The latest insurance developments in the countries of the former Soviet Union.
When world trade negotiators gathered in Geneva in the final days of February their attention was on Maxim Medvedkov, Russia's Deputy Minister of Economic Development and Trade and chief negotiator of terms for the country's entry into the World Trade Organisation. He was circulating an offer to open Eastern Europe's largest market to international trade in services – but managed to excite the imagination of no one with his pledges regarding Russia's overpopulated and much-abused insurance sector. Simply put, the Russian offer presents nothing new. At best, it puts forth the status quo as a starting point for negotiation. Some interpretations suggest that it may even restrict further the already stifled foreign access to the Russian market.
One local source said that Russia's offer would maintain the current relaxation on the 49% cap on foreign ownership of equity in Russian insurers (despite press reports that it is to be reintroduced). The limit was effectively scrapped in the country's latest piece of insurance legislation, passed into law by Boris Yeltsin shortly before his surprise retirement. However, the existing 15% market-wide limit on equity ownership which replaced it will stand. While foreign ownership of Russia's sprawling insurance sector is estimated to be around 6% at present, with something less than 3% of premium (and with few companies queuing up to participate) the market-wide cap is, for now, unlikely to hinder anyone's aspirations.
However, a single provision of the offer makes it particularly unpalatable to western non-life insurers, of whom about 60 have an equity position in the Russian market. Foreign insurers will be barred from offering “compulsory insurance and insurance connected with state procurement,” according to an AM Best correspondent's reporting of the events in Geneva. Best's pointed out that this is significant, citing a US & Foreign Commercial Service study which found that 80% of total Russian 1998 premium arose from ‘mandated' health insurance and employee compensation schemes.
The impact of this little exemption is much greater than that. First, much – probably most – of the aforementioned employee compensation insurance is a mask for tax evasion. Employers' premiums escape tax, as do employees' benefits. In the Russian way, masquerading the wage packet as insurance is to everybody's benefit (except the struggling revenue department), but few foreign players will want a piece of this action. However, the idea of prohibiting foreign insurers from covering items related to state procurement would significantly narrow their ability to cover what legitimate property and casualty business exists in Russia, where insurance penetration remains pitifully low.
If the ‘procurement' provision is interpreted to mean anything financed from the state budget, it shuts the door on foreign direct capacity to insure everything from Mr Putin's Zil limousine to Gazprom's pipelines. It could obstruct foreign companies from underwriting the life, health and pensions business of state employees. For major infrastructure projects, the provision could prove a huge barrier for a market already finding chunky insurance capacity hard to come by, despite having hundreds of insurance companies and at least a dozen professional reinsurers.
Blocking foreign companies from writing ‘compulsory insurance' is also a major barrier. It could be used to limit access to all manner of lines of business which are compulsory in Russia, such as aviation liability. But it looks like it was crafted to limit foreign access to Russian motor third party liability (TPL) insurance, which, against the odds, the Russian government looks set to phase in next year. A cynical observer might conclude that Russia's offer is designed to protect state-owned and partially state-owned businesses, by limiting competitive access to lucrative markets which comprise the majority of Russia's premium volume.
Ironically, one London market reinsurance underwriter prominent in Russian markets was this year – to his own surprise – asking Russians to reconsider introducing compulsory motor TPL in 2002. He offers several notes of warning:
“The Russians would be ill advised to pass their law now,” the reinsurer concluded. “There must be a further delay.”
The battle for control of Latvia's leading insurer has finished. Mid-way through 2000, Sampo Enterprise, part of the Finnish insurance group, announced it had terminated negotiations to purchase AAS Balta, the leading insurance company in Latvia. Sampo had signed a letter of intent, but the price, apparently, was not right. The result was that, in early March of this year, Copenhagen-based Codan Forsikring A/S, a subsidiary of Royal & Sun Alliance (and Sampo's arch-rival in the so-called Scandinavianisation of the Baltic states), signed a deal to acquire 73.5% of Balta for a total of about $25m. As it stands, Codan owns AB Lietuvos Draudimas, the former monopoly in Lithuania with about 65% of the market, and Balta, the successor of the Latvian Gosstrakh, which has a non-life share of about 16% and a life share of 27%. Sampo owns Eesti Kindlustus, the former Estonian monopoly. As the market consolidated, Sampo acquired for Balta the portfolios of several other Estonian companies. It now has a 32.7% market share. However, Sampo sold the former monopoly's life business. In late 1999 it launched a greenfield composite operation in Lithuania, and a non-life insurer in Latvia which has a non-life market share of about 1%.
