Alexei Kovalenko for Expert RA 2010

Alexei Kovalenko, head of OJSC Profile Re underwriting department for Expert RA 2010 Alexei Kovalenko, head of OJSC Profile Re underwriting department. - Alexei, what is your opinion on how the crisis has influenced Russian reinsurance market? - As we expected the crisis was mostly detrimental to the reinsurance market at the end of the 3 - the beginning of the 4 quarter of this year. Other sectors of the economy got affected by the crisis    in the beginning of the year but thanks to the base (the reserve)  insurance and reinsurance companies had the arrival of the crisis to our sphere was slightly delayed. I do not think that the impact of the crisis on the reinsurance market is significantly different from that for the insurance market for in my opinion  it was characterized by all the same factors.

We may distinguish three main ones affecting the reinsurance market.
The first factor is dumping. Dumping touched to the quick both insurers and reinsurers. What is the reason? Most likely it consists in the limitation of the range of insurers, the reduction of their ability to pay and  as a consequence in the increase of competition. Dumping now is probably one of the most negative factors of the crisis within the industry.
The second thing worth mentioning  is the shrinkage of reinsurance market per se due to the fact that insurance companies now see their task in minimizing costs  including those on reinsurance. Insurers left larger amounts of responsibility at their stop loss point. Thereby putting the issues of economy prior to the portfolio protection questions.
And the third point is unfavorable financial position of a number of insurance companies  caused by the above-mentioned dumping or conditionally shortfalls on premiums. This also may include payments by installments and significant delays in transfer of reinsurance premiums as well as serious  problems with the payment of damages. That is the questions concerning the solvency of insurers got shifted on reinsurers as well.

- You mentioned dumping.How many times have prices fallen?
- Prices have fallen indeed. But we can not give any definite values for it will be so-called ‘ an average body temperature at a hospital’ , it all depends on the type of insurance to consider. If we compare 2008 and 2009 rates on property lines of insurance fell on average in 2-2,5 times, vehicles insurance declined by 20-30%.

- And what percentage of risk that you are offered now do you refuse to accept?
- At the moment it's about 25% of the total number of risks offered.
- And what happens on the international reinsurance market? Do the prices go down?
- On this account I can say that the financial crisis is hitting the whole world not just Russia . I think the problems that affected Russian market are in varying degrees characteristic of the international market as well. Therefore I would not say that the price of Western coverage to date have highly increased. Western companies also require funds for further development  but today at providing reinsurance coverage they work diligently to approach this issue from the standpoint of quality. Now it’s almost impossible to find contracts with wast unfounded limits for significantly small cost.

- How has the crisis changed the requirements of insurers to reinsurers?
- If you take Russian market recently it tend to the reliability of the reinsurers being not the  primary concern of the insurance companies. Now in most cases the first place there is the contract price and companies are not always interested in  the future payments.
- And what about major insurers?
- Major insurance companies in the overwhelming majority do not place risks with Russian reinsurance market. They are working directly with foreign reinsurers on the main reinsurance programs. Of course the major insurers are also trying to get a cheaper coverage but with companies that meet their requirements or have certain ratings. As for the business placed directly in Russia the first place again is occupied by the price of reinsurance coverage so we see market principles at work.

- Has the demand from abroad for Russian reinsurance coverage increased?
- As exemplified by our company I can say that the volumes of international business are gradually growing. But this is related either to policy tightening of the Western reinsurers  or once again to the price factor. We see by an order more offers but sometimes the price offered does not comply with our policies  and we are forced to renounce these risks. In other words not everything is well in international business either. In my opinion Russian market still remains a reserve for Western assignors. Foreign companies are turning to Russian reinsurers only in case they can not place the risks in the international market.

- What  in your opinion can inhibit the development of Russian reinsurance market and how can it be stimulated?
- Once again I’d say  that Russian reinsurance market is inseparable from the insurance market. The better and more positive will Russian insurers develop the easier it will be for reinsurers to operate. The development of the reinsurance market depends directly on the ways  Russian economy develops. The quicker it revives the sooner Russian business recover from the effects of the crisis;  the larger is the inflow of investment, the bigger is the number of risks that policyholders have and accordingly the greater is the demand for insurance and reinsurance.

Now as for stimulation of the market. We all understand that the demand for insurance may be increased by two ways: either somehow encourage the voluntary insurance  or use the command-administrative methods to impose a particular type of insurance as mandatory. At the moment we do not observe any increase in the  potential customers’ willingness to insure voluntarily. Significant changes to my mind will occur only after improving of the welfare of the insured - when people are not forced to give ‘the last penny’ for the insurance but pay a pre-allocated part of the family budget. With regard to the mandatory forms that is directly subject to the legislators but the recent developments offer hope that the number of mandatory forms will be increased in the near future.

- A significant amount of premiums goes to the international market. Is it possible to reallocate some of these flows  rather than wait for the introduction of new types of insurance?
- It would be nice if all the money that goes to the West remained with Russian companies  but to achieve this it is necessary to impose some legislative or administrative barriers. Another option is to accept the fact that we live in a free country with  free-market, and everyone has the right to choose their business partners at their own discretion.
If you take professional Russian reinsurers it is clear that they do not have sufficient reinsurance capacity to compete not only with foreign reinsurers that have been establishing their credibility over years, but also with Russian major insurance companies with far greater own capacities. You can certainly put some restrictive barriers for example risk can not go to the West until the capacity of Russian reinsurance is exhausted or it can be transmitted to the West only in the part exceeding a certain value. But  I think this is not a way out of this situation since the choice of reinsurer must belong to the reinsured.

- Do you think it possible to stimulate somehow an increase in capitalization and reliability?
- It is possible to stimulate. The question is how to do it. Today the reinsurance business is not that attractive for major investors or major investments. You can increase the capital stock minimum I do not think this is the way out. Recent market developments show  that even companies with sufficient authorized capital are leaving the market. Perhaps a more robust policy of control or supervisory bodies concerning insurance and reinsurance companies will be of great help to insurers when choosing their business partners. But for me the size of the capital stock is not the primary indicator of the reinsurance company’s reliability.

- How do you feel about the possibility of creating a major public reinsurer? As we see for example in China .
- The very idea is not bad  but the question is how to realize it.
- Then perhaps the last question. What is your forecast for the next year? What should we expect?
- In my judgment: we should not expect the market recovery to happen next year. Problems of this year will stay with us for long and in the future quite a number of companies’ leaving the market  is to be expected and  in my opinion we’ll see rather ‘loud’ walkoffs  both by the volume of the ‘outgoing party’ and by in the way of leaving. At the same time next year we would very much like to see reinsurance market  continuing its cleansing, becoming more transparent and civilized.
All of us at the new year eve blow out candles, light sparklers, fire poppers and promise to ourselves that all the bad will remain in the last year and from January 1 on everything will be fine or at least better, everyone will be alive and all be healthy. People tend to believe it. Hopefully  it will be no worse though,  I think you should not rely on a miracle but work for it.