Russians often give a wry smile when they read advertising hoardings carrying the name of prominent (re)insurer Ingosstrakh. The brand name translates literally as ‘international fear’, an abbreviation of the Russian words for international and insurance (strakhsbor – ‘fear collection’).

However, despite its Soviet-era origins and scary name, the giant company – which writes the largest chunk of reinsurance business in Russia – now enjoys a far more benevolent image.

Indeed, the perception of insurance as a whole continues to change through sheer economic necessity as Russian GDP continues its meteoric rise.

Insurance industry growth in 2008 is expected to mirror the 16% per year expansion seen in 2007 and Lloyd’s safely predicts that the Russian insurance industry will be worth $41bn within two years.

So what of reinsurance? The key fact is that in the medium term reinsurance premium will show similar growth, though less will be offloaded abroad by insurers acting more like brokers.

Several factors have made sure of this. First is the frenetic M&A activity which has swept the Russian insurance market in the last 18 months, in which smaller insurers have consolidated or been snapped up in a ‘gold rush’ by foreign entities, such as Zurich, Allianz, AXA and ACE (see takeover timeline). Many of these foreign players appreciate that cooperation with Russian companies is essential in a market that depends heavily on local knowledge and relationships.

“This has meant a smaller number of stronger insurers who can retain more of their own risk because they are backed with more capital, so they have greater retentions and lower demand for reinsurance,” said Bruce Selby-Bennett, head of the Central and Eastern Europe team at Benfield.

Second is the fact that regulation and capital requirements are improving, forcing out practices which might be considered questionable in other jurisdictions. Thirdly, as Russian (re)insurance improves its image, capital volumes are increasing. However, capitalisation remains relatively low compared to the size of opportunities ahead.

Long term, however, the dominance of domestic reinsurers is expected to decline as the market opens and foreign participants establish a presence. In 2008, top-10 global reinsurers already have major partnerships with the leading Russian (re)insurers. For example, Reso Garantia, which is part-owned by AXA, declares reinsurance arrangements with Swiss Re, Munich Re, SCOR, Hannover Re, AXA Re and Lloyd’s.

For many years, there have been no restrictions on insurers ceding risk to admitted international reinsurers.

Indeed, according to Russian reinsurer Unity Re, inward reinsurance contracted by 20% in 2006, to US$3bn, due to a reduction in questionable ‘non-genuine’ insurance operations.

Significant challenges

However, a number of "significant challenges" remain that must be overcome if the market is to achieve its potential, according to Filip Wuebbeler, market intelligence manager at Lloyd’s.

“These include residual public distrust of financial services, inadequate capitalisation, low levels of reporting transparency and lack of qualified insurance professionals,” Wuebbeler added. Around $100m of Russian reinsurance business is currently written annually at Lloyd's.

Broker involvement

Increased broker involvement is one of the guiding lights on the horizon in Russia, which is expecting to nurture growth alongside a more robust regulatory regime with greater transparency in reserving and capital requirements. For example, Benfield’s Selby-Bennett added: “In Russia, we have obtained around 15% of the marine and property excess of loss reinsurance market. Our customer base in these regions now includes an increasing number of insurers.”

The introduction of compulsory business classes is an important factor in the growth of motor insurance. Life and commercial liability are also growing rapidly.

Barry Jacobson, president of ACE International Life which has set up in Russia, said: “We are very optimistic about the growth of the life insurance market in Russia. As the middle class grows, so will the demand for life insurance products to protect their family and assets.”

While economic demand is driving volume and sophistication of products, regulatory developments could also be driven by Russian (re)insurance business abroad as a result of growth in home markets.

For decades, Ingosstrakh has operated branches in countries such as China and Finland and now the copany expects to extend its business abroad, along other Russian companies - (re)insurers and brokers - in Western markets.

Ingosstrakh has said it will continue to deploy its services in the international reinsurance market, but that its priority is to serve its Russian partners.

David Banks is Deputy Editor, Global Reinsurance.

Timeline: Foreign activity in Russian insurance

• December 2007 - AXA buys a 36.7% stake in Reso-Garantia for $1.16bn.

• May 2007 - Allianz buys Progres-Garant, a top-20 Russian insurer with £120m GPW.

• May 2007 - Munich Re and Ergo extend an agreement that ensures distribution of Ergo life products in Russia.

• February 2007 - Zurich becomes the largest foreign insurer in Russia by purchasing a majority stake in Moscow-based Nasta Insurance Company.

• August 2006 - ACE invests in Russian Re, buying Ergo Group’s 15% share.

• March 2006 - Aviva begins operations in Russia.

Investing in Russia: Returns are high, but so are the hurdles

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Experience shows that organisations with more advanced country risk assessment capabilities experience fewer cases of expropriation, government payment default, import/export licence cancellation or currency restrictions as they are able to devise effective strategies to help manage risk. Ultimately country risk management is transaction specific and must be managed on a case by case basis.

Dr Elizabeth Stephens is a political risk analyst at JLT and lead author of the World Risk Review.