Reinsurance Market in Russia: Future Outlook

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Reinsurance Market in Russia: Future Outlook

Joint analytical report of ARIA and RNRC

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Summary

The reinsurance market in Russia needs a fresh start. The scope of internal reinsurance in Russia is declining progressively. The amount of reinsurance premiums on the internal market in 2015 was RUB 35.2 billion, which is RUB 8.9 billion (20%) less than in 2012. Over the 9 months of 2016, the amount of premiums for accepted risks was 28.8 billion.

In 2012-2014, the reinsurance market in Russia was expanding: premiums during this period increased by RUB 23.6 billion (20.5%); but affected by the negative political and economic factors in 2015, the reinsurance market stopped growing and entered a recession phase. During 2011-2015, reinsurance premiums increased just by 2% in 2015, while the growth of prices for insurance services reached 58% according to the Federal State Statistics Service.

The Russian reinsurance market is characterized by a low penetration rate. Refusal to cede risks is associated with a few factors: inability to cede risks, conscious refusal to cede risks by insurers and lack of insurers' trust in Russian companies operating on the incoming reinsurance market.

Despite the sanctions, the share of reinsurance premiums flowing abroad is increasing. In 2012 to 2015, premiums ceded to foreign reinsurers grew from RUB 79.4 billion to 98.4 billion.

The size of the reinsurance market in Russia for the 9 months of 2016 was RUB 28.8 billion, which is equivalent to 3.25% of premiums on the insurance market. According to 2015 data, this figure on the international reinsurance market was estimated at 5%. As such, there is an obvious lack of reinsurance capacity in Russia to afford efficient reinsurance protection.

The major reinsurance segment on the Russian market is corporate property insurance which remained stable throughout 2012-2016.

The internal reinsurance market in Russia demonstrates a considerable concentration: 40% of premiums are accounted for by two companies – SOGAZ and INGOSSTRAKH. The market share of 10 major companies is 78.8% (9 months of 2016).

The establishment of RNRC may give new momentum to development. The entry of a major national player on the reinsurance market may increase the volume of the Russian reinsurance market, improve the efficiency of reinsurance protection, set a new level of standards and facilitate the accumulation of analytical information for insurance and reinsurance of core risks on the Russian market and the emergence of new types of reinsurance operations and contracts.

In 2017, RNRC can have a premium income of about RUB 8 billion, and the national reinsurance market can grow by 10% (for the first time in the last few years, the reinsurance growth rate can become comparable with the growth rate of direct insurance). Without the contribution of RNRC, the market growth rate will be within 3%-5%.

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Dynamics of reinsurance market in Russia

The Russian reinsurance market demonstrates a low penetration rate: thus, the market dynamics has a clear descending trend. As compared to 2012, the penetration reinsurance rate in Russia in 2015 dropped by 0.017% to 0.045%.

Source: ARIA and RNRC according to the Bank of Russia and the Federal State Statistics Service

As compared to 2012, the share of ceded premiums (without personal and CMTPL insurance) decreased notably (by 2.3 pp) during the 9 months of 2016.

Source: ARIA and RNRC according to the Bank of Russia

The following factors stand out among the reasons for refusal of reinsurance:

• inability to cede risks (due to international sanctions)

Figure 1 - Penetration of reinsurance in Russia, (reinsurance premiums vs. GDP),%

Figure 2 - Dynamics of premiums for ceded risks (% of written premiums)

Amount of premiums for ceded risks, RUB billion Share of premiums for ceded risks

2012 2013 2014 2015 9 months 2016

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• conscious refusal to cede risks (due to worsening of financial situation in insurance and a lack of available funds) resulting in excessive risks for the capital

• increasing the capacity of obligatory programs which help optimize reinsurance costs, because obligatory reinsurance is basically less expensive than facultative reinsurance

• concentration of insurance business with major insurers with greater capital, who enjoy lower reinsurance costs in general

• presence of scheme-based operations on the internal reinsurance market, with a sharp decrease of their share in recent years

• low ratings of Russian insurers

The descending trend in terms of premiums was most evident in four insurance segments: aviation hull, marine hull, rolling stock and cargo insurance. The aggregate share of premiums in these insurance segments for ceded risks decreased from 60.4% to 40.5%.


