Russia has its attractions, and the proportion of premium for 'classical' business is growing, but it is not a market for the faint of heart, warns Adrian Leonard

A market of 1,397 insurers, gross premium of $14.1bn in 2003, premium growth of more than 55% since 2002 - diversity, volume and rapid expansion should make the Russian insurance market extremely attractive to foreign reinsurers, but the reality behind the numbers is somewhat different.

More than a decade after the opening of one of the world's most alluring emerging insurance markets, all is not as it seems. Several market leaders are changing their ways, but so far in Russia, little can be taken at face value.

A quick analysis of the top-line market figure illustrates one reason why Russia does not yet provide the bountiful opportunity that the numbers suggest. 'Official' Ministry of Finance reports put annual premium at $14.1bn, of which $3.4bn relates to compulsory covers including motor third party liability. Voluntary premium of $10.7bn includes $4.9bn in life business, which can be wholly discounted from the reinsurer's perspective (more on the life business below). Non-life underwriting yielded $4.1bn worth of voluntary property insurance, $1.4bn in 'personal' insurances (voluntary casualty and medical), and $420m in liability business. That breakdown indicates, according to David Wansbrough-Jones, an underwriting consultant who has been active in Russia and what is now the Commonwealth of Independent States since 1976, that Russia's total 'real' premium is less than $8bn, comprising the compulsory lines and voluntary property and liability (although he suggests the former also includes some 'surreal' business), since the other lines are almost entirely 'non-classical' in nature.

More than $6bn in life and personal insurance premium is business written to achieve tax avoidance, rather than risk transfer, and therefore is not on the radar screens of mainstream reinsurers. An increasing share of liability business also serves this purpose. With a market cession rate of 5%, total 'correct' reinsurance premiums from the Russian market are less than $400m, and even that isn't the cleanest business going: Russian insurers have mastered reciprocal risk exchange and co-insurance.

For reinsurers, these risk-sharing techniques mean one can never by quite sure what is in a portfolio, and how well it was underwritten by the original insurer (if at all).

The players

Russia's insurance industry feeds more than 50,000 tied agents, who provide the backbone of personal lines distribution. About 700 broking firms are registered, forming a rapidly growing alternative in intermediation. The market is concentrated despite the large number of insurers, but none dominate. The top five had market share of 24.97% in 2003, the top 25 some 55.65%, and the top 100 had 78.95%. While a handful of foreign reinsurers are selectively lending their expertise and capital to the best of these companies - many of which are captive insurers of large Russian industrial concerns - a local reinsurance and retrocession market for specific risks is flourishing.

Ingosstrakh (the former state monopoly for international business), Moscow Re, Russian Re, and Nahodka Re are leading local players, operating primarily with backing from the global reinsurance market. Earlier this year Russian Polis, a trade magazine based in Moscow, polled 48 insurers with both an inwards and outwards reinsurance book, and eight professional reinsurers.

The respondents were asked to name the reinsurers with whom they conduct retrocession business. Moscow Re, which earlier this year received a capital injection of about $20m from the noted Russian oligarch Kakha Bendukidze (recently appointed as the Georgian Minister of Finance), was cited by 21.4% of respondents as a retrocessionnaire which they currently use.

Some 12.5% use Hannover Re and Ingosstrakh, 10.7% of respondents use Meagarus (known primarily as a space insurer), while Lloyd's, SCOR, Swiss Re, Nakhodka Re and Russian Re are on the panel of 8.9% of respondents.

Latvian reinsurer Riga Re was recognised by 5.4%, and Munich Re, Capital Re, UralSiberean, and TransSiberean Re (which is owned in part by the Lloyd's managing agency Amlin) by 3.6%. However, a third of respondents would not reveal their reinsurers and retrocessionnaires, which significantly distorts the poll findings.

The need for expertise when settling large losses was the number one service that reinsurers can provide to their cedants, Russian Polis found.

Such demands are matched by the common call in the reinsurance community for better risk information. "In industrial and commercial property, we would like to get to real data," says Andrei Polyakov of Russian Re, a local reinsurer whose shareholders include Marsh, AIG, and Munich Re subsidiary Ergo. "Then we would like more information for life and motor casco business.

Growth is good, but the figures include salary schemes ... Premiums reinsured in the Russian market can be counted twice, or three or four times with retrocession. This should be borne in mind."

Salary schemes

Vadim Demchenko, editor in chief of Russian Polis, says: "Real, classical life insurance is only $80m to $110m of the total gross reported premium of $4.9bn, and that's according to life insurers themselves. Practically all life insurance is not insurance at all, and the majority of non-life is also something like a financial scheme." Although some insurers and reinsurers are beginning to eschew such practices, so-called salary schemes cannot be dismissed in the Russian market. They come in a number of forms, but the most common involve huge individual life policies and a willing bank. The employer borrows money from the bank, and loans it to employees to finance 'premiums' on a long-term 'policies' which pay them monthly 'benefits'.

Employees pay no income or social taxes on insurance benefits, and the employer avoids payroll tax. The insurer puts the 'premium' into an account at the original bank (in practice the cash never moves at all), so it is a low-risk affair for everyone. The cash to pay salaries comes from the employer's (tax deductible) interest on the loan, which in turn covers the employees' benefits under their 'life insurance' policies (via the insurer, who with the bank take a 'commission' of around 5% each). Moscow sources claim that even senior civil servants in the Tax Ministry have been paid this way.

