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Fitch: Practicalities for Managing Growth in Russian Insurance Sector

January 29, 2008 | Сbonds

Fitch Ratings-London/Moscow-29 January 2008: Fitch Ratings says in a special report published today that the ability to manage and adequately forecast underwriting performance has become one of the key goals for insurance companies in Russia in an environment of strong growth.

“The very rapid expansion of retail business lines has led to important changes in the operating environment, exposing local insurance companies to the risks of inadequate pricing and reserving in less mature segments,” says Anastasia Voronkova, Associate Director in Fitch’s Insurance team. In addition to the common difficulties of a dynamically growing insurance sector, which include increasing competition, worsening loss trends and pressure on expense levels, Russian insurers are challenged with unfavourable changes in the regulation of compulsory motor third-party liability (MTPL) insurance, relatively low capital adequacy and the absence of close regulatory oversight over internal business procedures.

Motor lines were the key driver of 18% growth of non-life insurance in 9M07 and contributed to the worsening of loss trends in this segment.. The life segment has recovered since the termination of tax-avoidance schemes and, in 9M07, this was evident in a 51% growth, reflecting the effect of the regulatory requirement to separate life and non-life businesses from July 2007.

Interest from high-profile foreign investors in the sector was unprecedentedly strong in 2007 and resulted in several acquisitions of local insurers with strong retail positions. At the same time, Russian investors were focusing on the consolidation of their insurance assets. “Market expansion is often associated with severe tariff competition and higher expense levels. Therefore, the importance of knowing safety margins grows substantially for insurers,” says Ms. Voronkova.
Government regulation of MTPL insurance tightened after amendments to the law on MTPL were signed in December 2007. Fitch believes they may contribute to further increases of MTPL loss ratios. Overall, the regulatory and supervisory framework for the insurance business in Russia continued to improve in 2007 after a number of financial strengthening regulations came into force in July 2007.
However, it appears that growth of the portfolio and rapid changes in the operating environment have occurred ahead of improvements of internal business procedures established by Russian insurers. Fitch believes the parallel maintenance of several accounting standards, the under-estimated role of actuaries and an inconsistent approach to the analysis of regional development may hinder the desired progress in efficient management of underwriting performance.

The report “Russian Insurance Sector: Practicalities for Managing Growth” is available on the agency’s subscriber website at www.fitchresearch.com.

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