It was announced in December 2000 that a 90% share of Georgia's state insurance company, Georgian Insurance Group, a former regional subsidiary (Gosstrakh) of the Soviet national insurer Rosstrakh, was to be sold to Georgiy Patsuria, a private individual, for $1,500. Mr Patsuria, the only bidder, is director general of the company and heads a private broking firm, thought to be called Salomon Salmon. He is said to have US backers, and is in negotiations to reclaim from Rosstrakh about $1m paid by Georgians to the insurer in life insurance premiums before independence in 1991. In any event, he will have to adequately capitalise the business, to about $240,000, and re-reserve the company according to a business plan filed at the time of the privatisation tender, to about $1.1m. The company has about $320,000 in assets such as its own buildings and vehicles, but is described as bankrupt by the privatisation agent, the State Property Fund.
The big news in Belarus is the partial liberalisation of the insurance market for foreign companies under a presidential decree late last year. It relaxes some of the provisions of the country's 1993 insurance law, allowing non-Belarussian companies to open subsidiaries or participate in joint ventures, although they must demonstrate two years' experience in the local market. Provisions similar to those in Russian legislation limit aggregate foreign ownership of the market to 30%, keep foreign-capitalised insurers out of the life business, and restrict them from covering government property or services procured by the government. Life insurers must not take on other activities. Separately, new visa entry requirements introduced at year-end 2000 require all visitors to Belarus to have valid health insurance.
A new Ukrainian law ‘On Banks and Banking' will prohibit banks from acting as insurers, although they will be permitted to act as insurance intermediaries. The law, adopted by the Ukrainian parliament on 7 December, will halt the development of a risk-carrying bancassurance culture, as has evolved in the nearby Baltic states. Meanwhile, a US Embassy briefing on opportunities in financial services described the country's insurance sector as “still quite undeveloped not warranting as much US business interest”. That has not prevented QBE from investing in a joint venture with Ukgazprombank, which is owned in part by the insurer Ukrgazprompolice. However, QBE came in at a difficult time. After a string of insurance failures throughout the mid 1990s, total premium was up 48% in 1999, to HRN1.16bn, although inflation accounts for half the increase. Considering a currency devaluation of 52%, the market shrank about 4.5% in real terms.
A black mark was placed on the Armenian insurance market when HSBC Insurance announced in February it is to flee Armenia due to limited growth possibilities. However, the development is more a sign of the difficulty of competing with local and state-backed insurers than it is of the state of the Armenian market. Others are jumping in: the Russian insurer ROSNO opened an Armenian branch last year, and is mooted as a possible buyer for the former Armenian Gosstrakh. Last summer, ROSNO and Russian partner Industrial Insurance Company participated in a ‘financial rehabilitation' of the state insurer, according to Hrachik Gulyan, the head of the Insurance Supervision Office at Armenia's Ministry of Finance and Economy. Meanwhile, in August 2000, the government approved a plan for introducing national medical insurance. Health Minister Ararat Mkrtchyan said compulsory and voluntary cover would operate in parallel, under a system expected to be in place by mid-year.
At year end, President Nursultan Nazarbayev set the promotion of the insurance industry as a component of one of seven priority tasks for the Kazakh government. The attention followed the commitment of $6m by the US government to assist in the development of Kazakhstan's financial services sector, to be administered by the US Agency for International Development, which plans to bring consultants to the country (and which assisted in the privatisation of the Georgian state insurer). Meanwhile, a government development programme for insurance and reinsurance hopes to triple sector capitalisation by 2003. Over the period, the government plans to boost annual insurance expenditure from 0.3% of GDP to as much as 1.2% (a challenge, considering life premium currently is only 0.002% of GDP).
