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AM Best: COVID-19 Sparked Innovation for Insurers in Russia

The pandemic presented challenges for Russian insurers in terms of both the asset and the liability sides of their balance sheets. It also highlighted the increasingly important role of technology and innovation in the industry.
  • John Weber
  • August 2021
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BUMPER TO BUMPER: A traffic jam on the Kremlin embankment in Moscow. Due to the pandemic, the Russia motor insurance segment experienced lower claims, according to a Best’s Market Segment Report.

BUMPER TO BUMPER: A traffic jam on the Kremlin embankment in Moscow. Due to the pandemic, the Russia motor insurance segment experienced lower claims, according to a Best’s Market Segment Report.

Russian insurers expanded their digital presence during the pandemic, said Valeria Ermakova, associate director, analytics, and Todor Kitin, financial analyst, AM Best.

Russia's economy took a hit in 2020 as a result of the COVID-19 pandemic and a sharp decline in global oil prices. While these factors created volatility in Russia's insurance market, the pandemic also accelerated innovation, according to the Best's Market Segment Report COVID-19 and the Russia Insurance Market: Negative Implications for Premium Growth, but Opportunities for Innovation.

Following is an edited transcript of an interview with Ermakova and Kitin.

For a number of years, the life insurance segment was the main growth driver in the Russian insurance market. However, the beginning of the COVID-19 pandemic intensified a trend of premium decline, which had already started in 2019. Later in 2020, though, the life market started to expand again. What are the reasons for this?

Kitin: Following a sharp decline in the second quarter of 2020, premium volumes in life insurance recovered through the rest of the year.

In response to the economic situation, the Central Bank of Russia reduced the interest rates several times in 2020. This made customers switch their preferences to alternative investment solutions, which typically generate higher return than bank deposits.

At the same time, the lower interests increased the borrowing activity in Russia. This, in turn, boosted sales of credit life insurance, which was another positive factor for the segment.

It's important to mention as well that in recent years the regulator has taken significant steps to increase public trust in life products, which was eroded by mis-selling practices in the past. The lower number of complaints and the stricter transparency requirements have increased the confidence of the customers.

This, combined with the low interest, is expected to generate steady demand and support the growth of life insurance premiums.

Let's talk about motor insurance in Russia. The report says that the consequences of the COVID-19 pandemic were broadly positive for insurers, although there are some risks that can pressure profitability in the long term. Can you elaborate on that?

Ermakova: In Russia, the motor segment can be separated into two main segments: the compulsory motor third-party liability, or MTPL, and motor hull, which is voluntary. We discussed both segments in our report, but for now I'm just going to talk about the MTPL.

So in general, MTPL—the compulsory nature of this segment combined with the official efforts to reduce the number of uninsured vehicles helped to prevent a drop in this line of business. In fact, we observed a slight increase in both the number of contracts and the volumes of premiums over the first nine months of 2020, compared to the same period in 2019.

The profitability, of course, benefited to some extent from lower claims frequency, especially in the second quarter due to the lockdown measures in the country.

At the same time, we are seeing some challenges that can threaten MTPL profits in the longer term. For example, the ongoing liberalization of regulatory tariffs is likely to drive down overall premium rates as insurers are willing to offer discounts to policyholders, given the very high competition in this segment.

In addition to that, we'll have issues to do with claims inflation given the increased cost of spare parts and also an acceleration of online insurance and online price comparison, which is good for the market in terms of technology, but it is likely to intensify that price-based competition even further, putting pressure on the profitability.

Let's talk about voluntary medical insurance. The report mentions a substantial premium reduction in 2020, but at the same time, healthy growth is anticipated in the future. Can you tell us more about that?

Kitin: The substantial drop in voluntary medical insurance premiums in the second and the third quarters of 2020 was largely a consequence of policyholders trying to reduce expenses during the economic slowdown, including large corporations, SMEs, retail customers.

