Russian reinsurance market by the end of year 2008. Expert RA

Russian reinsurance market by the end of year 2008.

Alexei Kovalenko

Chief of the underwriting department OJSC Profile Re .

Reinsurance market in Russia is undoubtedly passing through a new development phase. The financial and economic crisis which affected all areas of the world economy would not leave the reinsurance market alone.

New 2009 year reveals more new challenges faced by professional market participants in real-world conditions. Noone now has any doubts that 2008 became a turning point in transition from the ‘soft’ market where global players could afford to compete through providing ‘democratic’ prices to more stringent conditions set by practically all positions.

In retrospect it may be noted that Russian insurance and reinsurance companies faced some difficulties in placing obligatory programs on Western market in the middle of last year and by the end of 2008 these trends were only gaining momentum.

Leading Western partners tighten conditions placing increasingly high demands to their assignors. While analyzing the results of obligatory program placement for 2009 one can talk about a fairly significant change in price of coverage provided. The price of reinsurance in a number of companies has increased  by an average of 15-20% and in some cases even more.

According to colleagues the increase in rates is not final as the initial price adjustments were made as early as mid-year when the market did not yet fully felt all the problems of the looming crisis. A number of western companies reconsidered direct approaches to the business rendered to them as well. Thus we should mentioned an adoption by some of them decisions to renounce  Russian assignors’ retrocessionary programs, other reinsurers completely shut down from Russian market or decided to abstain from leadership in the contracts.

These changes according to Western counterparts are the initial phaze of the coming change in the conditions of reinsurance. This can partly be explained by the fact that compared to past periods the main factor influencing the behavior and price policy of reinsurers is not underwriting results of contracts passing but the financial and economic crisis itself that  seized hostages both reinsurers as well as the assignors.

However these circumstances bring up the question of reliability of a number of Western companies that announced serious financial losses at  2008 year end closing. According to estimates of some experts the level of global capacity reduction has reached approximately 30%.

These indicators characterize global scale let alone Russia . Without any doubt a serious review of the relationship with partners on reinsurance is in store. Someone will choose the track of achieving short term results aiming to stay on the market by all means, other will think long-term making the corner-stone of the coverage reliability by removing former partners from security-sheets because of their financial soundness decrease or just in case of getting any negative information.
What is in store for the the market in the coming year?.. One is not required to be a prophet to suppose that the reinsurance sector will further be undergoing its transformation  particularly given recent changes on Russian direct insurance market.

Reducing of the volume of credit automobile sales, decline of mortgage programs, growth of unemployment, policyholders’ income declining have a significant influence on the size of the collected premium.

Changeover of growing market trend to falling market trend significantly affect the companies accustomed to the ‘race-with-own-losses’ strategy both on the insurance and reinsurance market. Coverage of the cash gap only by means of a greater number of contracts is gradually disappearing in the past. Financial stability of companies and thier willingness to consistently meet their commitments come to the foreground.

Shortfall of insurance portfolios, increase in current loss ratio - all this significantly affect the amount of reinsurance premiums and the attractiveness of this business sphere. Some companies now see the outcome of the situation in the promotion of new products and offering of their services to the markets of CIS yet not covered by them, Asia, Africa and Middle East.

The increase of the western coverage prices will no doubt lead to the necessity of searching for alternative approaches in order to protect portfolios of their own companies. On the background of direct insurance market decrease insurers will look for ways to save costs on outward reinsurance.
Possible solutions as it is will lie within the field of:

-         resizing requested capacities volumes especially taking into account the emerging serious decline in the volume of written premium of market participants;

-         increase of the disproportionate reinsurance contracts share;

-         reduce of requirements to requested capacities both by the recovery volume and various types of exceptions;

-         increase of the priority value in the contracts.

Apparent factor that is already seen now will be a tendency to increase the net-retention of assignors. Perhaps one way for economy will be the introduction of ‘indirect’ and additional (excess) sections reinsured within Russia .

However this approach makes us be more scrupulous towards reinsurance partners tracking their activity trends and performance since in recent times a number of companies - permanent participants of Russian reinsurance market -  ‘passed away’ and regulatory bodies are more often articulate figures of forthcoming reduction of the total number of licensed Russian companies.
I want to believe that with regard to the difficult financial situation on both insurance and reinsurance markets the members of the relationships will strive not to dumping and receiving short-term profit but to balanced approach and financial sustainability of their companies. However the results of major changes ongoing right now we yet will have to conceive. It seems that noone at the moment can clearly describe the picture that we will see at the end of the year. Now it seems rather difficult to predict with high probability the conditions for the future because Russian reinsurance market (whether it is unfortunately or fortunately) are still very dependent on foreign partners.

In our rosy dreams we want to believe that the current changes will push the development of domestic reinsurance market especially given recent trends towards consolidation and capitalization of its leading players. Time will show ...