Despite external constraints, the amount of premiums ceded abroad has increased: 2012 to 2015, premiums for risks ceded to foreign reinsurers grew from RUB 79.4 billion to RUB 98.4 billion.

The Russian insurance companies having reinsurance licenses were not markedly affected by sanction risks – generally, the insurance market formed by clients under sanctions is not a trendsetter in terms of the scope of operations among the insurance companies. The only company having mostly sanction-affected clients is Independent Insurance Group providing reinsurance protection for Rostekh and Rosoboronexport state companies.

At the same time, there is a noticeable reduction in premiums for risks ceded abroad: in view of the current US Dollar exchange rate, the drop in 2012-2015 was -49% against the nominal growth of 21%. In 2015, the reinsurance market in Russia was only worth RUB 35 billion (in terms of reinsurance premiums), whereby the amount of premiums for risks ceded abroad

Figure 3 - Dynamics of ceded premiums by reinsurance types

Rolling stock

2012 2013 2014 2015 9 months 2016

Aviation hull

Marine hull

Cargo

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totaled RUB 85 billion. The growth of outgoing reinsurance can actually be explained by its using as a tool for money withdrawal. By various estimates, 20% to 50% of premiums ceded abroad are not related to any classic reinsurance.

Nevertheless, the international markets are still open for Russian companies, even after the negative macro and geopolitical changes. A number of large and medium-size Russian insurers continue active operations on the international market, often without any deterioration of the operating conditions, which can be considered a positive sign for the market as a whole.

The examples of major deals with foreign reinsurers made in 2016 are as follows:

• AlfaStrakhovanie OJSC made an obligatory fire risk reinsurance agreement for legal entities. The limit of liability is EUR 100,000,000 (or USD 125,000,000 or RUB 7 000,000,000) any one loss, where the liability of AlfaStrakhovanie amounts to EUR 2,000,000 (or USD 2,500,000 or RUB 140,000,000) any one loss. The reinsurers under the agreement are SCOR (leader) — 24 %, Hannover Re — 16 %, Partner Re — 9 %, Swiss Re — 17 % other western companies — 30 %, and major Russian companies – 4 %;

• SOGAZ INSURANCE resumed its obligatory reinsurance programs for aviation hull and third party liability of aircraft owners and carriers. The reinsurance capacity for aviation hull business is $50 million, for reinsurance – $1.25 billion. The risks are reinsured through international companies with a minimum “А-“ rating according to Standard & Poor’s. The leaders of the programs are Swiss Re and MS Amlin;

• Ingosstrakh resumed its outgoing reinsurance program for engineering risks for 2016. Its Ruble capacity is RUB 6 billion, and the capacity in Euro and US Dollars is 75,000,000 and 80,250,000, respectively. The program leader is Swiss Re;

• ARSENAL renewed its obligatory marine risk reinsurance agreement covering vessel hull, ship owner and ship builders’ liability risks. The liability limit under the agreement was increased to USD 20 million.

• SOGAZ renewed its obligatory property reinsurance agreement in 2016. The agreement is of multi-currency type, with the liability limits, depending on the currency of the original policy, set by respective sections as follows: USD 225 million, Euro 150 million and RUB 11.25 billion. This is the largest reinsurance capacity available on the Russian insurance market. The agreement is made with a pool of more than 20 leading international insurance and reinsurance companies. At least 92.3 % of the total coverage limit under the obligatory reinsurance program was ceded to companies with a minimum international financial stability rating of “A-“ according to Standard & Poor's and A. M. Best.

• Ingosstrakh resumed the outgoing reinsurance program for engineering risks for 2016. Its Ruble capacity is RUB 6 billion, and the currency capacity is EUR 75 million and USD 80.25 million. The program leader is Swiss Re.