This negative trend was offset by a preserved profitability because in the same period of time the insurers incurred a lower level of losses, because medical services were not accessible or scheduled for later during the quarantine.

In terms of future prospects, the impact of the pandemic has led to a higher awareness amongst the population of the importance of having access to good-quality medical care.

Some Russian insurers start to respond to this by using tools such as telemedicine, wearables, various wellness programs in order to incentivize their customers and also improve their own risk selection. Other insurers are, for example, utilizing their own clinics to improve the quality of medical services.

In 2020, insurers also have accelerated sales of standardized products, which are more affordably priced. These are all reasons for higher demand for the voluntary medical insurance in the longer term.

We expect investments in product design and technology the companies make to accelerate innovation across the whole insurance market in Russia.

How does innovation affect insurance companies in Russia and have you seen any impact from the COVID-19 pandemic?

Ermakova: In general, whilst the COVID-19 pandemic presented challenges for Russian insurers in terms of both the asset and the liability side of their balance sheet, it also highlighted the increasingly important role of technology and innovation in the industry.

What we've seen is that the sudden need to work remotely caught some insurance companies by surprise, as they were still rolling out their digital platforms. For some of these insurers, the only way to reach their customers was through online bank insurance platforms operated by the banking sector.

However, this route to the market came at the expense of high commissions that insurers had to pay those intermediaries. That downside associated with a heavy reliance on distribution through the banking channel is the risk of lower client retention.

What I mean by that is that when consumers buy a product through the banking channel, they may no longer associate the coverage that they purchase with a particular insurance brand.

This emphasizes the importance of developing in-house digital capabilities. In that respect, COVID-19 has accelerated that move toward digitalization.

In the medium term, we think that Russian insurers are likely to review their business models, and some companies have already started doing that so they adapt their services to the current consumers' expectations, consumer behaviors, making their services more accessible online. This is likely to be not just in the distribution but also with respect to underwriting and claims handling, which is what we are already seeing in some of the more mature insurance markets.

Russia

Following is an excerpt from the Best's Country Risk Report.

  • The Country Risk Tier (CRT) reflects AM Best's assessment of three categories of risk: Economic, Political, and Financial System Risk.
  • Russia, a CRT-4 country, has a moderate level of economic risk and high levels of political and financial system risk.
  • Russia's plentiful natural resources and well-educated workforce provide potential for growth. However, ongoing international economic and financial system sanctions will constrain growth over the near term.

Economic Risk: Moderate

  • Russia is a significant commodities exporter, which leaves the country exposed to shifts in global demand and pricing conditions. It is one of the world's leading producers of natural gas and oil, as well as a top exporter of metals, including steel and aluminum.

Political Risk: High

  • Current President Vladimir Putin won his fourth presidential term in March of 2018. In January 2020, he announced constitutional amendments that will extend his rule beyond 2024, when his current term ends.

Financial System Risk: High

  • The Central Bank of the Russian Federation became the ultimate financial regulator for all financial institutions, including the insurance industry, in 2013. Operations for the Central Bank are carried out by its Financial Markets Service.

Vital Statistics 2019

Nominal GDP USD bn 1637.89
Population mil 146.7
GDP Per Capita USD 11,163
Real GDP Growth % 1.3
Inflation Rate % 4.5

United Nations Estimates

Literacy Rate % 99.7
Urbanization % 74.8
Dependency Ratio % 51.2
Life Expectancy Years 71.9
Median Age Years 38.7

Insurance Statistics

Insurance Regulator The Central Bank of the Russian Federation
Premiums Written (Life) USD mil 6,324
Premiums Written (Non-Life) USD mil 16,533
Premiums Growth % -3.1

Regional Comparison

Country Risk Tier
Russia CRT-4
Belarus CRT-5
China CRT-3
Kazakhstan CRT-4
Poland CRT-2
Ukraine CRT-5

Sources: IMF, UN, Swiss Re, Axco and AM Best


Best’s Rankings
Largest 30 Russia Insurers 2019 Ranked by Gross Premiums Written

(US$ thousands)

