Analytical commentary

The establishment of the National Reinsurance Company (NRC) will increase reinsurance capacity for Russian insurers, prompt changes to fronting programs, increase transparency of reinsurance transactions, but will not lead to radical changes in the industry.

The amendments made to the Federal Law “On organization of insurance business in the Russian Federation” in July 2016 have defined the new contours of the reinsurance market. An inception of a reinsurer with a RUB 71 bln worth of capital will broaden opportunities for insurers in terms of risk placement on the Russian reinsurance market. A compulsory 10% cession to the NRC required by the new law will increase the share of reinsurance premium placed in Russia. According to the Bank of Russia, in 2015, 82% of reinsurance premium was allocated as coverage of risks transferred to the international reinsurance market. ACRA expects that in 2017-2018 the share of reinsurance premium placed in Russia will grow.

Figure 1. The share of premium directed for reinsurance abroad in 2012-2015 consistently exceeds the one placed on the Russian market

Source: Bank of Russia

Starting 2017, the NRC will feature on reinsurance program participant lists of all Russian insurance companies. ACRA believes that large companies will retain leading share in obligatory contracts, while the reinsurance premium for the NRC will be formed via reducing the share of other international and Russian reinsurers that are not contract leaders.

Insurance of civil liability of air transport owners, business risks, aircraft and property of legal entities in Russia may run into potential losses so significant that the need for reinsurance would be particularly acute. Over the past four years, over 50% of collected insurance premiums for these types of insurance have been consistently directed to cession.

Figure 2. The percentage of premium transferred to reinsurance is consistently high for certain insurance types

Source: Bank of Russia

The provision about a compulsory cession to the NRC will allow the latter to assume a role of risk aggregator for the types of insurance mentioned. ACRA expects that the NRC will be able to come up with a competitive offer for small- and medium-sized Russian insurance companies and thus emerge as a leader of their reinsurance programs. NRC’s competitive advantages include the absence of a risk of ambiguous interpretation (as insurance and reinsurance contracts will be in Russian), reinsurance premiums paid in rubles (implying no need for converting currency and obtaining transaction certificates), and, finally, a single legal framework to operate under.

Changes to fronting programs are expected

As insurers now have to offer part of their risk to the NRC, this will introduce some uncertainty into the programs implemented by subsidiaries of Western reinsurers. In some cases, subject to corporate rules, Russian insurers in fact will appear as nominal policy issuers while transferring a significant part of risk to their parent companies – major Western reinsurers.

Some difficulties may also await investment programs for which Western investors have certain requirements regarding insurance and reinsurance programs. Even the NRC, with its rather large capital for the Russian market, may not always be able to match those requirements.

Reinsurance transactions to become more transparent

On the other hand, an important positive the new environment has in store for the Russian market is an increase in reinsurance transactions transparency. As insurers are required to offer 10% of reinsured liabilities to the NRC, the latter will accumulate information about all reinsurance flows within Russia. The compulsory risk offer rule will either heighten barriers for capital withdrawal through reinsurance or will make such operations much costlier. Likewise, insurance companies may find their opportunities to use reinsurance as a tax optimization tool dramatically limited.

Sanctions related risks may not be fully reinsured

According to the law, the NRC is obliged to accept only 10% of the so-called sanctions related risk. The destiny of the remaining 90% of this risk is still in limbo. The declared value of NRC’s capital implies that it was calculated with regard to a maximum loss such risks may be expected to entail and that actual net retention placed on the Russian market may significantly exceed 10%.

The use of a multiple reinsurance mechanism for one and the same sanctions related risk will require the NRC to keep in net retention the amount of risk much higher than the 10% set by the law. With each risk transfer, each reinsurer will keep in net retention a minimum amount of risk, while transferring most of it to another reinsurer. The NRC will in turn be forced by the same law to accept 10% of the amount transferred. A repeated application of this mechanism may create an undesirable cumulative effect for the NRC.

Russian specialized reinsurance companies to see more pressure on their credit profiles

In 2017, the Russian incoming reinsurance market will see an emergence of a new leader – the NRC, an event that will squeeze incomes of Russian specialized reinsurance companies. As a result of a struggle over reinsurance premium, risk assessment requirements in these companies may be relaxed, which will inevitably entail losses and, consequently, negatively affect capital adequacy, with the latter putting more pressure on credit profiles of specialized reinsurance companies.

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