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The problem with reinsurance of business under sanctions lies in uncertain status of such sanctions, especially in the European interpretation (this refers, e.g. to production of double-purpose products, sanctioned contractors, suspected qualification for sanctions), which makes it difficult to essentially identify sanction risks. This may cause problems with obtaining indemnity in case of attachment of reinsured risks under conventional (international) reinsurance. The establishment of RNRC will provide a necessary reinsurance capacity for insurers dealing with business exposed to sanctions.

Over the 9 months of 2016, reinsurance premiums written in Russia totaled RUB 28.8 billion, which is equivalent to 3.25% of the total premiums written on the insurance market. According to 2015 data, premiums written by insurance companies worldwide made USD 4.55 against USD 0.223 trillion in reinsurance premiums. Therefore, the total figure on the international reinsurance market was 5%.

Considering the existing proportions of the international reinsurance market according to the results of the 9 months of 2016, the Russian reinsurance market could have amounted to approximately RUB 40 billion. There is an obvious lack of reinsurance capacity in Russia to afford efficient reinsurance protection, as well as certain undeveloped potential.

Figure 4 - Share of reinsurance premiums ceded to foreign companies, %

2012 2013 2014 2015 9 months 2016

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Due to the impact of negative political and economic factors in 2015, the reinsurance market stopped growing completely and entered a recession phase. In 2011-2015, the growth of reinsurance premiums did not exceed 2%, while the growth of prices for insurance services reached 58% according to the Federal State Statistics Service.

Until recently, the capacity that the Russian market can provide for foreign business has been insufficient, and the demand was only demonstrated by some emerging markets and business segments which, in view of their risks, political and other specifics, were not interesting to more demanding and “higher rated” markets. RNRC plans to change this situation, although some factors are still exogenous (such as rating constraints).

Structure of reinsurance market in Russia

The largest reinsurance segment of the Russian market is corporate property insurance with a share that remained stable in 2012-2016. This segment did not actually change its share of the market in 2012-2016. The second largest market segments were liability (9%) and hazardous industrial facilities (9%).

The share of other individual segments, both for the 9 months of 2016 and in 2012- 2015, was within 5-6%.

Figure 5 - Dynamics of premiums for ceded risks in 2011-2016

Amount of premiums for ceded risks, RUB billion Growth rate of premiums for ceded risks, YOY (vs. 2011) Insurance price index in Russia, YOY (vs. 2011) Linear trend (amount of premiums for ceded risks, RUB billion)

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The reinsurance market in Russia demonstrates a high premium concentration rate. 10 largest companies account for 78.8% of the total amount of premiums (the result of 9 months of 2016). Overall, there were 63 companies operating under reinsurance licenses during the 9 months of 2016. During the period from 01.10.2015 to 31.09.2016, the share of these 10 major insurance companies increased by 10.61%, and the share of the two market leaders grew by 4.83%.

The key factor differentiating the Russian reinsurance market and foreign markets is underdeveloped life, personal property and motor hull insurance segments. The reinsurance market is focused exclusively on corporate insurance. Globally, the share of life reinsurance in 2015 accounted for more than 13% of the market.

The distribution of premiums on the market is characterized by their significant concentration with two reinsurers: SOGAZ and INGOSSTRAKH. Their market share totals 40% of written reinsurance premiums, whereas the market share of most reinsurers (47) does not exceed 1%.

For instance, one of the landmark reinsurance deals on the Russian market was reinsurance provided by SOGAZ for the Kerch Bridge construction with the sum insured of RUB 228 billion under the insurance agreement made by Stroigazmontazh LLC with Crimean First Insurance Company.

One of the largest deals for reinsurance companies with a minor market share was reinsurance of VTB Ice Palace by Soglasie for a total amount of RUB 4.9 billion. The insurer under the project was SMP-Strakhovanie.

