New Russian reinsurer grabs business from established players

The Russian government first revealed details of the new reinsurer back in July. The move is set to plug the hole created by a political embargo after the Ukraine crisis, but the entity will also participate in the general market, increasing reinsurance capacity in an already soft market and reducing the business for other reinsurance players.

In June the State Duma of the Russian Federation passed legislation amending the Law on Organisation of the Insurance Industry in the Russian Federation to create the national reinsurance company (NRC).

The idea has been floating around for a while, but the introduction of political sanctions following Russia’s role in the Ukraine conflict has given the plan the last needed push.

A Russian military intervention in Ukraine in 2014 ended with the annexation of Crimea. In response to it several foreign governments introduced various restrictions on certain Russian entities and persons as well as sectors.

As a result, foreign reinsurers representing major international reinsurance markets started either to refuse accepting risks associated with such persons and sectors or to insist on the inclusion of the so called sanctions clauses in contracts.

RELIEF FOR SANCTIONS-HIT BUSINESS

“The NRC might help to mitigate some problems for local insurers with risks that are affected by Western sanctions,” says Christian Engeln, Swiss Re market head Russia & CIS.

The entity’s goals include “to provide maximum protection to the business which fell under international sanctions,” according to a November 2016 presentation by the NRC seen by Intelligent Insurer.

As part of legal requirements, cedants must offer the NRC a 10 percent share in all sanctioned business placements. And this will also apply retrocession policies, CMS Russia, a law and tax advisory firm, said in a commentary on this matter.

But NRC’s business will go beyond the sanctions affected reinsurance business. “Concentrating on the sanctions business would produce a quite volatile, unbalanced portfolio,” says Nicola Rautmann, market executive Austria & CEE at Swiss Re.

GRABBING MARKET SHARE

One of NRC’s strategic goals is the development of the direct insurance market in Russia. As part of the legal requirements and effective January 1, 2017, all Russian insurance companies have to offer NRC a 10 percent line in all outward reinsurance business (treaties or facultative).

NRC has the right to abstain of the offered share of unsanctioned business.

“As it is written in the law, NRC will be more open to the sanctions part of the insurance business,” [...] but “we see already their ambitions to write also non-sanctioned business,” Rautmann says.

The NRC signed its first reinsurance contracts in October. “Some of the first risks they took on were some bigger single risk accounts,” Rautmann notes.

The participation of NRC in the market will impact the business of other reinsurance players in Russia.

“Foreign reinsurers are affected by the mandatory sessions to NRC as the cession to other reinsurers gets reduced,” Rautmann says.

In addition, “for some long-term contracts going beyond January 1, 2018, the NRC has the right to participate,” she notes. “That’s where an existing contract gets affected, but in the first place it affects renewed business.”

The most controversial provision of the bill creating NRC is the requirement of compulsory cession in relation to all other (non-sanction related) insurance and reinsurance contracts concluded on the Russian insurance market, according to CMS Russia.

With respect to these contracts, the bill introduces treaty-facultative reinsurance (retrocession). As a result, the reinsured (retrocedent) must offer 10 percent of the reinsured risks to the NRC, which can accept this share, decrease it or refuse to accept it.

This obligation of the insurer extends also to the existing obligatory reinsurance policies. It seems this provision tacitly makes the application of the law retroactive as obligatory reinsurance contracts could remain in force for many years, CMS Russia says.

“Apparently, reinsurers under such obligatory reinsurance contracts and indeed other contracts as well would have to simply accept that they will lose 10 percent of their premium income pursuant to the law and at the discretion of the NRC,” according to CMS Russia.

OPERATING LIKE A COMMERCIAL REINSURER

Despite being government owned with the Central Bank of the Russian Federation (Bank of Russia) being the sole shareholder at date of establishment, market participants expect the NRC to have a profit-oriented risk-taking approach.

“We expect the NRC to operate like a commercial reinsurer,” says Rautmann.

As stated in the presentation, NRC may sign the share of less than 10 percent of the risk offered to it (except sanctioned business) if the risk is of inadequate quality or pricing or the size of business is higher than the risk appetite of NRC.

NRC aims to expand the protection of property interests of Russian businesses and the Russian state, and aims to achieve maximum financial results for all stakeholders, according to the entity.

The reinsurer will focus its business on property, CAR/EAR (construction), general liability, general cargo and shipbuilder’s risks.

The legal entity which was registered on August 3, 2016 is capitalized with RUB71 billion ($1.1 billion), with a possible issuance of additional shares.

The main effect of the creation of this new player is that “NRC is adding capacity to the Russian reinsurance market,” Rautmann says.

For insurers, this might be good news. “An inception of a reinsurer with RUB71 billion worth of capital will broaden opportunities for insurers in terms of risk placement on the Russian reinsurance market,” ACRA (analytical credit rating agency) said in an August press release.

NRC may also sign a share of more than 10 percent of the reinsurance volume if the direct insurer needs extra capacity from NRC.

But for reinsurers operating in the Russian market the added capacity and the new competitor are less welcome, particularly because, as it is the case in other parts of the world, Russia is experiencing a soft market.

SOFT MARKET AND OVERCAPACITY

“There is a lot of capacity available especially for the main programmes and this applies to all markets, lines and clients,” Engeln says. “We don’t expect this situation to change in the near future.

Although the sanctions may have reduced some capacity in sanctions-related business, this gap has attracted additional capacity from markets that have a different sanctions regime than Western markets,” Engeln notes.

In addition, the operating environment in Russia has been under pressure from an economic recession. The country’s GDP (gross domestic product) contracted by 3.7 percent in 2015, according to The World Bank.

Experts predict the Russian economy to continue contracting in 2016, potentially shrinking by 0.7 percent, while GDP may expand by 1.3 percent in 2017.

In order to protect profitability in Russia, Swiss Re is focusing on treaties involving partners with strong underwriting capabilities and where it thinks that prices are still compatible with the risks.

“We focus on those insurers that are interested in a partnership situation that goes beyond pure capacity and price tag discussions,” Rautmann says.” Also, we see lots of changes coming from technological innovation, where we want to actively partner with selected clients in Russia,” she adds.

On a positive note, an expected economic recovery may support the re/insurance business in the coming years.

“We always had this view that the market has a big growth potential due to many areas not yet insured on the direct side, something you could call a protection gap,” Rautmann says.

But NRC may, at some point, also target business outside of Russia.

Included in the company’s tactical goals is also the aim to start a global expansion. “The law sets no territorial limits for the reinsurance operations of NRC,” as stated in the presentation.