Nikolai GALUSHIN
First Deputy Chairman of the Management Board
SOGAZ OJSC

20 January 2016 — Oleg DORONCEANU
Nikolai GALUSHINFirst Deputy Chairman of the Management BoardSOGAZ OJSC
nikolay_galushinXPRIMM: How do you evaluate the development of the Russian insurance market in 2015?
Nikolai GALUSHIN:
The macroeconomic environment has had a direct impact on Russian insurance market, especially on the growth rate in 2015, the consumer expectations, and the competition level. At the same time, it has influenced the withdrawal of some insurance companies from the market and the tightening of the supervisory functions of the Central Bank.

The crisis is a time that brings challenges. We have noticed the tendency of consolidation on the Russian insurance market, as a result of the reduction in number of the insurance companies. However, the companies that have left the market did not have a significant share; therefore it did not impact the local industry.

In what the market's evolution is concerned, it can be noticed a minimal growth rate, as a result of the significant increase in MTPL tariffs. Nevertheless, we are not witnessing a major structural crisis of the Russian market. Still, our main concern is the reduction of the number of insurance contracts concluded for the most common types of insurance, such as MTPL and Motor Hull insurance. It means that a number of clients, who previously have bought these types of policies decided not to renew their policy. On the other hand, we can notice a positive trend on the voluntary health insurance line of business, but mostly as an effect of inflation. There is also an increase on the life insurance segment. It is also worth mentioning that property insurance (for retail segment) has increased considerably. I appreciate that the annual results will show that this trend will continue, as a result of the clients' increasing awareness regarding the protection offered by the insurance sector for their property.

XPRIMM: How can you comment upon the growth of tariffs for MTPL insurance? Will these changes affect the insurance market as a whole?
Nikolai GALUSHIN:
The increase of MTPL tariffs should have been adopted a long time ago. But for the moment, all the major insurers which are involved on MTPL segment consider that any further increase of tariffs will only lead to a destabilization of the market and will cause a negative reaction. Therefore, it is necessary to pass to the full liberalization of MTPL tariffs on the market. Besides the tariffs, there were also increased the compensation limits and were introduced new regulations for claims handling, in order to reduce the number of litigations settled in court. The changes have led to an increase of claims ratio and average loss per event, from RUB 34,000 (last year), to RUB 60,000 in 2015.

Obviously, an increase of the compensation limits will result in further growth of claims ratio for the MTPL insurance. Besides that, the devaluation of national currency (RUB) has led to an increase of vehicles' prices and also to higher costs for spare parts and for the repair services.

Some of the insurers are very "euphoric" at the moment, because the prices went up and claims will come a little bit later. Therefore, the following year will be probably less "pleasant" for the motor insurers than 2015, as there is a small chance that the Central Bank will review MTPL tariffs with the same regularity as it did last year, first in October 2014 and then in April 2015.

XPRIMM: Do you expect an increase in MTPL tariffs after the liberalization?
Nikolai GALUSHIN:
In this matter, we have started to see a support from the Central Bank. The Central Bank is also ready to discuss the stages of transition to a fully liberalization of MTPL tariffs. At the same time, it is necessary to assure the functioning of the bureau for traffic accidents records, which will allow the calculation of the bonus-malus coefficients. In fact, the calculation of MTPL tariff for each driver will be based on the information from the Russian Motor Insurers Union system, which will contain relevant information about client's insurance history in the previous years.

It should be an individual approach for each driver in analyzing the risk profile. Therefore, I evaluate that MTPL prices will grow, but in regards of the drivers without claims the MTPL prices will be lower than there are now.

XPRIMM: What is your opinion regarding the Russian reinsurance market in 2015?
Nikolai GALUSHIN:
I consider that the Russian reinsurance market has missed the opportunity to create an alternative coverage or its own domestic product in order to reinsure some risks that are not placed on the international market today. Moreover, taking into consideration the present realities of an excess of reinsurance capacity on the international markets, we should not expect any substantial breakthrough.

