Swiss Re bets on insurtech to boost Russian insurance market

"The Russian insurance market is in a stressed state,” says Christian Engeln, Swiss Re market head Russia & CIS.

“The motor third-party liability business is a drag for many companies. Rates are fixed in motor third-party liability and the loss burden is increasing mainly due to higher activity from claims lawyers in some regions in Russia, perhaps a dysfunction of the legal system. There is also less demand from commercial insurance buyers than in the past, particularly in engineering and marine, as a result of cuts in insurance budgets. It is a difficult operating environment, but we believe it will bottom out this year."

Due to a low oil price and sanctions implemented by western countries after the Russian annexation of Crimea, the Russian economy slid into a recession.

"Because of sluggish economic growth there is limited potential for existing insurance products,” says Nicola Rautmann, market executive Austria & CEE at Swiss Re.

Russia’s GDP shrank by 2.8 percent in 2015, but the performance of the economy improved somewhat in 2016 when it contracted by only 0.2 percent, according to data provider FocusEconomics.

But still there is not much reason for optimism. "There are no obvious pockets of growth in the P&C market,” says Rautmann.

“It’s a bit different in life & health, where there is an uptick in demand."

An expected economic recovery is set to support performance of the Russian insurance market.

In 2017, Russia’s GDP is estimated to expand by 1.3 percent and in 2018 by 1.7 percent, according to FocusEconomics.

"GDP growth spurs insurance demand," says Rautmann.

Optimism usually drives loan demand, which consequently boosts insurance purchases.

But "Russia can achieve insurance growth even if GDP growth does not rebound to past levels,” Rautmann notes. “There are essential insurance needs that have to be served such as life and health insurance which is not necessarily dependant on GDP growth."

Insurance growth can be spurred through new insurtech products and distribution, according to Swiss Re. “For insurers, it is essential to find innovative products to boost growth,” Rautmann notes.

In order to push innovation and growth in the Russian insurance sector, Swiss Re has organised an innovation fair in Moscow, hoping that it will stimulate the dialogue between insurers and insurtech companies.

"Insurtech can help develop new distribution channels, finding new client groups and opportunities to cross sell,” says Engeln.

“Especially the retail insurance business has a low penetration compared to international benchmarks,” he notes.

The Russian life insurance segment seems to be on the right track. It recorded growth of 66 percent in 2016, according to KPMG’s July 6, 2017, annual Russian insurance market survey. Life insurance will continue to grow rapidly (about 30 percent) for another 2–3 years taking leading positions in the near future, according to the survey. At present, the growth of the life insurance market is achieved through an active distribution of investment life insurance products, which are used by many insurers as an alternative to deposits, the survey participants explained.

The situation is less bright on the non-life insurance market. In this segment, the management of insurance companies in recent years has focused on auto insurance. But in the operating environment in this segment is difficult.

In 2017 the OSAGO (Obligatory “Auto Civil” insurance programme) loss ratio will reach its maximum level for the last five years, according to survey respondents. And even non-monetary compensation introduced to lower the OSAGO loss ratio will have an adverse effect and, according to comments by the top management, may add 7.5 percent to the loss ratio coefficient. In light of growing OSAGO loss ratio, the insurance market players consider to drop this particular type of license: the management of insurance companies taking part in the survey believe that another two large companies will exit the market in 2017.

At the same time, the CASCO (Casualty and Collision) market is showing very positive trends, according to the KPMG survey. Due to measures taken in the previous periods to reduce the loss ratio and cut costs, the profitability of voluntary car insurance has grown significantly. According to respondents, these trends may improve the competition in the CASCO market, which, in its turn, will lead to the reduction of insurance rates and influence the acquisition costs.

Overall, the non-life market in Russia returned to growth in 2016 with premiums up 0.8 percent, as the economic contraction slowed, according to Swiss Re’s July sigma study “World insurance in 2016: The China growth engine steams ahead.”

The management of insurance companies continue their search for profitable business growth: 90 percent of insurers participating in the survey believe that this growth will become possible through non-price factors, for example new technologies. The management of insurance companies highlight the potential opportunities for effective application of new technologies in all areas of business process – sales, underwriting and loss settlement.

“Insurtech companies can show innovative ways to sell insurance together with other services and finding potential new buyers for insurance protection which conventional sales channels have failed to target in the past," Engeln says.

"Russian insurance companies have fewer legacy systems, allowing companies to develop new sales channels and integrate technology to sell insurance products," he notes.

Health insurance products may be included in motor cover and insurance can be combined with services unrelated to insurance. In life and health, for example, it is fairly common to combine the cover with diagnostics services, Engeln says.

"We see Russia as a growth market for both P&C and life & health due to its low insurance penetration and we believe that insurers can drive growth through innovative products," Rautmann notes.