RUSSIA: Reinsurance under sanctions, realities and forecast for the current year

24 October 2014 — Olesea ADONEV
igor_shekhovtsov
Igor SHEKHOVTSOV
Deputy CEO
UNITY Re Russia
In the first half of 2014 the total value of reinsurance premiums accepted by Russian companies amounted to RUB 24 billion (EUR 527 million), 7.44% up as y-o-y but only 5% more than in 1H2012.


During the reporting period the total amount of reinsurance premiums accepted from abroad reached to RUB 9.4 billion (EUR 205 million), up by 35% as compared with 1H2013 (note: in 1H2013 reinsurance premiums accepted from abroad totaled RUB 6.9 billion or EUR 163 million, which was 19% higher as compared with the results of 1H2012). Thus, in the 1st half of 2014 the share of international business accounted for 39%. It should be also noted that the growth in reinsurance premiums was provided by the international segment.

Moreover, in the 1st half of 2014 the total premiums ceded for reinsurance by the local companies totaled EUR 68 billion, including RUB 16.6 billion or 24.5% premiums ceded to the domestic reinsurers and RUB 51.3 billion (about 75.4%) placed with reinsurance companies abroad.

"Russian reinsurance market in 1st half of 2014 "enjoyed" pretty much the same challenging environment characterized by an increasing frequency of severe losses and flat rates with no signs of possible market hardening especially in current global capital oversupply situation we are having", explained Igor SHEKHOVTSOV, Deputy CEO, UNITY Re Russia, the leading specialized reinsurer on the Russian market and one of the most active player in the CIS region.

According to Igor SHEKHOVTSOV, the shift mentioned could be the result of several factors:
  • market consolidation process resulting in small portfolios, which would otherwise be placed domestically, are being aggregated by large players tending to have high rated western securities backing their treaties;
  • the number of specialist reinsurers constantly decreasing with Moscow Re being the latest sad development in this regard;
  • the price of high rated fac capacity has dropped significantly moreover there is a huge appetite for new business from established markets resulting in an A rated capacity available at the same price.
"At the same time we are quite satisfied with the market performance in the first half of 2014 being more positive then we expected", added UNITY Re' official.

It should be noted that one of the tendency of the past years has been the growth in volume of premiums ceded to foreign reinsurers, and since two last years outward reinsurance premium split remained rather stable. For example, in 2011 the share of foreign markets was 67%; in 2012, the total volume of premiums ceded to reinsurance abroad amounted to 69.18%, which is 3% more than in the previous year (2011), while growth in 2013 compared to 2012 remained at less than 1%.

"It is roughly the same trend that has been observed for the last 2 years, so I would not outline any special change in the market development. The domestic reinsurance capacity is squeezing, large cedants rise their retentions, so more preference is given to a classic rated foreign capacity and alternative new markets" commented Dmitry GARMASH, Head of the Moscow representative office, BARENTS Re.

Over whom the "sword of Damocles" is hanging

In the current year, due to the sanctions imposed by the United States and the EU for a number of members of the Russian economy business, some of Russian insurance companies were affected too. This happened especially for placing the property or Cargo risks belonging to companies, whose owners are already in the "black list".

"Insurance and reinsurance markets weren't the target, so remained relatively untouched by the sanctions. So far the only impact we saw were some measures taken to ensure that the capital involvement of the sanctioned personalities/companies is rendered null within certain insurance companies. Not a single economic parameter in terms of cooperation with our western partners has been subject to worsening due to sanctions" explained Igor SHEKHOVTSOV.

At the present, market leaders tell that in case of any further strengthening of sanction will appear serious difficulties in placing large risks abroad.

dmitry_garmash2
Dmitry GARMASH
Head of the Moscow
representative office
BARENTS Re
"The volume of sanctioned business is not that big in reality, and comprises mostly various cargo transportations, some aviation and a range of named property accounts. In this instance the solution is found in the domestic capacity (though quite limited) and alternative capacity from Asian, South American reinsurers which looks quite enough to resist the current level of sanction threat. However it's obvious that in case of any further strengthening of sanction environment the lack of capacity for whole sectoral placements along all lines of business could appear a disaster", added Dmitry GARMASH.

Nevertheless, the tendency is that the insurers are studying Asian markets in search of new partners and reinsurance capacity, moreover Russian market revising relationship with reinsurers and business from country-members SCO (Shanghai Cooperation Organization) and BRICS members.

According to Igor SHEKHOVTSOV, "all the markets should be considered potential for the sake of ensuring that you have cost effective reinsurance and healthy level of diversification. Unfortunately our modern world at the moment cannot offer any comprehensive alternative to replace the western reinsurance market as a source of either leading quotes or sustainable capacities of large volume for non domestic business. By the way there is still so much potential in the national market. Potential that is still to be recognized and utilized properly".

The main capacity of the world reinsurance market is concentrated in the USA, UK and Germany. In terms of sanctions, USA market may not be ready to accept in reinsurance Russian risks (risks from CIS countries included). Moreover, the largest German companies don't depend so much of American capital and expressed their willingness to continue to work with Russian re/insurance companies. At the moment, it is quite problematic to find a real alternative to the reinsurance of risks, especially for clients-company that "fall" under the sanctions.