We have different projects and we provide reinsurance capacity for these projects. Today, we have a limited number of clients which do not have the possibility to place risks abroad. We are talking about companies/industries that have come under the sanctions which were introduced by the United States and the European Community. But, I would like to stress out that on the main clients' portfolio all the Russian insurance companies have no problems or restrictions in placing risks abroad.

XPRIMM: Will the trend of "soft" reinsurance markets continue in 2016?
Nikolai GALUSHIN:
I do not expect a massive insurance event may occur today and change the capitalization of the insurance market or its capacity.

The crisis began on the insurance market not even in 2001, but in 1999, first with a series of major natural catastrophes in Europe, which involved the insurers' reserves in order to cover these losses.

Then, it deepened with the crisis on the stock market and with a decline in value of quotations of major European insurers, after that the crisis phenomena was still reinforced by the events from September 11 in the United States.

Nevertheless, although in the last years some major natural catastrophes affected South-East Asia, Australia and New-Zealand and economical damages exceeded USD 100 billion - no significant changes on the global insurance market occurred. And I assume that no other new major global cataclysm will lead to a serious imbalance on the insurance market.

Most likely, the problem will be the decreasing of the investors' interest for this segment due to high competition and the reduction of margins in this business, or due to the changes of stock value of insurers that also lead to an outflow of capital from the insurance segment. But, as I see this will not be associated with any natural disaster, instead will be a stock factor, or a decrease of investor interest for this segment.

XPRIMM: How would you assess the project of creation of the National State Reinsurance Company?
Nikolai GALUSHIN:
From the market point of view, there is a need for support from the state, not for the insurance community, but for those companies that have come under the international sanctions. We conclude insurance contracts with "sanctioned clients" without further opportunities to place these risks outside the Russian Federation. In this regard, we set limits on such insurance contracts exclusively depending on self-retention, or the possibility to place in reinsurance inside the Russian Federation. It is not always the full protection of clients' property and for these issues, such state support would be necessary. I think this could be solved in two ways -either state guarantee, or creation of the National State Reinsurance Company.

It is important to mention, that in terms of the reinsurance of commercial risks, if this state reinsurer will be created, we consider it must be another reinsurer on the market, which should not have any unique or exclusive right to receive a part of business from the insurance community.

As regarding the idea of mandatory cessions (note: it was discussed a possibility of compulsory cession of 10% of risks to the state reinsurer) we disagree and we are ready, after the establishment of this company, to transfer to this company the risk on solely voluntary basis.

XPRIMM: Will the state reinsurance company have enough capital to reinsure sanctioned risks?
Nikolai GALUSHIN:
This question should be addressed to the Central Bank. Based on actual information, the capital of this company will exceed RUB 70 billion.

If we analyze the main sanctioned risks, the largest is construction of the icebreaker at the shipyard of the United Shipbuilding Corporation (USC), which falls under the sanctioned risks. Thus, RUB 70 billion capital of the state reinsurer will be enough to cover a loss in case of complete destruction of the icebreaker.

All other projects that are currently under sanctions have the insurance value or calculated values of the maximum possible loss much less than RUB 40-45 billion.

Therefore, if the state reinsurer will not have any restrictions regarding the use of capital, it will have enough capacity to manage one or two major risks.

XPRIMM: What about the National Rating Agency, to be created in Russia?
Nikolai GALUSHIN:
The idea of creating a national rating company is a good one. On the other hand, we already have a rating agency, EXPERT Ra that is working for many years on the market as well as other rating agencies.

Therefore, the issue is not in the creation of another rating agency. What we desire is that the standards of the National Rating Agency should allow us to have a comparable rating with other rating agencies, so we can work for example with other CIS countries, and regulators of other countries to accept our ratings. In any case, this is a difficult and a long way, but we should move forward.

