Vyacheslav CHERNYAKHOVSKY, General Director, Insurance Business Association of Ukraine

3 August 2022 — Daniela GHETU
Vyacheslav CHERNYAKHOVSKY, General Director, Insurance Business Association of Ukraine
XPRIMM: How would you describe in general the insurance market development in 2021? Were there any specific trends in quarterly dynamics of life and non-life insurance?

Vyacheslav CHERNYAKHOVSKY: Usually, throughout the year, the non-life market shows a quarterly growth of key indicators. For the first time in a long period, in the fourth quarter of 2019, there was a sharp drop in the non-life premiums collected. In 2020 there was another drop in the second quarter and a recovery in the third quarter, with the fourth quarter marginally worse than the third.

Key data for 2021 (Hryvnia exchange rate as of December 31, 2021: UAH 30.92 = Euro 1):
  • Life premiums - UAH 5.9 billion.
  • Life paid claims - UAH 0.8 billion.
  • Non-life premiums - UAH 43 billion.
  • Non-life paid claims - UAH 17.1 billion.
Thus, in 2021, GWP level in comparable figures (adjusted for inflation) was the worst since 2014, when the first phase of the Russian war against Ukraine began, Crimea was annexed and most of Donetsk and Luhansk regions were occupied.

As seen from the statistics, the transfer of regulatory powers to the NBU (which took place on 1st of July 2020) had a negative impact on market indicators, in particular on its volume.

Accumulative life insurance segment actively grows every year - from UAH 3.9 billion (in 2018) to UAH 5.9 billion (in 2021).

XPRIMM: How was the situation with insurers' profitability, reserves, and loss ratios compared to 2020?

V.C.: Because due to the war the deadlines for submission of annual reports were extended, some data have not been processed yet, so it is impossible to give an exact figure on reserves of non-life insurers. According to our expert estimates they are about UAH 22 billion, which is almost equal to 2020-2019 indicators.

The reserves of life insurers amount to approximately UAH 14 billion, which is 10-14% more than in 2020.

In 2021:
  • Non-life - loss ratio was a record, due to both an increase in the amount of paid claims by 1.6 times over the past 4 years, and a decrease in premiums - paid claims rose to 39.7%, with a 4-year average of 31%.
  • Life - loss ration rate was 13.4%, compared to the last 4 years average of 13.9%.
As for the profitability of the insurance business, it had been declining for several years even before the war due to the constant increase in the administrative burden and complexity of the business environment.

In 2020, the return on investment was about 8% in non-life, but in 2021, it fell to 5.6%; in life it decreased from 15.5% to 12.6%.

XPRIMM: Did the market continue to reduce the total number of participants and were there any noticeable changes in top-10 life, non-life, and general ranking?

V.C.: We note a sharp reduction in the number of participants in the insurance market.

In 2019, on the Ukrainian market there were 233 insurance companies, while in 2021 - 155 companies (as of 31.05.2022 - 145 companies). Thus, every third company left the market.

XPRIMM: How did the war situation affect the reporting of insurers and full year results? Could you, please, explain if most insurers have been able to continue working and how?

V.C.: At the beginning of the war, the National Bank decided to cancel penalties for late reporting based on objective reasons: evacuation of employees, location of offices in the war zone etc., it was an unrealistic task for many insurers to file reports on time. As far as I know, 97% of the companies have already submitted their reports for 2021 to the regulator.

During the war, literally a few insurers left the market or are about to do so, who made this decision as early as last year. The rest are working, planning to survive the crisis and continue to work. This is possible primarily because of the cohesive teams and the skill of working remotely - now that employees are scattered literally around the world, it is critically important. Unfortunately, every business in our country has had vast experience of both global and Ukrainian crises, so management is experienced at adapting and surviving in difficult conditions. Most shareholders of Ukrainian companies understand their responsibility to their staff and to the country, so they make every effort to keep their business.

XPRIMM: Are Ukrainian insurers offering the society extra assistance, coverage and help due to the war? How is claim settlement being done now?

