency Issuer default ratings at BBB. The outlooks were in the negative category.
Both the European Union and US were likely to respond to the July 17 downing of a Malaysia Airlines plane by imposing further sanctions which would depress capital inflows to Russia, and potentially lead to higher capital outflows, putting downward pressure on reserves and growth.
On July 17, the US imposed the most meaningful tightening in sanctions since March, by preventing two major businesses (Rosneft and Novatek) and two banks (VEB and Gazprombank) from raising debt and equity in the US market. This would increase investor risk aversion towards Russia, said Fitch.
The penalties, and international tensions, could push Russia into an outright recession, added the ratings agency.


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