• A revision of OMTPL terms has pushed insurance premiums up to an average level almost twice as high as the one seen before. Although the number of new contracts squeezed, the segment still lead the insurance market in 2015.
  • Average losses are growing fast thanks to insurance coverage extension, traffic lawyer activities and more expensive spare parts and works, reflecting in turn inflationary pressures and ruble weakening, while insured event frequency remains virtually unchanged.
  • Loss ratios may reach critical levels. Over the last two years, surging average losses have pushed new contract loss ratios from 65% to 78% and, unless trends reverse, might well see them climb as high as 94% in a year’s time, while the combined loss ratio may exceed 118%.
  • Growing losses jeopardize the whole system stability. Aggravated by uneven geographical distribution of losses, the current situation may run insurance companies into losing money, giving up OMTPL licenses and further raising tariffs.
  • RAMI initiatives may help. A single agent initiative proposed by the Russian Association of Motor Insurers (RAMI) should solve the problem of insurance policies unavailability in some regions and redistribute the loss burden across a broader range of companies. A positive effect may also come from physical settlement of losses and insurers bringing claims settlement in line with court requirements.
  • Increasingly loss-making insurers see their credit profiles under pressure. However, a successful implementation of RAMI initiatives may mitigate the negative impact the market factors have on creditworthiness of insurance companies.

The average premium doubled, while the number of contracts shrank

Over the last two years, OMTPL terms changed twice – in October 2014 and in April 2015 – resulting in a significant increase in liability limits coupled with higher tariffs. As a result, the average contracted insurance premium almost doubled.

At the same time, the number of sold policies is shrinking due to what ACRA believes to be related to the economic downturn depressing private incomes. However, the recent quarters saw the downward trend in new contract sales mitigate.

Figure 1. The average premium and the number of new contracts

Source: Central Bank, ACRA estimates

Due to a tariff increase, the OMTPL segment lead the insurance market in terms of growth (45%) and market share (21%) in 2015.

The average loss is growing fast

The average loss per an insured event is growing rapidly. ACRA sees one of the reasons for that in increased limits, resulting from changing insurance terms in October 2014 and April 2015. In addition, the average loss is pushed up by inflationary pressures on spare parts and garage works prices, as well as by traffic lawyer activities. By ACRA’s estimates, the aggregate effect of limits growth ran into some 40%, while other factors provided for the average loss growing 4.3% quarterly in 3Q13–1Q16.

An analysis contract numbers and loss claim cases reveals the average frequency of insured events either staying flat or showing a modest growth. An increase in the number of insured events seen over the last two quarters should be regarded as a deviation from the norm. ACRA expects the average ratio of insured events in 2016 to amount to 65-70 cases per 1,000 contracts.

Figure 2. Average insurance payouts and loss frequency

* The average payout on claims, settled during a relevant period.
Source: Central Bank, ACRA estimates

Growing losses jeopardize the OMTPL system stability

In this study, the loss ratio is the total expected payouts on insurance contracts concluded over a given period divided by the total insurance premium for these contracts.

ACRA’s loss ratios are estimates based on the average premium, frequency and dynamics of the average loss – all as calculated above. The contracts signed in 1Q16 are deemed to carry a loss ratio of 78%.

With current trends in place, the average loss for contracts to be signed in 1Q17 will run into RUB 80 th, while the loss ratio for the entire segment will reach 94%.

ACRA believes that the forecast implying a quarterly growth in the average loss by 4.3% has a fair chance of becoming reality for the following reasons:

  1. Traffic lawyer activities may continue to build up, while insurance companies hardly have effective tools to deter them at the moment.

  2. Ruble’s crash after the devaluation in 2015 is still not fully reflected in spare parts prices, by our assessment.

  3. There is a risk that insurance coverage extension to injury has not yet affected payout statistics, as such damages usually take long to settle. Moreover, such cases may be attractive to traffic lawyers.

Figure 3. The average loss and loss ratio forecast

* The expected average loss for contracts, signed during a relevant period.
Source: ACRA estimates

The future hinges upon proposed initiatives

Operating costs in the OMTPL segment, including those related to contracts signing, loss adjustment and daily activities, may be estimated at 20-30% of the insurance premium.

This figure, however, does not include court fines and penalties that the companies attribute to other expenses. If these costs remain as they were in 2015, they would account for about 4% of the insurance premium.

RAMI president estimates, that the total of fines and penalties in 2015 amounted to RUB 10 bln.

Thus, the combined ratio for contracts signed in 1Q16 may be estimated at 102-112%, while in view of the expected surge in losses this ratio for contracts to be concluded in 1Q17 should exceed 118%, even assuming an optimistic expense ratio. In ACRA’s opinion, this will make another increase in tariffs inevitable.

The combined ratio for contracts concluded over a period is the total expected expenses, including insurance payouts, divided by the insurance premium for these contracts.

Another problem for the market lies in an uneven distribution of losses across the regions. Companies whose portfolio is overweight with unprofitable regions are, most likely, already in the red in terms of their OMTPL financial performance. A possible exit by these companies from the segment poses a serious threat to the of the entire OMTPL system stability.

Among the initiatives that may stabilize the segment one may pick the following:

  • a single RAMI-based agent;
  • physical losses settlement;
  • streamlining law enforcement on the OMTPL market through cooperation between RAMI and judicial authorities.

The single RAMI agent is supposed not only to foster availability of insurance services to the population of troubled regions, but also to promote a uniform distribution of losses between companies. Unlike the situation with electronic policies, sales through the single agent will be mandatory for insurance companies and that should efficiently solve the most acute and urgent problems on the market.

On June 1, 2016, the single RAMI agent launched insurance policies sales in five regions: Krasnodar, Volgograd, Rostov, Chelyabinsk and Murmansk regions.

ACRA is also positive on RAMI’s initiative to work with courts and on the idea of physical settlement of losses. Payments in kind, in our opinion, may be an effective means to reduce fraud, while streamlining law enforcement and bringing the claims settlement process in line with courts’ requirements will cap both, traffic lawyers’ incomes and penalties imposed on insurers.

In the long term, the regulator will face a choice between a constant fine-tuning of regulatory standards and a stance towards liberalizing tariffs. The latter seems preferable to us. Associated risks may be effectively managed through tightening of financial stability requirements for companies operating on the OMTPL market and by means of limiting market shares of some companies in certain Russian regions.

Motor insurers’ credit profiles are under pressure

Surging losses in the OMTPL segment are exerting serious pressure on insurers’ credit profile estimates. If the current trends persist, they will surely entail significant financial losses for sector companies.

However, a successful implementation of the initiatives described above may significantly limit or even completely eliminate this pressure. If implemented, they will have the greatest impact on credit profiles of those companies whose insurance portfolios are skewed towards OMTPL contracts concluded in the troubled regions.

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Alexey Bredikhin
Director, Financial Institutions Ratings Group
+7 (495) 139 04 83
Evgeniy Sharapov
Associate Director, Financial Institutions Ratings Group
+7 (495) 139 04 95
Natalia Porokhova
Senior Director, Head of Sovereign Ratings and Forecasting Group
+7 (495) 139 04 90
Maria Mukhina
Operating Director
+7 (495) 139 04 80, ext. 107
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