Western re/insurance markets already losing 10% to new Russian NRC

The new Russian National Reinsurance Company has increased pressure on Western markets already challenged by the international sanctions regime with international reinsurers already losing a significant amount of business as a result.

That is the view of Leonid Zubarev, senior partner at CMS Russia, who argues that international reinsurance markets providing coverage in the Russian Federation now face losing a sizable chunk of a dwindling pot of business. From 1 January 2017, the NRC began collecting 10 percent of outward premiums.

“From January 1 2017, 10% of outward reinsurance premiums will have to be ceded directly to the NRC, introducing a potentially unwelcome income squeeze and some tricky claims handling protocols to boot,” Zubarev said.

He said that at a recent CMS seminar in London reinsurer had many questions about the implications the NRC’s creation may have for their businesses.

“Ironically, no single case of non-payment of reinsurance indemnity due to sanctions clauses has been reported since the end of 2014 (i.e. after the first renewal of the existing international reinsurance policies since the introduction of the restrictions that included these sanctions clauses),” he said.

“Nevertheless, the Central Bank of Russia is the sole owner of the NRC and is now attempting to counter the effects of sanctions. The 10 percent ceding rule was passed by the state Duma despite an expert report of the Presidential Council for the Codification and Improvement of Civil Law which was strongly against this idea for ‘conceptual reasons."

Zubarev said that the Council said it was contrary to the basic principles of civil law – freedom of contract and equality – and creates unjustified advantages for the NRC.

“Meanwhile, the legislation behind the NRC has introduced for the first time the concept of ‘follow the fortunes,” Zubarev added.

“While this condition is widely used in international and domestic reinsurance practice, it usually requires the reinsured to fulfil all of its obligations under the reinsurance policy as a condition precedent. Those ceding to the NRC will have to comply with its own terms and conditions.

“This could lead to different consequences for reinsureds and reinsurers. Reinsureds with complex (primarily international) reinsurance programmes may have to bring the terms and conditions of such programmes in line with the NRC’s internal policies on risk assessment and risk management.

“In particular, these conditions include the scope of the cover, leader and claims control clauses, proof of loss, indemnity payment provisions and so on. Reinsurers would lose 10% of their business and everybody would have to partner with a state company, potentially with a lot of red tape and objectives that are far from adequately safeguarding their business interests.”