Thus, according to Alexander TSEKALO, CEO, SKALA Insurance and Reinsurance Brokers, "the situation on the Russian market is not an easy one. We don't feel much confidence in the stability of our partners. There is stagnation of the market. In my opinion, the development of the market is not influenced by the Economic sanctions. The sanctions only caused further stagnation of the insurance and reinsurance market in the Russia itself".
Also, in July 2014 the United States, the European Union and Canada imposed sanctions against several Russian state-owned banks and the Russian energy and defense sectors and some of the Russian re/insurance companies were affected too. This happened especially for placing the property or Cargo risks belonging to companies, whose owners are already on the "black list".
"Despite the current situation, refusals to pay or delay payment from the western reinsurers in connection with the sanctions have not been recorded. However, there is information that the so-called "sanctions clause" could be included in the contracts. This will work in case of the application of sanctions. In general, the current situation in reinsurance is not so "critically painful," we normally receive payments (claims) under the past event," explained Igor ZHUK, Director of the department of the insurance market, Central Bank of the Russian Federation.
The main capacity of the world's reinsurance market is concentrated in the USA, UK and Germany. The portfolio of risks ceded abroad consists mainly of risks related to the cosmos industry, construction, power generation, up-and downstream energy, metallurgy, and large-scale property projects, where there are initially high requirements for reinsurers' capital, international rating and expertise.
During the reporting period (2014) the total amount of reinsurance premiums ceded for reinsurance by the Russian re/companies totaled RUB 138.4 billion (+15.2% y-o-y), including RUB 37.0 billion (nearly 27%) inside the country and RUB 101.4 billion (73%) abroad. At the same time, the main protection for Russia is traditionally offered by the European insurance market (50% are covered by reinsurance companies' from UK and Germany), nearly 7% - American insurance market. Moreover, the total value of reinsurance premiums accepted by Russian companies amounted to RUB 48.4 billion, 8.3% up y-o-y compared with 2013.
"We feel that the main trends on the Russian reinsurance market didn't change - rates were stable but still far from adequate level especially considering increasing claims which was an obvious feature of 2014 on the reinsurance side", said Igor SHEKHOVTSOV, Deputy CEO, UNITY Re Russia.
Also, "the Russian reinsurance market remains attractive for foreign cedents. Thus, as reported by data of the Central Bank, the reinsurance premiums from abroad amounted to more than RUB 16 billion, and their share to more than 33% of the total volume of the reinsurance premiums of all Russian companies", stated Irina POSTNIKOVA, General Director, TRANSSIB Re.
At the same time, "I wouldn't say that something has changed significantly. All trends of the last 2-3 years remain roughly the same, including the squeezing number of specialist reinsurers locally and the concentration of reinsurance premiums over a stable range of Top-5 reinsurers. Interestingly, despite the very difficult and inconsistent 2014, the domestic reinsurance sector demonstrated some obvious growth - inward premiums have grown by 8% compared to 2013, reaching RUB 48.4 billion, where the share of domestic reinsurance stayed flat, while the overall growth was supported by the foreign risks placement with the Russian reinsurers (RUB 16.0 billion in 2014 compared to RUB 12.8 billion in 2013). Another highlighting fact for 2014's political and economic environment is the significant rise of outward reinsurance by 15.2%, where the domestic reinsurance remains the same at RUB 37.0 billion, while the reinsurance abroad has grown from RUB 83.1 billion to RUB 101.4 billion! So to summarize, we see the market is still slowly growing, mostly through the inward volumes from abroad, but in 2014 this positive trend was distinctly offset by a severe 30% growth of inward reinsurance loss ratio which does inspire poor forecasts for 2015 and market results. It is noteworthy that despite an evident confrontation with the Western countries, the EU and the USA, the volume of outward reinsurance placed abroad has been boosted significantly, by about 30% compared to 2013, while the domestic placement remains the same level," explained Dmitry GARMASH, Head of the Moscow representative office BARENTS Re.
In the opinion of the Irina POSTNIKOVA, "the volume of the reinsurance premiums fell down only in case of 3 specialized reinsurance companies from 14 (the companies which did not have incomes from direct insurance in their portfolio). One year before that there had been 6 companies with negative evolution. However, out of 14 professional Russian reinsurers only 9 companies recorded premiums from abroad. The share of the foreign business in their portfolio represented just over 23%. At the same time, in 2014 all the reinsurers remained on the market; there were no license redrawn. The volume of the accepted premiums from abroad increased by more than 20.3% while net premiums (gross premium minus retrocession) increased only by 3.2%".