XPRIMM: What were SOGAZ's results in 2015 and what are the strategic objectives planned for 2016?
Nikolai GALUSHIN:
We are the market leader on several insurance lines, especially on corporate segment. As a matter of fact, we have decided to withdraw from some of the retail segments of the market, due to nowadays realities. Therefore, earlier this autumn, we have completely stopped our activity with dealership sales channel. We no longer sell our policies through car dealerships, but we are developing other areas of retail insurance.

However, we cannot say that we are not a retail company, as we have reached the 6th position on MTPL market (in 2012 we had the 17th position)

For us, the most profitable line ofbusiness is the corporate property one. Nevertheless, it should be noted that general situation on property segment for individuals is better than on the motor insurance lines. In addition, we continue to increase our portfolio on property, construction, cargo insurance and aviation insurance lines.

In the first nine months of 2015, GWP of SOGAZ increased by more than 20% compared with 3Q2014. This is a significant achievement for the company compared to stagnation of the Russian insurance market overall.

We have achieved better financial results compared to the similar period in 2014, due to investments made in previous period, aiming to reform the company and further developthe regional network. Namely, the investments made in a difficult year helped us to achieve impressive results and we would like to strengthen and maintain our positions on the long term.

XPRIMM: How do you see the cooperation with CIS countries?
Nikolai GALUSHIN:
Our largest country-partners from CIS were Ukraine, Kazakhstan and Azerbaijan.

For several years, we have noticed the trend of increasing requirements for rating and capital in case of risks transfers from the CIS national companies to foreign reinsurers.

In Ukraine these requirements were reflected in additional taxes; in Kazakhstan - supplementary reserves and in Azerbaijan requirements for the rating.

Therefore, a negative factor in cooperation with these countries is the decrease of the sovereign rating of the Russian Federation, which led to a rating downgrade for Russian insurance companies. In fact, this situation did not facilitate our relationships with foreign reinsurers.

On the other hand, we see that certain businesses, especially in ruble, are growing due to the currency difference between the RUB/USD. On the other hand, there are a lot of partners which are focused on SOGAZ based on its capacity rather than on rating requirements of A- or higher.

XPRIMM: SOGAZ is present through its subsidiaries in Serbia and Germany. How do you appreciate this activity?
Nikolai GALUSHIN:
The subsidiary in Serbia, named SOGAZ a.d.o. Novi Sad, has been opened since 2012, and this year completed the first cycle of its development. This company should serve the South Stream project, but now this project is stopped.

However, from the moment of obtaining license in Serbia, our subsidiary was active on other lines of business and was able to build relationships with Serbian companies, such as DUNAV, DDOR, GENERALI etc. Moreover, this company has become very useful for the Russian investors in Serbia. Also, SOGAZ a.d.o. Novi Sad provides coverage for several industries and Russian entities based in Serbia.

Regarding the subsidiary in Germany, named SOVAG, this company will be transformed into an European insurer, fulfilling Solvency II requirements. The shareholders support the company, in order to transform it into a corporate insurer with focus on servicing Russian businesses abroad, in European countries.

Moreover, the company will work with European brokers, but mostly with medium-sized businesses and with the London brokers.

XRPIMM: Does SOGAZ plan other acquisitions abroad in the near future?
Nikolai GALUSHIN:
At the moment, for us it is important to finish restructuring our company SOVAG (Germany).

Also,we are opening a representative office in China, and expect to finish this operation in 2015, as one of the steps of the strategy of SOGAZ's territorial expansion abroad. At the moment, we are waiting for a positive decision from the Chinese regulator. It will be a representative office focused on developing the communication between Chinese companies and SOGAZ, with the scope of implementing joint investment projects.

We do not plan to create an insurance company in China. We believe that the bilateral potential is not fully achieved. Therefore, the representative office is created in order to bring closer the positions of the Chinese insurers with SOGAZ. We want to have more offices abroad, but for now this topic is premature.

XPRIMM: Except China, where do you see potential for opening new offices?
Nikolai GALUSHIN:
In other BRICS countries.

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