A National Bank study found the quality of insurance services on offer is low, and that the insurance sector has not yet become an effective instrument for improving the investment climate in the republic.
In its December 1999 offer to the WTO, Kyrgyzstan proposed to eliminate its restrictions on foreign reinsurance, to remove its 49% cap on foreign ownership of insurance companies by 1 January 2002, and to allow foreign insurers to offer broking and agency services. Remarkably, foreign-supervised companies will be able to offer insurance in Kyrgyzstan without prior registration by State Insurance Supervisor, Sabira Sultanovna Orozova. Plans to introduce inter-bank insurance and a deposit insurance fund are intended to strengthen confidence in the financial system. Legislation requiring compulsory motor TPL insurance, however, remains elusive.
In January 2000 the government implemented a law on the licensing and regulation of insurers, which gives the regulator the power to both issue and revoke five-year insurance licences. Companies require capital in the form of a cash deposit equal to about $23,500. The licence feeis $71.Last year Moldova boasted 46 insurance companies, although insurance spending is below 1% of GDP. Premium in 1999 was Lei101.3m and growing, with a loss ratio of about 66%. However, the range of products and services on offer is slim. In October 1999 QBE International put $5m into ASITO, the country's largest insurer. More recently, a new entity, Asigur-Plus SRL, began underwriting.
Estonia is probably the best-regulated and most consolidated market in the FSU. It boasts an amended insurance act, giving the supervisor the power to effectively regulate companies, albeit too late to avoid some painful and notorious insurer collapses. As the law finally arrived last year, the market had evolved to be dominated by two companies – Sampo's Eesti Kindlustus and BICO Kindlustus, which became a subsidiary of Ergo after Munich Re last year bought Alte Leipziger Europa, the Eastern Europe operations of the German mutual.
Both businesses were built on the back of aggressive consolidation, which saw the market shrink from 16 non-life insurers in 1995 to just seven today, of which the top three, including the aggressive Seesam, a joint venture between Finland's Pohjola and AIG, achieved a 2000 market share of 76.8%.
The life business is even more concentrated, with only six insurers, led by Hansapank Kindlustus with a 58% market share. Estonian banks tend to be Scandinavian owned, so it is foreign companies enjoying the benefits of the 43% increase in life premium income in 2000. The final piece of the Estonian puzzle could be the introduction of compulsory worker's compensation, which the government has promised for 2002.
If no news is good news, Lithuania is in good shape when it comes to motor TPL insurance. Like Russia, Lithuanian legislators have yet to tackle the issue, which is regarded by parliamentarians as a vote-loser. Recent statements by the government suggest obligatory motor TPL insurance will be introduced in early 2002, although such news is reminiscent of many earlier announcements by previous governments that it was on the horizon. More likely to come to fruition is the government's plan to make construction liability insurance mandatory from 1 August this year, following its introduction of compulsion for workers' compensation business in 2000. However, a good sign for the market is the long-awaited profitability of market leader Lietuvos Draudimas, which reported 2000 profits of LTL15.5m ($3.9m), after a loss of LTL6.0m in 1999. Early this year, the company sold its credit subsidiary to Allianz Group credit insurer Hermes.
Uzbekistan has welcomed about 70 new insurers since 1996, of which more than 60 are listed on the local bourse. However, Uzbek-American, a joint venture involving AIG, is said to be the only insurer providing a broad range of insurance services that match western standards. From the beginning of this year, Uzbekistan formalised its pensions scheme by separating pension insurance funds from general revenues, and outlining schedules of pension contributions for businesses and individuals (including voluntary payments for farmers). Other government initiatives include the proposal by the Central Bank and the Ministry of Finance to introduce a Collective Insurance Fund for private savings deposits. From 1 April 2000 all non-residents have been required to pay for insurance (and a number of other services) in convertible foreign currency, rather than local cash. President Islam Karimov has suggested the launch of a joint venture Indian-Uzbek commercial insurer to cater to Indian businesses operating in the Uzbek market.