Expensive Global Reinsurance Protection
The total amount of reinsurance premiums ceded abroad for reinsurance by the Russian re/companies growth from 5.7% (RUB 83.1 billion) in 2013 to 21.9% (RUB 101.4 billion) in 2014, an increase of almost 4 times.
Western companies fear strengthened "punitive" measures against Russia and the deterioration of the economy, against the back ground of existing sanctions, along with an oil price tumble and the 30 p.p. devaluation of the national currency (RUB) over the last year.
"There is concern that further sanctions could be imposed (and) there is uncertainty about where they might be imposed. If (insurance companies) were to write credit risk for Russia - even if the companies are not sanctioned - and they were to default, they would have a difficult conversation as to why they chose to write the risk," said Andrew Van Den BORN, WILLIS Insurance Broker.
According to Igor SHEKHOVTSOV, "besides the direct and quite obvious impact of the currency devaluation we have not faced any difficulties. We succeeded in renewing our treaties with the same well known and high rated leaders and maintained the panel of reinsurers on the same quality level. Not a single reinsurer jumped off on the grounds of sanctions or anything related to that issue. There is no point in agreeing on obvious stuff. Sanctioned entities are left without the coverage supply they had plenty of previously. It's a new reality for them and currently no substitute to western capacity can be found".
Also, the capacities that were put under sanctions represent additional opportunities for the Russian reinsurers to increase their portfolios, noted Irina POSTNIKOVA. She added that the sharp devaluation of the ruble has occurred in the 4th quarter of 2014 and affected the annual balance sheets that represented in rubles only the amounts of exchange differences on assets and liabilities in foreign currency. For that we could observe a depreciation in the companies' capital and in all the nominal results".
In the opinion of Alexander TSEKALO, "devaluation has led to many negative effects. The reinsurance abroad has become more expensive for us. The reserves formed by Russian insurers are not able to cover the liability in foreign currency that has built up. Even in the Russian Federation most of the companies set their limits in the foreign currency in the insurance agreements for the Russian insured. There is a possibility that further bankruptcy of the re/insurance companies occurs."
Foreign companies that will remain on the Russian market will probably double the price for their services to cover risks. Domestic insurers will struggle to find foreign reinsurers to share the cost of insuring Russian energy or shipping projects, for example, which in turn will put increased financial pressure on those projects to find far more money for coverage, Reuters said, citing industry underwriters.
"Sanctions have cut the available high-rated reinsurance protection for a number of large-scale, state-related and strategically important Russian clients and projects; currency devaluation has significantly affected the structure of reinsurance covers, including the drop in retentions and deductibles and the decrease in premiums written under the contracts nominated in Rubles (RUB). A potentially hard issue is an increased cost of claims and claims adjustment," noted Dmitry GARMASH.
2014 - the year with most of the losses
The higher level of losses should be the most important trend of the year 2014 for the Russian market. For example, in 2014, Russian re/insurance companies were paid RUB 18.7 billion under contracts accepted for reinsurance, which was 30% higher than one year before (editor's note: in 2013, the local companies received RUB 14.3 billion, up by 3% compared with 2012 and by 4% as compared with 2011).
"A negative trend of 2014 is that the paid claims on the inward reinsurance have grown by a huge 30%! To summarizing, we see the market is still slowly growing, mostly through the foreign inward volumes, but this positive trend is now offset by a severe growth of a loss ratio, and many domestic cedents boost their reinsurance protection abroad, not domestically, despite actual and potential sanctions and a negative economic environment," explained Dmitry GARMASH.
Russian insurers have been hit by large claims (in the order of USD 30 million-plus) totaling some USD 2 billion between 2006 and mid-2014 in the property damage and the engineering sector, said Andrey RUNOV, Deputy General Director, MALAKUT Insurance Brokers.
"Having all the major property accounts in our portfolio there is no doubt that we "enjoyed" that increase, which relates to large industrial losses mainly. At the same time proper treaty back up and conservative reserving allows us to go through these loss peaks with minimum capital erosion", explained Igor SHEKHOVTSOV.
