The National Reinsurance Company (NRC), Russia
The Russian Federation has created its own specialized reinsurer - the National Reinsurance Company (NRC), effectively from October 12th, 2016. The main goals of the company are to offer additional capacity for the Russian market (including sanctioned risks) and also to cover Nat Cat perils for consumers. The law stipulates also that local insurers/reinsurers must offer 10% quota of the risks to the NRC.
The company's head has offered XPRIMM readers some additional details about the company's features.
XPRIMM: What are the reasons of the NRC establishment?
Nikolay GALUSHIN: The idea to establish State owned reinsurance company appeared for the first time as long as 20 years ago, when the domestic market was very small, corporate insurance was just launched and there was no business infrastructure between Russian and international markets. NRC finally established in 2016 to support the domestic market and to provide extra capacity to Russian insurers and their clients which are under international sanctions and not. NRC is not a substitute for risks placement on foreign markets. NRC is not a market regulator, but one of its main purposes is to reduce the amount of the suspicious transactions carried out under reinsurance on foreign markets.
I would like to point that the NRC is also planning to be present on the international markets, as soon as we will get an international rating.
XPRIMM: You mentioned the NRC's objective to become an effective tool to add capacity to the Russian business - has the NRC enough coverage in this regard?
Nikolay GALUSHIN: Just to offer some basic figures: the paid capital of the NRC, at the moment NRC starts its activity, will be of RUR 21.3 billion, or 30% from the total announced capital (RUR 71 billion). According to preliminary calculations made by our actuaries, the maximum retention for a single risk, without taking into account accumulation factors, will reach approximately RUR 4-5 billion, but would be limited to a certain share in each treaty or risk. This value of net retention will apply to reinsurance of the sanctioned risks, thus complying with all requirements of the company's solvability. The net retention of the NRC will be determined depending on the type of insured object, frequency of the events etc. Following the structure of the Russian insurance and reinsurance market, the main share in the NRC's portfolio will come from property insurance lines (property and engineering - CAR/EAR).
NRC would not buy any retrocession coverage except the one to protect the portfolio - cat cover, stop loss, etc. The company will sign the business in the amount of the net retention. We would limit share in inward business in maximum percentage of 100% risk and to a certain amount per each class of business depending the terms and conditions, underwriting information, industry losses per line of business, cummulation, appetite of the company, etc.
We consider that additional capacity is of high demand on the local market. NRC is planning to expand its operations shortly pretending to be no pure local reinsurance capacity.
XPRIMM: What are the countries which you consider in this regard and why?
Nikolay GALUSHIN: The most complicated issue to NRC is the topic of rating as it would be limited maximum to the sovereign rating of Russia. Thus we would make our steps outside of national borders in direction of markets which are less strict in their rating requirements, at them BRICS, other countries which are major trade partners of Russia, etc.
XPRIMM: When do you think NRC will obtain an international rating? Which rating agency will you apply with?
Nikolay GALUSHIN: We would first of all apply for Russian Rating of AKRA. And we would start negotiations with international rating agencies after the first annual report of the company would be audited and published. Which agencies we would apply for rating it is not yet decided.
XPRIMM: Coming back to some technical details, what will be the practice related to the 10% quota of the risks ceded to the NRC?
Nikolay GALUSHIN: NRC will participate, according to the law, in the facultative placements and also treaty contracts. The requirement of mandatory 10% ceding to the NRC will be fulfilled through the NRC's participation in the treaty program of the direct insurer.
In the cases where NRC will be the leading reinsurer, the reinsurance conditions will be agreed between NRC and the direct insurer. If a local insurance company intends to transfer the risk entirely to a foreign reinsurer, it should be however taken into consideration that the stake of the international reinsurer will be 90%, because 10% will go mandatory to NRC.
If a certain risk proposed to NRC is not a sanctioned one, NRC has the right to decline undertaking it. Moreover, it has the right to propose alternative reinsurance conditions (if required), different from those asked for by the direct insurer. In those situations, where NRC will accept an over 10% stake, reinsurance conditions should be negotiated together with the direct insurer. It is also possible that these conditions will determine the price of the insurance contract.
XPRIMM: Just to understand it correctly: the NRC will participate only in the newly concluded reinsurance contracts or will enter also in the already existing agreements?
Nikolay GALUSHIN: If the contract is concluded before January 1st, 2017, and the reinsurance premium is already paid (we speak about regular yearly contracts), the NRC will not be retroactively included in such agreements in 2017. The same approach will be applied for other long term contracts (including engineering - CAR/EAR) concluded prior to January 1st 2017 for the whole duration of such a contract, if there are reasonable and objective cases according to business practices.
We should point here an important exception: the long term contracts concluded for a period of more than 1 year or already operating on the date of the beginning of the NRC activity. Those reinsurance contracts which are concluded artificially for a long period of time which does not correspond with the normal business practices - starting from 1 January 2018 -, will automatically lead to the NRC's involvement, meaning they will be revised taken into consideration the 10% stake to be ceded to the NRC.
XPRIMM: What about the facultative risks, what will be the standard practice of placing the risk with the NRC?
Nikolay GALUSHIN: There are two options: 10% from the share of each reinsurer or 10% from the total risk placed in reinsurance, at a price equal to 10% of the total cost of reinsurance for that risk.
XPRIMM: Could NRC undertake more than 10% quota of the risks proposed in reinsurance?
Nikolay GALUSHIN: The risk appetite of the NRC and the maximum net retention, accumulation of risks etc. will be made according to actuarial calculations concluded before the company will start its activity. The NRC is ready to take the share of more than 10% following the insurers' requests. We should point out that the NRC has the right to reject risks offered in reinsurance (except for the sanctioned ones). If the NRC is accepting more than 10% for some risk (acts as a leading underwriter) it means that the conditions of reinsurance for that risk should be determined by the NRC itself.
XPRIMM: Speaking about timing, when should an insurer send the proposal to the NRC?
Nikolay GALUSHIN: At the same time when they send the offer to other reinsurance companies. If the NRC will be the leader in the reinsurance program - it is clear that the conditions of risk transfer should be coordinated with the NRC on the key parameters of the reinsurance contract.
XPRIMM: What conditions should be offered to the NRC if other reinsurer receives from the broker the reinsurance terms that include their commission?
Nikolay GALUSHIN: Similar conditions as for placement with other reinsurers. Direct insurer could work also directly with the NRC as well. The practice shows that more often the risks are placed on the Russian and also reinsurance market directly, without the involvement of a broker.
XPRIMM: In the context of the forthcoming Baden-Baden Reinsurance Meetings, what are your expectations for this year renewal season?
Nikolay GALUSHIN: As we are talking about general expectations I consider that no significant changes would happen neither in respect of risk appetite, nor pricing. However, some segments which demonstrate higher exposures would be asked for more hard renewal conditions.
XPRIMM: What is your message for the foreign reinsurers active on the Russian market, considering the creation of the new player?
Nikolay GALUSHIN: We are the partners! Notwithstanding the fact that NRC would create extra domestic capacity which would take some part of business which was traditionally placed overseas.