In a recently published report S&P Global Ratings said that operating conditions for Russian reinsurers have become considerably more complex over the past few years In the agency's view, the market has become more concentrated, in part because of an increase in minimal capital requirements since 2012. The Russian reinsurance market lacks internal capacity and remains heavily dependent on reinsurance protection from developed markets.

Outward reinsurance volumes have decreased since 2014, in U.S. dollar terms. The main causes of the decline, in our view, were the depreciation of the Russian ruble (RUB), gradual reduction in the amount of tax optimization business, and the difficult macroeconomic conditions in Russia.

In addition to the lack of capacity, since early March 2014, the U.S., the EU, and other countries have introduced sanctions against certain Russian companies and individuals. These sanctions vary from blocking property of certain companies and individuals to restrictions on certain activities and financing of the sanctioned entities. Insurance and reinsurance companies across the world have interpreted the sanctions in a way that makes it difficult for them to work with certain individuals and entities, or to insure or reinsure certain other risks. As a result, no cover from traditional reinsurance leaders has been available for these "sanctioned risks."

In the second half of 2016, Russia's central bank (CBR) established the Russian National Reinsurance Co. (RNRC). This new reinsurer is primarily supposed to provide reinsurance protection for sanctioned risks, increase domestic reinsurance capacity, and eventually become a national reinsurance champion over time. RNRC's initial paid-up capital was RUB21.3 billion (about USD361 million) and its declared capital was RUB 71 billion. In addition, RNRC received a RUB 49.7 billion guarantee from CBR, specifically to cover sanctioned risks.

RNRC's operating model includes compulsory cession--it is expected to get at least a 10% share of all reinsurance covers placed by local Russian players from Jan. 1, 2017. While this is not an unusual model for new national reinsurance companies, the feature could significantly affect how insurance and reinsurance companies operate in Russia. Although S&P's considers that the RNRC has potential to address some of the Russian reinsurance market's long-term problems, it could also distort the market and create a conflict of interest because the CBR is both its owner and its regulator.

The main report's findings with regard the influence that the RNRC may exert on the Russia reinsurance market are as follows:

• Handled well, establishing the Russian National Reinsurance Co. (RNRC) could increase the Russian reinsurance market's capacity and support transparency.
• That said, it could also weaken the competitive position of domestic and nondomestic players in the market.
• The overall long-term impact strongly depends on the government's appetite for increasing the level of mandatory cession that other companies have to offer to the new player from the current level of 10%.
• Any increase in the compulsory cessions could mar the development of the local reinsurance market.
• Despite the significant changes, S&P's doesn't currently expect the new market structure to trigger immediate rating actions on Russian insurers over the two-year outlook horizon or to significantly revise our assessment of industry and country risks for insurers operating in the Russian property/casualty market.

See "Introducing Compulsory Cessions Could Support Russia's Domestic Reinsurance Market, Or Undermine It" in the S&P Global Ratings' Credit Research section.

Primary Credit Analysts: Irina Velieva, Moscow, (7) 495-783-40-71; irina.velieva@spglobal.com

Victor Nikolskiy, Moscow, (7) 495-783-40-10; victor.nikolskiy@spglobal.com

Secondary Contact: Ekaterina Tolstova, Moscow, (7) 495-783-41-18; ekaterina.tolstova@spglobal.com

Additional Contact: Insurance Ratings Europe; insurance_interactive_europe@spglobal.com