According to Dmitry GARMASH, "potential" market for reinsurance Russian risks are those markets who are not extensively or absolutely exposed to the sanctions regime of USA, UK and EU; those companies which are not managed by citizen of these countries or have capital from there. Therefore, the potential territory for such capacity is Asia, Africa and Latin America. Most treaties (and facultative) placed abroad with the classic markets of continental Europe, UK, USA are subject to common sanction exclusion clauses, which really expose Russian cedants to reinsurers' potential declining claims under these actual reinsurance contracts. So the key potential problem is one big - having no reimbursement via reinsurance.

In this context, the Russian officials are talking now more often about the creation of a state reinsurer, but so far it is only at a stage of project, according to the declarations made by the head of the Russian insurance supervisory authority.

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Andrey T. UNTON
General Director
BELARUS Re


In similar situation several years ago has been the Republic of Belarus. Andrey T. UNTON, General Director, BELARUS Re noted that "The Republic of Belarus was subject to sanctions selectively, i.e. they were imposed basically on manufacturing enterprises. Nevertheless, a careful search for business partners and brokers made it possible to provide these enterprises with reliable insurance and reinsurance protection".

Regarding the measures that should be taken by Russian companies together with the state to identify new reinsurance capacities, to resolve existing political situation in order not to be victims of "bankruptcy", General Director of BELARUS Re considers that "in this particular case, one should give consideration to new reinsurance markets, or to those that are involved in a lesser extent. Any state-owned enterprises can serve as an alternative to any rated companies. But in any case, it is necessary to monitor any counterparts' financial status on a regular basis".

The Central Bank of Russia is supposedly discussing the possibility of providing reinsurance cover to insurers unable to obtain traditional reinsurance because of international sanctions regimes. The creation of a state reinsurer would mirror similar actions from the Indian government which set up a reinsurance operation to provide support to Indian insurers to cover main risks.

"The idea of creating a state reinsurer sounds very interesting and promising..... but only as a matter of political populism, of course. Reinsurance is a global risk transferring mechanism allowing effective exposure distribution aimed at gaining higher levels of sustainability. If you heavily pump a company designed to cover losses with taxpayers' money you better name it properly - call it a government guarantee fund. Currently all the economical parameters are against setting up a reinsurer: there is too much capital available worldwide at a very low cost , the rates are at the bottom, huge dependence on the rating; thus little chance to build healthy portfolio and strong premium flow able of covering all the losses. Even if you put USD 1 billion of capital in such type of company it won't help without proper flow of premiums - at the end of the day a single loss of Achinskiy size will erode all the capital", stated Igor SHEKHOVTSOV.

The portfolio of risks ceded abroad consist mainly in risks related to the cosmos industry, construction, power generation, up-and downstream energy, metallurgy, large-scale property projects, where there are initially high requirements for reinsurers' capital, international rating and expertise.

Despite the relatively small capacity of the Russian market the large losses can lead to the "fiscal imbalance" or bankruptcy of the insurance company. Thus, in Russia single risks with premiums from 300-500 to 3,000-5,000 USD remain, meaning those which are not considered by Western companies (underwriting profitability calculation).

"There has been no major shift - market is extremely soft and there is little possibility that someone had struggled with placements. My personal believe is that sanctioned business will not find any substitute even partially covering their risks unless they dramatically increase the price they offer for the capacity. There is absolutely no use trying to find a capacity on the basis of expiring rates. The sooner they realize it the better", added Igor SHEKHOVTSOV.

As far as the competitiveness of Russian reinsurers is concerned, as well as their possibility to increase their capacity to attract reinsurance business from abroad, there should be said that in comparison with the international entities, the domestic reinsurers still have to overcome the handicap of their relatively low capitalization, as well as - in some cases, the lack of an international rating confirmed by the international credit rating agency, etc.


However, in the two decades that have been passed since the formation of the Russian reinsurance market, domestic reinsurers have gained the necessary qualifications and experience to protect the national insurance poerfolio and have learned how to work and understand the specifics of the international re/insurance market. "Russian insurance and reinsurance companies remain the main business partners of BELARUS Re. It is caused not only by close similarities in culture, language and mentality, but general business principles of underwriting as well. And positive growth dynamics in premium income from inwards and outwards reinsurance is the clearest demonstration of that", added Andrey T. UNTON.

The recent politically generated situation affected more the "reputational-image character" of Russian re/insurance market, due to the reduction the country's rating. According to BELARUS Re's official, any downgrading of national credit rating can reduce business volume with companies in those countries where particular requirements to financial credit ratings exist. In the Republic of Belarus there are no such requirements, therefore, we hope to maintain cooperation at least at the same level.

Moreover, local experts say that currently it is very difficult to talk about further extension of sanctions for the Russian Federation, in particularly, Russian re/insurance companies, banking institutions, oil and gas companies, etc. "Frankly speaking I really do believe that our partners would not jeopardize our long standing relations and will not go beyond the written sanctions text in the document introduced which by the way does not restrict reinsurance operations at all. Minor issues like having your bank under sanctions can be easily solved by choosing another bank for the purpose of receiving reimbursement. I see no possibility of sanctions having an impact on the claim settlement process of non-sanctioned business. Once again, leave politics to politicians. We and our western partners are actually doing business here and would prefer to remain our minds free of politics or any other hard-to-calculate matters", concluded Igor SHEKHOVTSOV.

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