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. Last Updated: 07/27/2016

Fledgling Sector Clings to Protection

MTForeign competition in compulsory third-party liability insurance is a disputed point.
Restrictions on foreign companies' participation in the insurance industry remain among the major obstacles in Russia's negotiations to join the World Trade Organization.

The insurance industry has only been developing in its present form since 1991, and the law has sought to protect it in its relative infancy.

Foreign companies cannot account for more than 15 percent of the industry's total charter capital, and majority foreign-owned companies -- those with more than 49 percent foreign participation -- cannot be involved in obligatory forms of insurance or life insurance (with the exception of American International Group and Allianz, which began offering life insurance before restrictions on foreign companies were introduced in 1993).

The WTO has said Russia's insurance market must be liberalized before the country can enter the trade group.

Herve Jouanjean, the European Commission's director for WTO affairs, was reported to have said earlier this month that Russia is not doing enough to open its markets and is backtracking by asking to impose caps on foreign participation in the banking, insurance, telecoms and distribution sectors.

Yekaterina Mayorova, head of services negotiations for the Economic Development and Trade Ministry, said the restrictions on foreign participation are major sticking points in her discussions with WTO officials, but that more work needs to be done on legal issues before the market can be opened up.

Analysts agree that WTO accession will proceed hand in hand with necessary new laws to regulate the industry.

On Sept. 27, Prime Minister Mikhail Kasyanov signed the Insurance Industry Concept, a plan for insurance market development through 2007 that will demand higher base capital, greater transparency in auditing and accounting, and a national reinsurance system. The new plan -- which has yet to go before the State Duma -- comes on the heels of a law requiring mandatory third party motor insurance that is to come into effect next July.

Mayorova said these new laws are still in their infancy and continued protectionism is necessary to give policy- makers time to develop them.

"What we have right now in legislation is only third party liability," Mayorova said. "One of the main reasons to ask the WTO for a longer transition period is to develop the legal framework for mandatory insurance."

Edgar Pleshkanovsky, director of Russian insurance company Ingosstrakh, said that only legal reforms will create confidence in the market, and only then will local companies and Western firms alike succeed.

"The market needs to develop first before we can speak of competition between firms," he said. "The main issue with the protectionism in the life-insurance sector is to give the government enough time to straighten out the loopholes."

Although protectionism might be an issue at the negotiating table, insurance insiders said WTO accession is essentially a non-issue for an industry that will reform itself in due time not because of international mandates but because of internal necessity.

The population is unwilling to invest in the products of Russian life-insurance companies, but some Russian companies have established good brand names and can compete in non-life industries. Meanwhile, a growing middle class will demand foreign-quality life insurance regardless of WTO accession.

About 1,400 insurance companies exist today in Russia -- almost double the number in Germany and four times the number in France.

Douglas Prentice, managing director of independent broker Eurocapital Group, who has worked in the Russian finance, investments and insurance market for 10 years, said WTO entry is far from being the main issue for insurance.

Prentice said that planned new laws would wipe out insolvent companies with or without WTO accession -- but accession might quicken the process, depending on the speed of changes.

"If Russia was opened to the winds of competition tomorrow all of these companies would be blown away," Prentice said.

In the life insurance market, Prentice said foreigners and locals alike have accomplished little in the market since its opening in 1991.

"In reality, we've had 10 years of protectionism and the market has achieved very little," Prentice said.

Prentice said part of the problem is that a historical precedent for life insurance has never existed. The majority of Russians are unwilling to invest money in anything other than cash, property or their own businesses.

Still, some foreign companies see positive indicators in the life-insurance market and favor reducing protectionist measures to allow expansion.

At AIG Life, chief marketing officer for Russia Mikhail Ryzhkov said the life insurance market is primed for growth.

"The market has considerable depth," he said. "The numbers are low right now. ... But there will soon be a gold rush."

While some expect the introduction of compulsory automobile third-party liability insurance to boost the industry, Prentice sees it as a potentially large problem. Intense competition could corner this new market, with margins falling as companies cut premium rates and increase marketing expenditure to get ahead -- at a time when reinsurance rates have been growing.

"When the losses begin to come in, some companies -- typically smaller companies -- could get into difficulties and this would adversely reflect on the whole Russian insurance market," Prentice said.

"Western companies that are here are largely staying clear of it, waiting for the time when they can pick up the pieces."

How the insurance lobby will strike a compromise on WTO accession is less clear than how industry might reform itself.

"We are not going to do anything to cause any Russian businesses to fail," Mayorova said.