Expert, #14 (369) April 7, 2003 ECONOMICS AND FINANCE   

   INSURANCE  

Lust for Life

In the next few years, Russia can expect an upswing in the life insurance market. The main players will be foreign insurers and the best of Russian companies.

Evgeni Reshetin

In the near future, foreign insurers will be officially allowed to offer long-term life insurance. It is hard to say for sure how predictably things will develop. On one hand, very recently, Russia's position in its negotiations with the WTO was very firm. A Russian monopoly will remain on the life insurance market for a certain period of time. This was explained very simply: long-term money should stay in the country, and the market was still so weak that it would be literally snapped up by foreigners.

On the other hand, Russia and the EU agreed on a partnership back in 1994, in which Russia would ensure via legislation that Russian daughter companies of EU corporations would enjoy conditions similar to those of Russian insurance companies. However, this agreement is only now becoming a reality. In amendments to the law "On the Insurance Business" introduced to the government by the Ministry of Finance, proposes to expand certain companies' operations on the life insurance market, of which more 49% are EU companies.

It is not hard to imagine what will happen next. Different legal bases for insurers from Europe or America will hardly please the powers that be in the US. This difference is in and of itself illogical. The liberalization of the insurance market for all WTO members is one of issues Russia can back down on painlessly. Thus, in the not-so-distant future, all foreigners will have the right to sell long-term life insurance packages in Russia.

This is no cause for alarm. First of all, insurance clients only stand to benefit in terms of the quality of service. Secondly, foreign companies have already started operating in Russia without waiting for special permission. Finally, Russian insurers, fed by financial-industrial groups and the income from actual insurance, are beginning to invest in life insurance development. The policies they offer are no worse than those at foreign companies, and knowing the ups and downs of the market is just as important as the experience of the international insurance groups.

Owning life

Less than three months remain until the law on manditory third-party liability vehicle insurance comes into effect. Associates at the Center for Insurance Information have decided to verify whether car owners are ready. They have examined statistics on visits by Internet users to the insurance calculator at www.strahovka.info. The survey has discovered the following three trends. First, the number of users interested in the cost of vehicle insurance policies has increased by 30% over the last three months.

Second, these users' demands have changed fundamentally. While last autumn most drivers were interested in the cost of insurance policies with a liability limit of $5,000, since the beginning of the year the number of car owners wanting to insure their civil liability to $10,000 and $15,000, has increased significantly to 74% of the total number of visitors to the site.

Third, while in 2002 mostly owners of expensive foreign and new Russian cars showed interest in car insurance, the end of the last year and the beginning of this year saw a growing interest in insurance from owners of 3- to 4-year old domestic cars and older foreign cars.

However, the growing interest in car insurance is characteristic only of Moscow, St. Petersburg, and other big cities. This is evident in the results of a poll conducted by the International Institute for Marketing and Social Research, GFK Rus, by request of Ingosstrakh. The survey covered 4,644 car owners in 44 Russian towns. According to its findings, 10.4% of car owners across Russia have a car insurance policy and 4.5% of car owners have third-party liability insurance. In Moscow, these figures are 35% and 23%, respectively, and in St Petersburg, 18% and 7%.

Russian insurers earned almost 104 billion rubles (more than $3.3 billion) from insurance in 2002. However, not all of these earnings came from actual long-term individual life insurance. There are not exact figures, but it seems that life insurance made about $30-40 million, a bit over 3% of total revenue, according to analysts at the VSK Insurance, ROSNO, and McKinsey & Co. By 2005, according to preliminary estimates, insurers' earning in this category will triple or quadruple.

There are even more optimistic outlooks. Specialists at Rosgosstrakh and Expert RA estimate that if the insurance market is liberalized, insurers could make more than $700 million from long-term life insurance. This kind of growth should not seem surprising. For example, in Poland, insurance earnings grew from $20 million in 1994 to $1.047 billion in 2001. According to experts at McKinsey & Co., Russia has just now reached the GDP per capita and inflation figures that existed in Poland in 1994, which signaled the beginning of a period of rapid growth in life insurance.

The Russian market is now practically free and open to anyone prepared to invest in a promising project. At the moment, there are two leaders. In Moscow, AIG Life ($12 million in earning for 2002) holds the leading position in classical life insurance, while Rosgosstrakh holds the provinces. Competitors include German insurer Allianz in the form of Ost-West Allianz (earning more than $2 million in 2002), Ceska pojistovna as Cheshkoi Insurance (which opened in September 2002 and has so far established an agent network), as well as leading Russian insurers like BSK (earning from its long-term Life Line program for 2002 exceeded $1.1 million), RESO Garantia (with more than 23,000 life insurance clients at the beginning of 2003), and other large companies.

This picture seems a bit strange at first glance, as the leaders include foreign insurers' daughter companies, while Russian companies in business for over a decade have very modest figures.

There are objective reasons for foreign insurers' current success. According to General Director at Nika Insurance, Mikhail Kamalov, "Russian companies in 1995-1997 had no opportunities to invest their resources in developing life insurance, and the product won't pay for itself for five to six years." Kamalov believes that in order to offer life insurance an insurer has to invest at least $10 million over five years: $1.5 million a year for advertising, brand creation, and client service; $2.5 million to found an sales network. Until recently, only foreigners could afford this kind of investment.

Russia's chance

Russian insurers also have a chance to win in the race for life insurance. Some of the major companies have already found the money to develop long-term life insurance. Russian companies have also matured enough to know their competitive edge.

What do Russian insurers need to compete successfully? What market segments should they target?

Firstly, Russian insurers are not perceived as financially reliable institutions, nor are government guarantees in case of bankruptcy according to Ludmila Bratus, Advisor to the President of Spasskie Vorota Group. According to Expert's estimates, well-promoted Western brands are playing a major role in foreign companies' current success in Russia. President of the Stolichny Insurance Society, Pavel Loginov, comments, "Today, life insurance clients are people with a Western mentality, as a rule the employees of foreign companies. Many insurance purchasers after the crises in Russia over the last few years have the distinct impression that the West is more secure than we are. For this reason, well-off Russians living in major cities are more inclined to buy policies from foreign insurers. Yet Russian insurers have an excellent chance to become leaders in the provinces among people who do not have large incomes. Consequently, a necessary element in Russian companies' competitiveness will be creating sales networks in the provinces.

All we need is control

In general, there are not that many foreign insurers targeting the Russian market. As a rule, they are leaders on the international market. There are two reasons not to fear their appearance on the Russian market. On one hand, the competition they present will stimulate the market. On the other, the fact that they are few leaves a huge niche for Russian companies where they can become leaders.

Quality market evolution is possible without damaging the Russian economy if the oversight agencies can solve two problems. The first is to avoid a repetition of the Safe-Invest situation, in which a company deceived tens of thousands of Russian in the mid-90s (this insurance broker illegally sold foreign life insurance policies in Russia which clients could not collect on according to Russian law). The solution is obvious: only companies registered as official daughter companies of foreign insurers, not mere representative. When registering companies, the state should carefully investigate their stability and reputation.

The second problem facing state agencies is how to monitor investment and reinsurance. The government wants to keep the majority of accumulated insurance funds in Russian investments. Especially as, according to experts, these investment are already more appropriate for investing long-term life insurance resources. The best confirmation of this is AIG Russia's investment policy of investing on the Russian market.