V.C.: Sure, the insurance market seeks to make life easier for its clients who find themselves facing such challenges. Some companies have expanded coverage under hull insurance policies to European countries, some reduce the amount of insurance payments, for example, if a car is not in use, an insurance company allows to renegotiate and renew almost any type of contract remotely, some have included military risks in life insurance, expanded insurance coverage for motor hull, as well as for agricultural machinery, cargo etc.

At the country level we primarily see the need to insure war risks and risks indirectly related to the war (damage to property, life and health from unexploded shells, mines etc.). Now our Association is actively involved in the development of the concept of such insurance at the state level.

Regarding settlement - except that the insurance companies' experts sometimes must inspect the property under fire, not much has changed - during the pandemic most insurance companies have established remote settlement, and now it helps a lot make the process as convenient and safe for all parties.

At the very beginning of the war the NBU recommended accepting a maximum of documents for payment in electronic form, which is what insurance companies are doing now. It also pushes our market to full transition to the "Green Card" electronic certificate.

XPRIMM: What do you think of the cooperation with the Western insurance market? What in your opinion helps the insurers the most to cope with the crisis and what else can be done?

V.C.: First, I would like to thank our foreign colleagues for the enormous help and support, both practical and emotional, that we received during the war. It is truly priceless.

As for cooperation, the possibility to reinsure specific risks (war, terrorism, political violence) as well as reinsurance support in general is now critically important for Ukrainian insurance market. Our Association, for its part, demands the National Bank to cancel restrictions on the transfer of currency abroad under reinsurance contracts, which were introduced on 24 February 2022, so that Ukrainian insurers could fulfil their obligations to Western partners. Now, the National Bank allows reinsuring abroad only for the risks of "Green Card", travel, nuclear and aviation insurance. Ukrainian companies take premiums, reserve money for reinsurers, but temporarily cannot buy currency and transfer it.

There is a separate problem with nuclear liability reinsurance. Some foreign nuclear insurance pools, which include European market leaders with subsidiaries in Ukraine, have sharply reduced their own retention, as a result of which at the moment a considerable part of nuclear liability insurance risks remains with Ukrainian insurers who are members of the national nuclear pool, which requires the state to take urgent measures to ensure that Ukraine meets its obligations under the Vienna Convention on Civil Liability for Nuclear Damage in full. We are especially grateful to the nuclear pool of Great Britain, which provides assistance and support to our Ukrainian colleagues in these difficult times.

I have to say that there are isolated cases when foreign reinsurers in the first days of the war behaved in a non-partner way, unilaterally terminating multi-year obligatory contracts with many Ukrainian companies, despite the fact that war risks under such contracts were included in the exception. I think it will be difficult for such companies to return to the Ukrainian market, and their place will be taken by more loyal competitors.

The main thing that will help the Ukrainian insurance market cope with the consequences of the war is the development of industry "Marshall Plan", as we call it. Such a plan should include organizational, methodological and direct (not through the mechanisms of the state budget of Ukraine) financial support of companies working in the non-banking financial market.

I have already started consultations both with major Western insurance businesses and international investors and donor organizations. They all understand the need for such a "Marshall Plan" for the industry. However, its concept and mechanisms, including financing, still need to be thoroughly worked out. We have taken the very first steps on a very long road. I am glad that Ukrainian parliament's members understand this problem and are ready to provide their support.

For the industry to be able to strategically cope with the crisis caused by the war in a long term, we need two things: a systematic review of regulatory requirements and standards (primarily solvency, diversification of assets and approaches to technical provisioning), NBU assistance in creating mechanisms to increase liquidity through availability of credit facilities and long-term systemic external financial support.

XPRIMM: What regulatory measures did your association propose for the war period? And what has been done so far?

V.C.: We have prepared a list of measures necessary to maintain the industry in war conditions, namely:

1. Mitigation of regulatory requirements, revision, and reduction of norms, namely:

Revision of the requirements for calculation of reserves, primarily unearned premium reserve - a shift from gross premium-based reserving to net premium-based reserving

As for solvency, diversification, and asset structure, in particular, temporarily establish different indicators for receivables, ease restrictions on placement of insurers' funds in one banking institution and increase the reinsurance indicator with one reinsurer

2. Reducing the tax burden on insurance companies - to initiate in the Verkhovna Rada abolition of double taxation in insurance, that is, to abandon the 3% tax on the amount of all insurance payments, leaving only the income tax applicable to all legal entities in the country

