Remember the taste test? That was a marketing ploy by Pepsi, when the soft-drinks maker claimed that consumers who sampled their drink preferred it for taste to Coca-Cola – so long as they couldn’t see the label on the bottle.
In reaction, Coca-Cola blind-tested consumers, and discovered that if their old sugar formula was changed for chemical sweeteners and corn syrup, the new drink was preferred over Pepsi. So the Coca-Cola Company launched New Coke – only to discover that soda-drinkers wanted the old Coke back. But that’s another story.
This one is about the Russian taste for insurance – or is it really insurance at all behind the label?
If you believe what the chief government insurance supervisor, Konstantin Pylov, recently announced, Russia’s insurance companies are booming, with a 63 percent increase so far this year in revenues totaling 108.3 billion rubles ($3.5 billion). The problem of interpreting this boom is behind the label on the bottle.
Most Russian insurance, and most of the rapid growth in premiums, come from the sale of life-insurance policies that are redeemed (paid out) so swiftly, they are not really insurance at all. As everyone in the insurance business understands, these policies are a form of employee compensation that avoids, legally, income tax. Many of the leading Russian insurance companies acknowledge that pseudo-life accounts for 60 percent to 90 percent of their revenue, and of their portfolio of coverage. Most of this year’s growth in insurance revenues comes from pseudo-life, whose proportion of total premiums is increasing, not shrinking with time.
Companies like Industrial Insurance (PSK), which leads the domestic industry in value of premium revenue, say they are obliged by their clients to offer this type of policy, in order to be able to write conventional insurance coverage. They add that pseudo-life is a temporary phenomenon; that it will disappear and they will be better able to develop real life insurance, as this is known outside Russia, if they could invest the income in relatively safe forms of domestic investment. But without even safe banks to hold funds for lengthy periods of time, and without the legal right to invest offshore, Russian insurers are badly hobbled.
Then there is this year’s growth of voluntary medical insurance. This isn’t real insurance either, because most policies are payments for medical services, not cover against conventional risks.
In the outside world, where insurance is purchased to safeguard against risk, life insurance generally amounts to about 50 percent of total coverage. Industrial and corporate-property insurance consumes about 20 percent; motor coverage about 20 percent; and individual property and other risks, about 10 percent.
If that is the standard Western insurance model, the Eastern European pattern has been somewhat different. In countries like Poland, for example, motor coverage has been the takeoff point for domestic insurance companies, and at times the fastest-growing form of cover, as well as the single largest segment of the industry’s portfolio.
In Russia, however, although motor coverage is growing fast at companies like Ingosstrakh and People’s Insurance Company of Russia (ROSNO), the takeoff point has yet to be reached for the industry as a whole. That’s because the State Duma is delaying enactment of the legislation that would make motor coverage compulsory. Although the legislation is complex, and there have been problems between government, industry and parliament in arriving at a consensus for the new law, the most powerful reason for the delay in enactment is different. There is a quiet lobby of large foreign insurance companies that don’t want to see the benefit of compulsory motor coverage go to their domestic rivals. So they, and their friends in the Yedintsvo faction of the Duma, have been slowing down consideration of the new law, awaiting the time when the limits on foreign ownership of Russian insurance companies may be lowered.
There is no effective way to discover how much of the growth chief regulator Pylov has announced is going to motor or other forms of classical insurance coverage. That’s because the chief regulator does not collect such data from the 1,345 currently registered Russian insurance companies. Attempts by the Duma to broaden the scope of data collection and regulation of the insurance sector have been blocked by the Finance Ministry, which doesn’t want to allow Pylov’s department to become autonomous. His staff and resources are already far too stretched. Pylov himself is reluctant to answer public questions on any subject within his mandate.
Accordingly, it is impossible to follow one of the key questions that everyone has about the health of the insurance industry – where do Russian insurers invest their reserves, and how prudently are they managed? The record of scandals in the international insurance industry provides ample notice of what unscrupulous managers can do with the funds required to support insurance claims and protect the solvency of their companies. All that can be said right now about Russian insurance practice is that the regulations exist, but there is no telling whether oversight and enforcement ensure against serious violations.
When you look carefully at the data that have been issued, you will find that some of the leading insurers of property in Russia are creations of the large companies that own them. Sogaz for Gazprom and LUKoil Insurance Company are two of the best known. In the insurance business, these are considered captive companies, because most of the business they do comes from their owners. They don’t really seek the business of other clients. Nor do they respond to public questions about what their portfolios look like; what their payouts amount to; what reinsurance companies they use; and other indicators that are standard measures of insurance-sector performance.
Ask any Russian insurer, and he will tell you that Russian companies cannot afford to retain coverage of more than about $1 million in property risk per contract. The balance is reinsured with Western companies with the income and reserves to deal with the claims and payouts, if they materialize.
So the question to be asked of the major Russian captive insurers is how they reinsure the billion-dollar policies they write for pipelines, oilfields and countless other loss- and damage-prone assets that oil and gas companies hold. Unfortunately, these captives don’t talk.
What domestic insurers do concede is that, unless they make alliances with large banking and industry groups to guarantee them industrial property contracts, they cannot compete in the Russian market. This is the pressure that led to the recent acquisition of Ingosstrakh by the Russian Aluminum and Sibneft groups, and the award of property insurance cover for those groups to Ingosstrakh. Similar moves have been made between Alfa Insurance and the Alfa-controlled oil company, Tyumen Oil (TNK); and between the Moscow city administration, Bank of Moscow and Moscow Insurance Company.
These aren’t captive insurers in the usual sense, at least not yet. But unless the government regulator and the public are able to learn more about the financial conduct of these companies, no one can be sure in which direction they, and the Russian insurance industry as a whole, are heading.