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The Russian insurance market in 2012: The guest for profitable growth

The Russian insurance market in 2012: The guest f...

The Russian insurance industry secured an exemplary position among most neighbouring markets in terms of premium growth in 2011. Russia’s economic recovery paved strong support for the return of demand in non-life insurance, while the reopening of credit lines fuelled life business.


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Despite the robust increase in top-lines, inefficient administration and excessive acquisition costs continue to put pressure on margins. In an increasingly competitive environment management of the bottom line has become the chief concern. While redesign of target operating models coupled with reviewed underwriting processes are expected to provide some relief, prohibitive intermediary commissions must be addressed through tougher regulatory intervention. The growing influence of bancassurance also seems to have tipped the scale further towards intermediary based supply, away from more desirable product driven competition.

Adrian Quinton, Partner, Head of Insurance and Actuarial Services, KPMG in Russia and the CIS, commented: “As Russia continues to offer attractive longer term growth opportunities, 2012 has already born witness to renewed interest from prominent foreign players, while domestic M&A activity is on an upward trend. The incoming requirement for an industry-wide transition to IFRS under the Law on Consolidated Reporting presents a major leap towards transparency and comparability within the insurance sector.”

Executive summary

Top line growth and market development trends

  • Average premium growth in 2010-2011 exceeded 10%, which supported the optimistic outlook on premium growth in 2012. In the recovering market the majority of respondents will maintain focus on premium growth and profitability.
  • The Top 10 players are expected to concentrate market share even further, continuing a trend which started to gain momentum a while ago. Executives attribute top line growth mainly to general economic growth, which may not be too strong in the near future as GDP is forecast to increase by less than 4%.
  • Respondents highlight the historically significant support of the insurance sector by the State as a key growth factor. This has been evidenced further through recent introductions of additional mandatory classes such as Hazardous Objects Insurance.
  • The motor sector remains the predominant contributor to growth for most insurers, assisted by an expected increase in credit finance of 20-25% coupled with a growing car market.
  • The life market seems to have began to unlock some of its potential but the outlook for further growth rests largely on regulatory improvements in the tax treatment of contributions and benefits associated with life products
  • Notwithstanding the excessive commissions demanded by banks and car dealerships, insurers appear to remain largely committed to reliance on these channels at the expense of direct distribution

Improving bottom line efficiency

  • Despite the apparent need to streamline and automate operating processes, the majority of insurers are not planning to significantly increase IT spend relative to premium. Most of our respondents take the view that improvements in IT in 2012 will be centered on client relationship management (CRM) systems.
  • Administration costs and acquisition expenses are the main bottom line focus areas, whereas risk valuation and claims are seen as less important compared with last year when 50% respondents cited the latter as key.
  • According to respondents, cost cutting measures in 2012 will be mainly associated with centralisation of certain functions and streamlining of personnel expenses.
  • Acquisition costs are being driven by intensifying competition and a rebound in commission levels, both of which are exacerbated further by the growth in sales through banks. Cost containment measures such as optimising contractual relationships with intermediaries may be difficult in view of their current sway in the market. At the same time free capital is needed to upgrade infrastructure to reduce the share of business sold through intermediaries, adding pressure to profitability in the short term.
  • Improving relationships with partners and managing fraud are seen as the essential measures aimed at reducing claims costs. However, the former may prove less effective owing to the high bargaining power of intermediaries while the latter appears a little contradictory to companies’ stated intentions not to focus as much on claims risks in 2012.

As in previous surveys, respondents do not foresee marked improvements in profitability in major lines such as CASCO and VMI. Profits remain concentrated in the corporate property segment while OSAGO is expected to fare better in light of statutory tariff adjustments.

Regulation and IFRS

  • Our respondents feel that the insurance market is in imminent need of more robust legislation and regulatory reform, predominantly in the areas of capital adequacy, monitoring of fraud and associated penalties and a leveling of the playing field between insurers and intermediaries.
  • In light of the recently endorsed Law on Consolidated Reporting, mandatory transition to IFRS for insurers in Russia is seen as a progressive step towards finance reform that will ultimately benefit all stakeholders.

Market dynamics and M&A

  • The majority of respondents expect the Top 10 to increase their market share by more than 2% in 2012, which is similar to observations in prior years. The continued absorption of market share by the leading players will be supported through M&A as well as organic growth on the back of competitive differentiators such as brand and strong branch networks.
  • Most executives see deals involving major insurers as likely; further, our respondents expect M&A activity to be both domestic and cross-border in nature. Furthermore, more than a third of respondents anticipate new foreign players to enter the market in view of the relative attractiveness of the market coupled with medium term expectations of an increase in the foreign capital quota. Executives generally do not foresee insurance license withdrawals among leading insurers in 2012.
  • Respondents cited a mild recovery in price valuations of the Top 10 segment compared with one year ago. The outlook on pricing of companies ranked outside of the Top 10 is less optimistic which is partly demonstrated by the gradual weakening of their market positions vis a vis the market leaders.

The abovementioned trends are expected to intensify competition in a flux market. In order to maintain positions, players will be expected to transform business, risk and finance models and have a more comprehensive strategy.

© 2021 KPMG refers  JSC “KPMG”, “KPMG Tax and Advisory” LLC, companies incorporated under the Laws of the Russian Federation, and KPMG Limited, a company incorporated under The Companies (Guernsey) Law, as amended in 2008, member firms of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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