In 2014, one of the main losses (about USD 1 billion) in property and construction was the explosion on Russia's top oil producer Rosneft's Achinsk. Regarding the largest losses in the space and aviation sector, a USD 260 million loss can be noted in 2011 for a Proton-M space launcher and a similar casualty in May 2014, which cost USD 225 million.
According to the Central Bank, on average, the claims ratio (payments made related to the written premiums) reached 42%, whereas for the professional reinsurers this percentage represents 79% in 2014.
"The majority of the Russian professional reinsurers are focused on the Russian client, and their attempts to enter the foreign markets are quite costly for them. This significant difference in the level of profitability for insurers and reinsurers can be explained simply: a share of the premiums that are written abroad are coming from foreign subsidiaries of the direct insurers; at the same time, they are using specialized techniques of financial optimization," explained Irina POSTNIKOVA.
Reinsurance pool - as far as really
In the context of unclear situation, which is spread out over the international market, some of the Russian officials are talking about the creation of a Reinsurers Pool, but so far it is only at a stage of project.
"Russian reinsurers pool is actually promising and of demand for a particular number of sanctioned Russian accounts where the risk can't be anymore placed abroad with the sanctioning territories (UK, EU, USA) and should be spread among reliable Russian players", stated Dmitry GARMASH.
At the same time, in the opinion of Alexander TSEKALO, "the creation of a pool would cause the collapse of the market. While there is no pool, the companies can work in full length and take their own decisions regarding the choice of the Reinsurers and conditions of the Reinsurance protections. If there is a pool, the members would be forced to cede all the risks there. That would cause unhealthy competition. The market should not have unhealthy competition. The initiators of the Pool assume that the Pool is going to be compulsory for the Reinsurers and will solve the problems of gaining additional capacity. That is not true because the facility created by the pool would only cover 3% of assets of Russia."
On the other side of the continent
At the time of the introduction of economic sanctions against Russia the Middle East and Asia may become a possible reinsurance capacity. Moreover, the Russian market is reconsidering its relationship with the reinsurers and businesses from country-members of the SCO (Shanghai Cooperation Organization) and BRICS members.
"We are not under any illusion regarding the Middle East and Asian markets. These countries have always been very cautious in building the economic relations with Russia. Perhaps the reasons might be that if they start working with Russia they will put themselves under danger to be under sanctions as well. At the same time, the situation with the CIS has deteriorated; the amount of the operations has declined" noted Alexander TSEKALO.
Thus, despite close historical and economical relations between Russia and the Independent States (CIS), at present the situation regarding the CIS partners has deteriorated. Irina POSTNIKOVA characterizes reinsurance operations with CIS countries "as the most problematic segment for the Russian reinsurance operations. Unfortunately, the majority of the states of the former Soviet Union have created some kind of barriers from the Russian reinsurance market by using rating limitations. We must have patience and at the next "wave" our business relationships with insurers from CIS will rise to a new level".
Also, according to Igor SHEKHOVTSOV, "the only positive switch appeared in Kazakhstan where we saw certain improvement in terms of rating barriers dropping down for a notch which immediately triggered an increasing flow of business. It was a long awaited action from the Kazakhstan regulator we highly appreciate".
In the opinion of Dmitry GARMASH, "this segment remains quite stable too; both in terms of relatively low volumes of business and strengthening of the reinsurance regulation imposed earlier (Kazakhstan, Uzbekistan) or promoted now (Azerbaijan). The trend of 2014-2015 periods is the additional attention that CIS cedents start paying to the Russian economy stability and the same goes for particular Russian reinsurers; becoming more cautious with dealing with Russian capacity and turning to high-rated foreigners".
Perspectives' for the 2015 - "do your best and don't panic"!
"I would prefer not to make any forecasts in these circumstances which have too many external factors impacting the environment. Do your best and don't panic is the best tactic at the moment. Mutual trust and two ways beneficial cooperation is the partnership everybody is looking for and we remain providing them", commented Igor SHEKHOVTSOV.
At the same time, "the reinsurance sector will be exposed to various influences, including the extension of sanctions; further fluctuation and lack of stability of Ruble; financial and operations trends with the target clients' sectors such as industry, trading, real-estate, oil&gaz, manufacturing and macro-economic factors", added Dmitry GARMASH.
According to broker's opinion, "foreign reinsurers have started to revise offered business more thoroughly and they started to check the information on the Insured for the sake of protecting their portfolio from the sanction risks. The market will continue with the further stagnation due to the internal economic problems", believes Alexander TSEKALO.
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