The number of insurance and reinsurance companies that wish to move away from or out of the tax optimisation business is growing. "We position ourselves as a classical reinsurer," Sergey Dedicov, a management board member of Moscow Re, told Global Re. He insisted that salary scheme business does not contribute to the portfolio of his company, which reached $19m of gross premium in 2003. Although such reluctance is far from universal, insurers and reinsurers alike are inclined to resist Russia's non-traditional business.

Hannes Shariputra Chopra, deputy regional chief executive of Allianz for Central and Eastern Europe, is one westerner facing such a challenge.

Mr Chopra has just taken on the job of deputy chief executive of Russia's fourth-largest insurer, Rosno, in which Allianz holds a 45% stake (Russian law requires a national at the helm). In 2003 the insurer wrote premium of $216m for traditional insurance products, and that will be the last year, he says, that any non-classical insurance will pass through Rosno's books. "In 2004 there will be no scheme business. We have some now, but Rosno was never a big player," Mr Chopra declares, admitting that in abandoning scheme business, the company has chosen a "difficult road." Underwriting such programmes is a common way for insurers to gain inroads to traditional commercial risk.


Acquiring commercial and industrial risk is not as straightforward in Russia as elsewhere. Natalia Karpova, director of the major projects insurance division at Russian insurer Alfa Strakhovanie, explained one of the challenges.

"How is a Russian insurer selected? There are four kinds of tenders," she explained. "Sometimes a client with a captive insurer (which are prevalent among large Russian industrials) will have a tender, but only the captive is really participating." The other insurers involved are there "for comfort, if at all," Ms Karpova reveals.

The second, more insidious type of tender is held to choose a prescribed insurer. "The requirements are agreed with a selected insurer, and the tender is set to ensure the other insurers cannot meet the requirements," she says. The third method of insurer selection is "the Monte Carlo option.

A plethora of tenders is sent out with no information, and insurers send tariffs without any information. What criteria they use, nobody knows." The final option is a real tender. Ms Karpova says it is the route preferred by Alfa Strakhovanie (Alfa Insurance, the top-five Russian non-life insurer controlled by the oligarch Mikhail Fridman), but such open competitions are not the norm.

Ms Karpova delivered an anecdote to describe a typical tender process.

A company which belongs to a large corporate group saw its potential insurers muscled out of a tender in favour of a captive owned by the parent company, even though the captive wanted three times more premium than the tariffs proposed by competitors in the tender. "The buyer went to his parent company to ask why, and the argument was settled swiftly: that subsidiary now pays the captive two thirds less for its insurance; the other group companies now pay three times more."

Like Rosno under Allianz, Moscow Re and Alfa Strakhovanie, the leading insurer Rosgosstrakh is attempting to modernise, and pull the market ahead with it. The descendent of Russia's former monopoly insurer for local risks (Gosstrakh, or the Main Administration of State Insurance), Rosgosstrakh was launched in 1922 and remains the largest insurer in Russia, with 10 affiliates, 79 large branches, and about 2,300 smaller branches and agencies throughout Russia. It has 70,000 employees servicing 25 million private customers and 150,000 corporate clients.

Rosgosstrakh has been growing rapidly on the back of the introduction of compulsory motor third party liability insurance in Russia in 2003.

It has nearly cornered the market due to its enormous physical presence, which reaches almost every community in Russia. "Last year our total gross premium income was about $700m, but this year we will collect about $1.3bn," Dmitry Markarov, first vice president for insurance, told Global Re. With the backing of new shareholders following privatisation in 2002 (the state now holds 25% plus one share), Rosgosstrakh has been completely overhauled, after an entirely new management team was hired. "We managed to re-establish completely the organisational and financial management of the company in our first year," he says. "My priority task now is to reorganise the insurance business process, and modernise all the insurance technologies."

Everyone has problems, he says, but the "archaic system of management" that prevails at Rosgosstrakh - the negative side of the legacy of Soviet monopoly - is his greatest. "We have retail system problems. The 2,300 agencies need to be unified, standardised, and given technical equipment and knowledge. We are working on that, and expect the first results of optimisation of our network by the end of the year."

The second challenge is transformation of the workforce from one which sells policies under rules to one which markets products which people want. "At selling, we are not the most effective. The management of selling, underwriting and settling losses is quite difficult," Mr Markarov admits.

However, he is quick to point out that Rosgosstrakh's outdated agency infrastructure proved its worth when compulsory motor third party liability was introduced. "Our network showed how effectively it can work, even though it is not perfect. It gave us an opportunity to win nearly half of the market." With that achieved, the company is now looking to cross-sell, and has developed a stream of new products this year.

The privatisation and modernisation of Rosgosstrakh is another good sign for international players hoping that the Russian insurance market will develop into a place of genuine opportunity. "Rosgosstrakh is one of the top three independent providers of real insurance policies in a marketplace that has been dominated for a decade by captive insurers selling tax minimisation schemes," the company declares, highlighting the new openness in a market which is attempting - in some quarters, at least - to evolve to the next phase. For those reinsurers brave and patient enough to venture there, it is another positive sign.

- Adrian Leonard is a freelance insurance journalist and a regular contributor to Global Reinsurance.