Insurance & Reinsurance 2022

Last Updated January 25, 2022

Russia

Trends and Developments


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SEAMLESS Legal is an alliance of independent law firms allowing clients to benefit from high-quality, business-focused advice in law and tax matters. Over 5,000 lawyers in 45 countries from this firm offer clients business-focused advice tailored to their needs, whether in the local market or across multiple jurisdictions. SEAMLESS Legal has been supporting many of its clients in the challenging Russian economy since 1992. Over 50 experts qualified in Russian, French, English and German law advise international clients on every aspect of business in Russia, and assist Russian clients in Europe and beyond. The firm's insurance sector lawyers work with some of the market’s largest insurance businesses, offering exceptional depth and breadth of expertise to deliver comprehensive solutions to the sector. The firm has developed the SEAMLESS Legal Insurance App to help heads of legal and heads of claims stay abreast of the latest legal developments and emerging risks impacting the market.

Latest Developments

Branches of foreign insurers

There have been several developments in the Russian insurance and reinsurance market that merit attention. One of them relates to the opening of the market to branches of foreign insurers. When Russia joined the WTO in 2012, it promised to allow foreign insurers market access through local branches in addition to subsidiaries. A transition period of nine years was negotiated that expired in August 2021. To comply with its international obligations, Russia adopted a law that establishes requirements for setting up and operating branches of foreign insurers.

Branches are subject to licensing and accreditation by the Central Bank of Russia. The scope of the licence is limited to voluntary life, accident and health and medical insurance, voluntary property insurance and compulsory motor third-party liability insurance. To establish a branch in Russia, a foreign insurer must meet a few requirements. For example, a foreign insurer must be registered and have a permit to carry out insurance activities in the territory of a WTO member state. The foreign insurer cannot be registered in offshore zones, nor directly or indirectly controlled by persons registered in offshore zones.

The foreign insurer must have not less than eight years of experience in selling life insurance and not less than five years in selling other types of insurance. It is also required to have at least five years’ insurance experience in providing insurance services through branches in other countries for those insurance services it intends to provide in Russia. Furthermore, to be able to open a branch in Russia, the foreign insurer must have assets of not less than USD5 billion.

As regards insurance operations, branches are subject to the Russian requirements for the formation of insurance reserves. In addition, the Russian branch of a foreign insurer is obliged to reinsure up to 10% of the risks with the Russian National Reinsurance Company, similarly to all Russian insurance companies.

Finally, the foreign insurer must keep a security deposit with the Russian Deposit Insurance Agency (a state agency acting as the insolvency administrator of the Russian financial institutions) that is sufficient to fulfil the obligations of the foreign insurer under the insurance contracts concluded in Russia. The exact amount of the security deposit is accessed quarterly using actuarial calculations in accordance with the subordinate legislation on the procedure of actuarial calculations, evaluation and checking the adequacy of the security deposit that is yet to be adopted by the Central Bank of Russia.

To sum it up, technically, Russia has complied with the WTO requirements that were supposed to ease the access by foreign insurers to the Russian insurance market. However, conditions for opening and operating branches are equally burdensome if not more complicated compared to those that existed for setting up and operating subsidiaries of foreign insurers in Russia. Unsurprisingly, foreign insurers are not lining up to apply for a licence to set up and operate a branch in Russia.

Solvency

Another significant development that will have a long-lasting effect on the Russian insurance market is implementation by the Central Bank of Russia of new rules and approaches concerning the financial stability and solvency of insurers. As of 1 January 2022, all Russian insurers and reinsurers will have to comply with the new risk-based capital solvency regime, including undertaking specific parameters (close to the Solvency II Directive).

Also, the government continues its efforts aimed at increasing capital requirements. With effect from 1 January 2022, the minimum charter capital requirements come into force:

  • for non-life insurance companies – RUB240 million;
  • for life insurance companies – RUB380 million; and
  • for reinsurance companies – RUB560 million.

With effect from 1 January 2023, the minimum charter capital must be as follows:

  • for non-life insurance companies – RUB300 million;
  • for life insurance companies – RUB450 million; and
  • for reinsurance companies – RUB600 million.

COVID-19

These days, no discussion can avoid COVID-19. As such, a discussion about the insurance industry would not be comprehensive if the impact of COVID-19 were not mentioned. The UK insurance industry has been severely affected and the FCA test case poses questions as to whether the insurance industry in other countries has faced similar problems.

The effect of COVID-19 on the Russian insurance market has not been dramatic. In fact, there have been almost no issues with coverage as the insurance penetration level in Russia is very low. It would be safe to say that no Russian SMEs have obtained property and business interruption cover, while property and BI policies for larger businesses do not cover BI other than as a consequence of physical damage. However, COVID-19 has influenced travel insurance to the extent that the number of cancellations has increased, with a subsequent decrease of demand for new policies due to travel bans.

