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. Last Updated: 07/27/2016

Insurers face high-risk future in Russia

Chaos, for now, will continue to prey on Russian insurers.


Industry sources here said this week that the passage of long-awaited insurance legislation has likely been delayed until September. Until then, insurers here will continue to operate in an environment approaching utter lawlessness.


"We hear the first draft will be read next week, but it probably won't be ready for passage until after the summer recess", said a representative of several major U. S. insurers here, who requested anonymity. "If you asked me last January, I would have expected it to be in place by now".


Most industry sources agree. In April several said legislation would be passed by May. Now they are less certain when, if ever.


"Frankly, I do not know now when the law will be passed. It's either very soon or no one knows when. The market needs it right away", said Mikhail Safronov, chairman of Ingostrakh, the former state monopoly for international insurance, now a private stock company.


Safronov said one likely sticking point is how Russian insurers will function in other former Soviet republics, and vice versa, given even less legislative progress there. For now, few republics have drafted, and virtually none have passed, legislation.


Under current sparse regulation, insurers licensed in Russia can do business in other republics, but will this continue?


"That is the question. How it will be with the former republics, I don't know", Safronov said. "This will lead to some adjustments".


Any adjustments would further delay legislation, exacerbating conditions in a market which some say has a criminal element. Insurers here operate without a system of supervision. Yuri Bugayev, former chairman of state insurer Gosstrakh, now functions as supervisor, albeit without rules and few resources.


There are also no rules on how insurers invest premiums. Out of the roughly 2, 000 insurers registered here only 120 are licensed, according to statistics obtained by The Moscow Times and confirmed by Safronov.


The news is also bad for potential foreign investors, even if current drafts are passed. While Russian foreign investment legislation now allows 100-percent foreign-owned companies, the draft insurance legislation limits foreign interests to joint ventures with 49-percent equity.


Most industries here that limit foreign investment are military related. Western insurers question why they are being singled out.


"I can't say it's the most attractive environment for foreigners", said the U. S. industry source, citing hyperinflation and political and legislative uncertainty. "I can't understand why the Russians want to keep us out. Limited investment is one of our principal complaints".


The other key issue affecting foreign investment is property rights. Private ownership of land is still not permitted. Gosstrakh did not insure factories in the past when they operated as state property. With privatization here moving forward, albeit slowly, a potentially vast market exists.


The young, Russian insurance market has started virtually from scratch. Without adequate foreign investment, development will likely take years, sources said. Safronov, a veteran of international insurance but also chairman of a former monopoly, said he feels comfortable with limited foreign participation.


"It's reasonable. It is a virgin market, and it's better to give it a national flavor first", he said.