Table 1. Ranking of major (Top 15) reinsurers on the Russian insurance market (including specialized companies)

Rank as of 30.09.2016

Rank as of 30.09.2015 Insurer

Market share as of 30.09.2016

Market share as of 30.09.2015

Reinsurance premiums, RUB billion as of 30.09.2016

1 1 SOGAZ 24.27% 21.24% 6.99 2 2 INGOSSTRAKH 16.45% 14.65% 4.74

Figure 6 - Structure of reinsurance market for 9 months of 2016

Life Accident VHI Hull Rolling stock Aviation hull Marine hull Cargo Corporate property Personal property TPL Business risks Financial risks Hazardous facilities Other

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3 3 CHABB INSURANCE COMPANY 7.38% 6.48% 2.12 4 4 SCOR P.O. 6.72% 4.39% 1.93 5 8 AIG INSURANCE COMPANY 4.91% 3.65% 1.41 6 5 VTB INSURANCE 4.11% 4.06% 1.18 7 11 ALFASTRAKHOVANIE 3.84% 2.62% 1.11 8 7 CAPITAL STRAKHOVANIE 3.74% 3.69% 1.08 9 9 UNITY RE 3.70% 3.50% 1.07

10 6 ROSGOSSTRAKH 3.70% 4.00% 1.06

11 12 RUSSIAN REINSURANCE COMPANY 2.54% 2.53% 0.73

12 14 RESO-GARANTIYA 2.18% 1.84% 0.63 13 13 VSK 2.04% 2.09% 0.59 14 15 ALLIANCE 1.45% 1.61% 0.42 15 16 SOGLASIE 1.30% 1.37% 0.38

- - Other insurance companies 11.67% 22.28% 3.36

Establishment of RNRC: background and expected results

The challenges accumulated on the Russian reinsurance market, and the need to ensure further growth of the national reinsurance market and reduce the amount of premiums flowing abroad were a sufficient reason for the government intervention. The CBR made a decision to set up Russian National Reinsurance Company (RNRC) which was established in August 2016.

RNRC will be operating on the market as any other insurance or reinsurance company, and the competitive environment on the reinsurance market is not expected to sustain any pressure; this, on the other hand, will give momentum to the development of the market as a whole.

If risk covered by a Russian insurance company becomes an object of sanctions or restrictions in terms of its foreign reinsurance, RNRC will come up with reinsurance protection. This will create additional internal reinsurance capacity, which in turn will help further expand the opportunities of insurance companies to sell their direct products and make new insurance agreements with a more extensive insurance coverage.

Besides, RNRC will potentially be able to provide the market with information on accumulation of risks and possible influence of catastrophic events on the portfolio of insurers, as well as to support the insurance market players with analytical and statistical materials. The assessment of accumulation and furnishing the market with this information is thought to encourage the emergence of new types of reinsurance operations and reinsurance agreements.

The establishment of RNRC will result in structural shifts on the Russian reinsurance market. The crucial outcome will be the acceptance of part of risks currently ceded to foreign reinsurers, which will facilitate the growth of the Russian incoming reinsurance market.

In 2016, RNRC already marked its start with a number of large-scale deals. Among the first ones was a facultative agreement with Rosgosstrakh. The agreement covered the risks associated with the building of a rescue vessel. The limit of liability assumed by RNRC was about RUB 900 million. Also, RNRC made an obligatory reinsurance agreement with Sberbank Strakhovanie and a facultative agreement with Ingosstrakh (aircraft insurance). The limit of liability assumed by RNRC for facultative risks exceeded 10% of the ceded risk (the company assumed liability of

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about RUB 900 million under each agreement).

Additionally, RNRC will help clear the market of “non-risk” reinsurance (rather “reinsurance” in this context) – these operations will become more expensive and more heavily scrutinized.

Currently, insurance agreements with considerable insured sums protecting the property interests of state corporations are not fully provided with reinsurance protection due to the sanction-led restrictions and an insufficient capacity of Russian reinsurers. A considerable additional reinsurance capacity which RNRC is well positioned to create with an equity capital of RUB 20 billion will help reduce costs incurred by the RF budget in paying indemnity in connection with adverse events.

After becoming a major player on the reinsurance market, RNRC will be able (if it can avoid sanctions) to offer its reinsurance services on the global market. This way, the reinsurance portfolio of RNRC will become more diversified, stable and potentially sufficient to make the operations of RNRC more economically efficient.

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2017-2018 development forecast for Russian reinsurance market

The establishment of RNRC will support further growth of the Russian reinsurance market. But the growth prospects will heavily depend on the general situation on the insurance market.