3. Creation of a mechanism of so called "instant refinancing" supported by the NBU and banks, primarily state-owned, as well as the possibility of preferential lending for term deposits placed in Ukrainian government bonds, where reserves of insurers are placed

4. Cancellation of the explicit or indirect discriminatory procedure of "accreditation" in banks and when participating in tenders

5. Revision of the Regulations on the conduct of activities for the insurance of agricultural products with state support to remove restrictions on the participation of insurers with the appropriate license in such insurance

6. Stimulating domestic reinsurance, including through creation of pools

7. Ensuring the possibility of transferring reinsurance payments abroad

8. Postponement of entry into force of all norms of new laws ("On insurance", "On financial services and financial companies") and bylaws (licensing conditions etc.). Postponement of the implementation in Ukraine of IFRS 17 for several years after the end of the war and beginning of a sustainable economic recovery.

Unfortunately, none of these steps, which depend on the regulator, has been implemented so far.

At the same time, the Motor (Transport) Insurance Bureau of Ukraine has cancelled deductions to additional guarantee funds for the first 6 months of 2022, which provided liquidity support to insurers-members of the Bureau at the time of the biggest drop in business volumes during the first months of hostilities.

XPRIMM: The new Insurance Law became effective on 19 December 2021. How has the ongoing crisis affected implementation of the law requirements?

V.C.: Most of the provisions of the law should enter into force on 1 January 2024.

We strongly insist on the need to postpone the entry into force of the law for at least two years after the end of martial law. Given the real state of development of the Ukrainian insurance market, I announced about redundancy of the law requirements at the stage of discussion and refinement of the bill. Now, against the background of the country's loss of a huge number of objects of insurance, falling premiums, implementation of the new law in the coming years will be impossible for most companies. We will ask the parliament to decide on postponement.

XPRIMM: How was the situation with the Ukrainian insurers' solvency in 2021 and how it is now?

V.C.: In 2021, the solvency of Ukrainian insurers remained at a high level. Moreover, I have repeatedly noted that there was formal overbooking of reserves in non-life insurance.

Now against the background of falling business volumes, unearned premium reserves are falling, at the same time, due to force majeure, some insurance payments were delayed, so the reserve of reported and unpaid losses has situationally increased. But since by the end of the year we expect all major indicators to decline (GWP to decrease by 50% compared to last year in comparable figures), the solvency indicator will grow at the expense of excess capital requirements.

At the same time, the losses that companies will incur will have a negative impact on the financial results, which have already been deteriorating over the past two years.

XPRIMM: What risks and perspectives do you see for the Ukrainian insurance market in 2022? Do you think that insurers will be able somehow to achieve their targets?

V.C.: The risks are obvious:

  • intensification of hostilities or transition of the war to a protracted phase
  • economic crisis caused by the war, a drop in GDP, production and the entire supply chain
  • Substantial impoverishment of the population, which brought in insurance half of all premiums, and a huge part of the solvent population who went abroad (5-6 million people), including with their vehicles (about 1 million cars)
  • A sharp rise in the price of fuel, which has already begun, and which will lead to a decline in motor insurance, the main market drivers
  • physical destruction of the objects of insurance (factories, companies), whose employees were insured under voluntary health insurance, will lead to a decrease in the volume of this line of business, since the companies will not have the funds for it, and will reduce social programs for employees
  • Practical termination of aviation insurance and significant reduction of cargo insurance
A separate specific risk for insurance companies with Ukrainian shareholders is that their main production or agricultural businesses have often been fully or partially destroyed or looted, which becomes an obstacle for additional capitalization of insurance companies at the expense of shareholders' funds.

The main goal at this point is to maintain physical and economic security of employees and their families and to preserve the business.

Prospects for the industry will appear only if the economy begins to recover, a systematic plan to support the industry is implemented, and new types of insurance (construction and installation risks, military risks, various types of liability insurance etc.) are launched. Despite the war, we are working on the necessary regulations to introduce these lines of business in the national market.

It is in times like these that we can see that joint work of insurance companies united in the Association shows much more efficiency, awareness, ability to exchange experience and solve problems than attempts to survive alone, relying only on one's own strength.