KPMG presents the results of its second annual study of the insurance market.
KPMG, an international network of audit, tax and advisory firms, has published the results of its second annual study of the insurance market, entitled Opportunities in an evolving market.
The study considers companies’ market strategy, the current market situation and the main factors that shape it, certain aspects of the insurance business and efficiency, the mergers and acquisitions market, and also insurance legislation.
Insurance companies expect that in 2011 the market will grow an average of 6-10%, but growth rates differ significantly between the top 10 companies and other market players.
In the top 10 segment, two-thirds of respondents expect that premiums collected will grow by more than 10%, while 65% of those surveyed forecast even higher growth rates for these companies.
Among the factors significantly influencing the growth of the insurance market, respondents singled out an increase in bank lending (89% indicated this was a significant factor) and the introduction of new types of mandatory insurance (83%).
Adrian Quinton, head of the Insurance Group of KPMG in Russia and the CIS, notes that other insurance market drivers will include the recovery of demand for insurance and the legislative norms being introduced.
Profits will continue to be low, and the majority of insurance executives are not expecting to see a change any time soon.
More than 80% of companies noted that the largest factors depressing profitability were price dumping, the high cost of doing business, and excessive acquisition costs.
The majority of those surveyed predict that in 2011 the combined ratio will exceed 100% for auto insurance and will be at the level of 90% for other segments.
Adrian Quinton comments on the situation as follows: “Profitability will continue to be low, at least until the end of the current year. This is because the significant rate cuts of the crisis years along with potential under-reserving are likely to cancel out the favorable effects from the current recovery of premiums. Secondly, additional investments are required to upgrade systems to support the steadily rising demand for quality and business efficiency. Also there is a good chance that there will be a new round of price competition among the major companies”.
Companies plan to reduce their costs on external agents and to develop their own sales network, and place their hopes on the banking channel.
More than 80% of respondents plan to make active use of the banking sales channel, and almost the same amount will rely on direct sales. Almost all respondents agreed that bancassurance will play a significant role in the growth in the insurance market.
Adrian Quinton added: “We expect that insurers will continue to reduce their dependence on external intermediaries, especially in the mass insurance segment. Bancassurance has significant potential: for companies that are not among the leaders, this is one of the key ways of staying in the market and creating a successful business model. Chances are there will be a battle among companies for this particular segment. It's possible that this stage will last three or four years, after which we may see the beginning of real consolidation of banking and insurance services.”
Companies plan to optimize their internal processes and IT systems, but also improve their employees’ qualifications.
The majority of executives plan to aggressively implement or upgrade information technologies and processes. The main areas where companies plan optimization are operating costs (83%) and acquisition expenses (67%). More than 70% of respondents said they intended to centralize certain processes in 2011, and 60% plan to optimize the purchasing process. For 70% of companies, managing personnel development will be a high priority. Almost all executives also plan to focus on the development of client relationships.
Executives expect increasing consolidation as a result of fierce competition and legislative changes. Market participants also indicated that they did not foresee major activity in mergers and acquisitions in 2011.
Consolidation is one of the key trends in the Russian market, and is expected to continue. Nonetheless, it will not move forward at such a rapid pace.
More than 70% of the companies say they do not plan any mergers and acquisitions in 2011. As for transactions on the part of foreign companies, it can be noted that foreign investors have reevaluated the risks of the Russian market, and are cautious about entering the market, as a result of the continuing volatility of the economy.
Companies welcomed the new legislative measures and spoke in favor of bringing Russian insurance legislation into harmony with European norms.
In the near future, keeping audited financial statements in accordance with IFRS will become mandatory for all insurers that prepare consolidated financial statements. This will make their financial accounts more transparent, and will also promote understanding and the comparison of financial indicators between different companies. At the same time, the upcoming introduction of new mandatory types of insurance will help to increase insurance demand, and is a strong signal that the government intends to further develop this sector in Russia.
78% of respondents agree that all market participants will benefit from the introduction of IFRS, while 61% of participants in the study believe that this initiative should be deferred to 2013–2015 to give companies more time to prepare.
“The introduction of mandatory accounting under IFRS will result in substantial positive changes, which in the longer term will outweigh all challenges that may arise at implementation stage,” notes Adrian Quinton.
Overall economic growth was named the main factor affecting the level of insurance penetration in Russia.
More than 80% of respondents indicated that an increase in the insurance industry’s penetration of the Russian market required overall economic growth and economic reforms, as well as statutory requirements that organizations and companies obtain insurance coverage for the risks associated with their operations.
In the segment of commercial and industrial risks associated with the fast-growing sectors of the Russian economy, the Russian insurance market has great potential for growth and an increase in the level of penetration. In addition, the market as a whole continues to offer an enormous number of opportunities for refining existing products and expanding the range of services offered.
This study of the insurance market is an annual project of KPMG, and is conducted among the largest insurance companies in Russia.
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