The mechanism of financial rehabilitation for insurers is in work out; how to avoid the "new" ROSGOSSTRAKH case

19 October 2017 —
The Central Bank of Russia worked out the mechanism of financial rehabilitation for insurance companies, which potentially could be similar to the one introduced in the banking sector.

In banking sector it means recapitalization of a bank by the Central Bank via a Consolidation Fund of the Banking Sector.

For the time being, in case of bankruptcy of insurance companies the regulator faces with a number of restrictions in the application of the law on bankruptcy of financial organizations, because in case of insurers the law doesn't provide application of the mechanism of financial rehabilitation.

In the case of ROSGOSSTRAKH this was probably the main reason for the OTKRITIE intermediation.

Amendments initiated by the regulator provides changes in different laws, including the laws of Banking Financial Institutions, the law of insurance and the law of Legal Status and Functions of the Central Bank. The bill proposes to expand powers of the regulator in order to realize the financial rehabilitation for insurance companies, similar with banks one. On this stage, the consultation of the Central Bank with the Ministry of Finance is continuing.

It is worth to mention some facts regarding the ROSGOSSTRAKH, which has, first of all, the social role as a provider of insurance: "It as a special case on the Russian insurance market because ROSGOSSTRAKH has a social role as a provider of insurance, particularly OMTPL in many remote Russian regions, even though this OMTPL business is currently largely loss making", mentioned Ekaterina TOLSTOVA, Associate Director, S&P GlobalRatings.

The transaction between OTKRITIE Holding and ROSGOSSTRAKH Insurance Group begun at the end of 2016 and was recognized by the officials in August 2017. At the beginning of this year, ROSGOSSTRAKH Insurance Group began to lose leadership positions in MTPL insurance, due to financial difficulties. Claims paid for MTPL remain the highest on the market about RUB 40 billion and double compared to GWP - RUB 22 billion. The loss of ROSGOSSTRAKH under IFRS report in 2016 increased by 6.6 times compared to 2015 - to RUB 33.3 billion, in 1Q2017 the net loss amounted RUB 23 billion.

In the middle of august 2017, OTKRITIE Bank, part of group, has faced the difficulty with liquidity. A number of experts believe that namely the deal with ROSGOSSTRAKH was fatal for the financial stability of the OTKRITIE: "The actual expenses of the OTKRITIE Bank to finance the activities of this company (ROSGOSSTRAKH) far exceeded the initial expectations of the group's owners. The bank spent considerable amounts of its liquidity to restore the financial stability of the insurer", explained Dmitry TULIN, First Deputy Chairman of the Central Bank of the Russia for local market. It is important to worth that OTKRITIE Bank enter in the top-10 systemically important financial organizations of Russia.

According to Ekaterina TOLSTOVA "the potential acquisition of ROSGOSSTRAKH by OTKRITIE Holding, the ultimate parent of Bank OTKRITIE Financial Corporation (BOFC), was announced late 2016. We understand that during early 2017 BOFC provided RUB 40 billion (about USD 690 million) of short-term funding to the RGS Group, which controls ROSGOSSTRAKH, with shares in ROSGOSSTRAKH being transferred as collateral. These short-term funding enabled ROSGOSSTRAKH to comply with the minimum regulatory capital requirement (100%) with a solvency margin of 119% as of June 30, 2017".

Due to the fact that both companies are social and systemically important organization for banking and insurance industries, the Central Bank by the Consolidation Fund of the Banking Sector (note: created by the Central Bank of Russia) started the procedure of financial rehabilitation of companies. Thus, the Central Bank became the main investor. According to preliminary estimates, the amount of capitalization for the entire group may reach to RUB 250-400 billion. A significant part of the funds was allocated to support ROSGOSSTRAKH and TRUST Bank, the rest will cover the risks associated with the operations of OTKRITIE Bank.

The full version of article can be read in the forthcoming issue of the specialized publication "INSURANCE Profile Russia 1H2017", will be officially launched 22 October 2017, during the Baden-Baden XPRIMM Reception.

The biannual bilingual publication (Russian and English) includes the 1H2017 financial results of the insurance market, from GWP and mediated premiums to claims paid, but also aspects such as reinsurance statistical data, the insurance companies' GWP portfolios etc. The current status of the Russian reinsurance market and perspectives of reinsurance market alongside of the new partner - RNRC: statistical data and market opinions.