Rank Company Gross Premiums Written Capital & Surplus
1 INSURANCE COMPANY OF GAZ INDUSTRY SOGAZ 3,343,165 2,884,131
2 SberBank, Life Insurance Co., LLT 2,474,284 736,275
3 AlfaStrakhovanie PLC 1,789,654 385,155
4 Ingosstrakh Insurance Company PJSC 1,778,115 1,223,214
5 SPAO RESO Garantia 1,603,124 1,364,735
6 VTB Insurance, Insurance Company Ltd. 1,414,397 591,606
7 Military, Insurance Company (VSK) JSC 1,356,629 418,672
8 Rosgosstrakh Insurance Company, OJSC 1,291,251 843,649
9 AlfaStrakhovanie Life Insurance Co LLC 900,077 123,987
10 SOGAZ-Life, Insurance Company LLC 734,771 136,056
11 Renaissance Insurance Group JSC 567,944 411,772
12 Renaissance Life, Insurance Company, LLC 542,303 55,997
13 Soglasie, Insurance Company LLC 540,888 139,542
14 Capital Life, Life Insurance Co. LLC 334,938 133,774
15 Sberbank Insurance Co LLC 322,193 89,363
16 ENERGOGARANT Insurance Company, OJSC 243,834 80,865
17 Societe Generale Strakhovanie Zhizni LLC 239,796 89,768
18 Russian National Reinsurance Co. JSC 227,343 431,100
19 Rosgosstrakh Life IC Ltd 221,957 21,904
20 Yougoria Group of Insurance Cos JSC 219,105 59,846
21 Cardif Insurance Company LLC 206,668 63,281
22 Allianz Life, Insurance Company Ltd. 196,083 93,671
23 MAKS, Moscow Stock Insurance Co CJSC 176,910 86,740
24 Ingosstrakh-Life, Insurance Co LLC 143,076 44,859
25 RSHB-Life Insurance LLC 130,722 23,811
26 VSK-Life Line LLC 129,011 55,977
27 Yuzhural-Asko Insurance Co PJSC 127,944 27,703
28 ROSENERGO, National Insurance Group LLC 127,413 24,039
29 JSC Sovcombank Life 123,573 65,680
30 RSHB Insurance Company JSC 122,900 36,189

Source: BestLink logo

Best’s Rankings
Largest 20 Kazakhstan Insurers 2019 Ranked by Gross Premiums Written

(US$ thousands)

Rank Company Gross Premiums Written Capital & Surplus
1 Eurasia Insurance Company JSC 231,181 410,587
2 Halyk-Life, Life Insurance Subsidiary Co 184,036 76,746
3 Halyk Insurance Company JSC 156,921 136,234
4 Nomad Life Insurance Co JSC 148,276 46,741
5 Kazakhmys Insurance Co JSC 76,343 29,835
6 Nomad Insurance Company JSC 57,972 26,096
7 European Insurance Company JSC 57,710 20,473
8 JSC Insurance Company Centras Insurance 32,308 12,311
9 Oil Insurance Company JSC 32,021 18,050
10 Standard Life Insurance Company JSC 28,174 12,443
11 Kommesk-Omir Insurance Company JSC 26,758 24,683
12 Amanat Insurance JSC 26,578 11,182
13 Freedom Finance Life JSC 23,938 12,213
14 InterTeach, Kazakh Corp Health & Med Ins 23,088 9,675
15 Tsesna Garant Ins Co JSC 20,281 25,352
16 Insurance Company London-Almaty JSC 19,944 20,440
17 Basel Insurance JSC 16,974 29,141
18 ASKO Insurance Co, JSC 15,527 9,413
19 Victoria Insurance Company JSC 13,537 239,882
20 State Annuity Company, Life Ins Co JSC 10,587 13,824

Source: BestLink logo



John Weber is a senior associate editor. He can be reached at john.weber@ambest.com.


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