UKRAINE: Despite the changing legislative frame, the market grew by 49.6% in 1H2013

31 October 2013 — Olesea ADONEV
alexandr_zaletov1Gross written premiums collected by Ukrainian insurers in 1H2013 amounted to UAH 14.33 billion, which represents 49.6% more y-o-y. The life insurance market grew by 34%. The significant increase in GWP in the non-life segment related to changes in the Tax Code, which led to an increase in reinsurance operations on the domestic market (tax optimization of business entities).

For example, the domestic reinsurance market in 1H2013 amounted to UAH 3.9 billion, up 545.1% or UAH 3.4 billion more than in the same period of 2012. Insurance premiums from enterprises increased by 34.8% and reached UAH 6.379 billion. Retail insurance showed the worst dynamics (up by 6.5%) amounting to UAH 3.574 billion, explained Alexandr ZALETOV, Deputy Chairman of the Council of the League of Insurance Organizations of Ukraine and Editor in Chief, Insurance TOP Magazine. The main growth in life insurance was linked to bancassurance (life insurance for consumer credit).

Compulsory insurance of property interests of investors

There is a discussion about the implementation in Ukraine of compulsory insurance of property interests of investors and bank guarantees for housing, exchanging responsibility for their implementation and the choice of method on developers.

"Indeed the State Commission for Regulation of Financial Services Markets of Ukraine developed this bill despite the negative attitude towards this initiative on behalf of insurance companies and professional associations. Considering the high risk for private investors when investing in housing during the construction stage, the State Commission for Regulation of Financial Services Markets of Ukraine have been trying to transfer the risks of delay to the insurance market", said Alexandr ZALETOV.

According to ZALETOV, there is a probability of approving such bill in 2013 (there is a political component), but its implementation will encounter a lot of problems. Incidentally, in 2007 there was approved a law about compulsory insurance of investor risks in the construction of house, but it was never implemented.

Agricultural insurance in Ukraine

The Ukrainian Law on "Particularities about the insurance of agricultural products with state support" (2012) provides the compensation for agricultural producers up to 50% of the insurance payments and extends to the crop insurance, crop perennial plants, farm animals, birds, rabbits, fur animals, bees, fish and other aquatic resources and livestock products. Most farmers are trying to insure mortgage cereal crops, canola, corn, sugar beet and sunflower.

The volume of agricultural insurance is however insignificant - in the summer of 2011-2012 farmers insured about 500,000 hectares of crops in the season, which is about 2-3% of the total crops area in the country. About half of the insured areas were cultivated with winter wheat, as farmers often take short-term loans for harvesting and in such cases the winter wheat plantings are insured. Areas for other crops are about the same and traditionally about 50,000 ha of sunflower, maize and sugar beet. The amount of premiums collected is USD 12-13 million (UAH 90-100 million) per season. Total insurance contracts for the spring-summer period are usually around 1600-1800, added Alexandr ZALETOV.

The average premium rate for the season is about 3.5%, but for some crops the average premium rate is slightly higher (sunflower - 3.55%, corn - 4.2%, sugar beet - 3.6%, spring barley - 5.3 % soybean - 4.6%). Such low premium rates are due to the fact that for the mortgage crops farmers usually choose insurance contracts with an unconditional franchise at the level of 40-50%, which only provides compensation for catastrophic losses.

The Ukrainian Agrarian Insurance Pool was created in 2012 in order to provide a single point of risk management programs for public procurement of grain, the Agrarian Fund, and monitoring of the program of state support implementation for agricultural insurance. In 1H2013 the members of the Agricultural Insurance Pool signed 527 contracts for the crop insurance program and the Agrarian Fund of Ukraine conducted crops inspections on more than 300 hectares. According to ZALETOV, annual economic losses from fires amount to EUR 250-300 million and those caused by natural disasters - to EUR 100-900 million. Unfortunately, these risks are not covered by the compulsory insurance, only by the voluntary one, so in the private sector citizens' property insurance is less than 2%.

Legislative changes

In the Ukrainian President's National Action Plan for 2014 the State Commission for Regulation of Financial Services Markets proposed the following changes in the legislation: Strengthening the institutional capacity of the State Commission for Regulation of Financial Services Markets through the introduction of a regulatory tax in the regulation of financial services markets. Allocation of funds collected from the regulatory tax to the implementation of the regulation and supervision of non-banking financial services markets. Improvement of the prudential supervision of insurance services through the implementation of stress testing procedures by insurance companies. The increasing demand for risk management through the implementation of risk management in insurance companies, explained Alexandr ZALETOV.

According to ZALETOV, the introduction of market-based instruments for the accumulation and redistribution of long-term financial resources is made through the amendment of the Ukrainian Law "On remuneration", namely, the exclusion of insurance premiums from remuneration that employers provide to their employees.

Another point is the planned settlement procedure for calculating and indexing the liability limit for damage caused to an individual in terms of life, health and disability, depending on the victim's category (child, benefactor, senior, etc.).

For optimizing the management of public finances, the reduction of costs related to state and local budgets has been proposed for compensation of damage caused by unforeseen events. For this purpose, an action plan is prepared for defining the risks that are to be transferred to insurers, on the one hand, and those that remain on-hold with the state and local budgets, on the other hand.

Expectations for the second half of the year

On the insurance market of Ukraine there is a rotation of players which is observed, increasing of competition and a reduction in the number of insurance companies, more responsible approach to the choice of insurer's policyholders, operating inefficiencies and one of the highest in Europe the cost of doing business.

According to ZALETOV, among the positive trends in the first half of this year compared to the same period last year on the Ukrainian insurance market are the following: an increase of insurance services provided by insurers to the population; the growth of deposits' income of the insurers; an increase of insurance payments to citizens; the growth of investment of insurance companies in fixed assets and in real estate; an increase of deposits placed by insurers in banks; insurers' earnings growth on the bonds; the growth of payments to non-resident reinsurers.

However, there are also a number of negative trends: the growth of the domestic reinsurance, rising acquisition costs, reduced insurance operations by branches, reduction of income on shares, increase payable by insurers for payment.

In 2013, the expected decline in CASCO (10%), the growth of health insurance (20%), credit life insurance (40%), the growth of MTPL (5%), and the growth of travel insurance (15%).

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