Insurance market in Russia bounces back but threats remain: AM Best

Russia's insurance market has reached a positive turning point as premiums grew in 2018 driven by life and non-life products, however, credit ratings agency AM Best warned that the recovery was “fragile” as threats remain.

In a report on the Russian insurance market, the agency said that “more stringent oversight” from the country’s regulator the Central Bank of Russia (CBR) had reduced the number of firms in the market as smaller re/insurers had failed to pass closer scrutiny. The number of insurance companies operating in Russia fell to 199 in 2018 from over 700 a decade earlier.

AM Best highlighted figures from the CBR showing that total insurance premiums rose 16 percent to RUB 1.48 trillion ($23 billion). Increases were driven by non-life insurance as well as life products.

“In terms of profitability, Russian insurers benefited from solid investment returns and improved combined ratios, with the overall market recording a return on equity of approximately 31 percent (22 percent in 2017),” the report said.

However, the agency warned that the market’s recovery remained at risk from threats in motor third-party liability (MTPL) and life insurance.

Motor insurance in the eastern super power was viewed as “one of the most challenging areas” in the insurance market, due in particular to weak performance in MTPL. But in 2018 the performance of motor insurance improved as MTPL and ‘motor physical damage’ saw premium growth and good profitability, supported by rising car sales and a partial liberalisation of MTPL tariffs.

However, the sustainability of improved performance remains in question.

“Greater flexibility in setting rates, combined with an increasingly competitive environment, may ultimately result in underpricing as insurers seek a larger market share,” the report warned.

Further threats to motor profit recovery include the potential increase in agent commissions “which could rise as intermediaries gain more influence in MTPL - an increasingly sought-after line of business - and difficulties in setting reserves due to changing claims trends”.

AM Best said: “In their internal stress tests, insurers should consider scenarios such as a rise of incurred but not reported claims, adverse outcomes on disputed claims, and an unexpected spike in inflation resulting in higher costs for motor spare parts.”

The report found that life product underwriters may see their margins “squeezed” over time as banks and other credit institutions dominate the distribution of these products. AM Best explained the risk for insurers is that over reliance on banks for distribution subjects them to high commission fees.

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