In 2017-2018, the Russian insurance market will be facing a tough development environment due to further decrease of real personal income. In order to maintain the existing level of profitability, insurers may start cutting down their reinsurance protection costs.

The base forecast provided by ARIA for 2017 is a 10% market growth, where a 5%-7% share in the growth trend will be ensured by RNRC – the market growth pace without RNRC's input is estimated at 3%-5%, which is explained by stagnation of direct corporate property insurance (the largest market segment so far). Corporate property insurance in 2017 will not, most probably, demonstrate growth better than 5%. This will ensure stability of premiums for ceded risks in this segment. This insurance segment provides the greatest amount of reinsurance premiums on the Russian insurance market (54% for 9 months of 2016).

And of course, one of the key market growth drivers will be RNRC. In 2017, it can report about RUB 8 billion in revenues – partially, as a result of redistribution of the market volumes, which also will hugely boost the growth of the national reinsurance market. In 2017, we are forecasting a growth at about 10%, which will be close to the forecasted growth of direct insurance. Setting up of RNRC will not only lead to redistribution of premiums in incoming reinsurance, but will also redirect part of premiums for risks ceded abroad. Subject to the best case scenario, RNRC will be able to attract some foreign risks to extend its own portfolio. The higher cost of non-insurance operations on the reinsurance market may result in decrease of outgoing reinsurance (for the share of non-insurance operations). Also, RNRC will remove some constraints for reinsurance of certain large and/or complex risks, which could not be ceded to the Russian market of incoming reinsurance.

According to the forecast of Swiss Re, the growth rate of the global reinsurance market in 2017 will be 0% to 5% for the developed markets and 12% to 17% for the emerging markets. Therefore, the Russian market can demonstrate a medium growth rate as compared to the emerging markets; but one should not disregard the very small size of our market against the market in a number of countries comparable with the RF in terms of their economic position.

Further development of the national reinsurance market will also materially depend on the quality of the CBR's supervision and the ability of RNRC to offer optimal reinsurance conditions and high-quality services for insurance market players. A large share of the Russian incoming reinsurance market and a significant amount of assets, combined with the successful activities of RNRC on the Russian market, will become the basis for acquiring international ratings. This will help RNRC increase the volume of premiums written abroad and enhance its reputation among foreign counteragents, positioning it to raise its revenues and enjoy more favorable conditions of cooperation. The question that remains open is the possibility of obtaining a rating above the sovereign level (which is possible under certain conditions).

If the activities of RNRC are not restricted by international sanctions and its relationships with foreign participants of the reinsurance market grow actively, this will allow diversifying the impact of the 10% cession on the company's portfolio. This scenario of RNRC's development will result in its status of a full-fledged participant of the global insurance market (even with a

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sovereign rating of the RF).

The loss ratio on the reinsurance market, according to 2015 data, was 65% and kept growing steadily throughout 2012-2015. Over the 9 months of 2016, the market reported a loss ratio of 45%. In 2012-2016, the key loss makers among the reinsurance segments were marine hull, motor hull and business risks. The least unprofitable segments were reinsurance of hazardous facilities, life and financial risks. The lead reinsurance segment on the Russian market of incoming reinsurance was corporate property, which had a loss ratio of 42% in Q3 2016.


In 2016, the level of payments will likely be from 53% to 58%. Without structural shifts on the market, loss development will continue aggravating, and the payment figure will be from 58% to 63% by the end of 2017.

RNRC will lead to redistribution of premiums on the reinsurance market through the introduction of mandatory cessions and through attracting risks which were beyond the limits of the Russian incoming reinsurance market, as well as a part of premiums for risks ceded to foreign reinsurers. By 2017, the market share of RNRC will reach about 25%. The share of the two current market leaders – SOGAZ and INGOSSTRAKH – will rise to 18%-19% and 12%-13%, respectively. The share of 10 largest companies will account for some 80%. In future, the market concentration will tend to increase, which is also true for the insurance market in general.

Figure 7 - Payments on reinsurance market, % (65%)

2012 2013 2014 2015 9 moths 2016

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Reinsurance Market in Russia: Future Outlook