Russia has avoided the turbulence that has shaken the UK insurance industry. Nevertheless, the Central Bank has provided certain temporary regulatory reliefs to insurers, mostly easing reporting requirements and lifting penalties for late reporting. As employers, insurers could use state-funded, low interest loans to finance their payroll obligations and some office rental expenses. Those measures were cancelled once the lockdown ceased in 2020.

Trends

Regulation and supervision

The strengthening of controls and a tightening regulatory grip are trends dominating the Russian financial market, including in insurance. The Central Bank, acting as the mega regulator of the financial sector, continues its efforts to consolidate and unify the regulatory regime for all financial services, aiming at ensuring financial stability, transparency and consumer protection.

The changes introduced into the regulation of financial services and financial instruments seem to be a logical reaction to a considerable increase in the number of individual investors. Moreover, the changes refer not only to the securities market, but also regulate the rendering of financial services as a whole, extending to credit, pension and insurance products. It is understood that in the future these requirements may be specified or supplemented by acts of the Bank of Russia or self-regulatory organisations.

Consumer protection

According to the Central Bank of Russia, a trend in 2020 was the mass arrival of retail investors in the stock market. The number of clients on brokerage services increased 2.3 times, and at the end of the first quarter of 2021 the number of unique investors reached 15% of the economically active population of Russia.

The increase in the number of investors, most of whom have no experience, led to a review of the regulation of financial services and establishing requirements for disclosure of information on financial services or products to consumers.

These requirements apply to credit institutions, insurers, brokers, management and investment advisers, private pension funds, microfinance organisations – in each case in relation to financial services or instruments offered by such an organisation (eg, securities, derivatives, insurance products, trust management, investment advice, pension agreement or consumer credit).

The Central Bank has developed detailed rules on how insurance products must be sold to consumers. The rules relate to the scope of information that must be provided to the consumer, the ways of providing that information, disclosure obligations of the insurer about agency commissions, return on investment (for life insurance products), exclusions, etc. All consumer insurance products must provide for a cooling-off period of 14 days, subject to a full return of the premium.

Moreover, financial institutions, including insurance companies, are not allowed to sell certain financial instruments (eg, life insurance products with an investment component) to unqualified investors until they have successfully passed a test, the purpose of which is to ensure that the investor has sufficient knowledge to decide whether to conclude a transaction.

Life insurance

Another trend seems to be a logical reaction to a considerable increase in the number of life insurance policies with an investment component, accompanied by the increasing number of consumers’ complaints regarding mis-selling. The Central Bank tries to respond to these complaints by introducing requirements to life insurance and other consumer insurance products. The regulatory trend goes into the direction of the insurance product regulation and interference into the relationship between the parties to the insurance contract. The Central Bank dictates what insurers can and cannot put into their policies, often going beyond its statutory authority to stop dubious distribution practices.

In parallel, the government is trying to introduce new kinds of life insurance, including unit-linked insurance products. As Russian law is not particularly suited to such combined insurance and investment products, a serious consideration is needed before pursuing any such route.

Another government plan is to extend the system of state guarantees for bank deposits to life insurance policies and develop private pension insurance products to support the struggling state pension system.

CMTPL (OSAGO)

Compulsory motor third-party liability insurance (OSAGO) has been in the focus of the government’s attention since it was first introduced back in 2002. The government has tried implementing various options to combat a high level of fraud and to make policies easier to purchase and claims easier to handle. Low margins and the high loss ratio of this compulsory kind of insurance result in the lack of capacity including reinsurance. The government is now planning to introduce a compulsory reinsurance pool that OSAGO insurers would have to be a part of even if they do not have a reinsurance licence.

Intermediaries

Russia has been at the front line of digitalisation and e-commerce, especially in the financial sector. Online banking and other services are widespread all over the financial market. A notable trend in this field is the growing number of financial marketplaces where consumers can get bank loans, insurance policies, etc, by clicking a few buttons in their mobile application. The government has even promulgated a special law on financial platforms to establish rules of e-commerce in the financial sector. Obviously, the trend towards further and deeper digitalisation of financial services will continue to dominate the agenda.

Another visible trend on the Russian insurance market is the increasing government attention towards insurance intermediaries. At present, insurance agents are not subject to any regulation, while insurance brokers must obtain a licence and are supervised by the Central Bank. The Central Bank is working on the idea of introducing a regulatory framework for agents to create an even playing field for intermediaries.

In addition to the Central Bank, Russian tax authorities are looking very closely into the arrangements between insurers and intermediaries. There are increasing examples of Russian tax authorities successfully challenging payments of agency and brokerage commissions as unjustified and exorbitant. Significant additional taxes and penalties have been placed on insurers as a result.

Reinsurance

Besides insurance intermediaries, the Central Bank and Russian tax authorities are focusing on reinsurance, especially cross-border reinsurance arrangements. In many cases, they have been successful in recognising reinsurance contracts as fictitious transactions aimed at getting the money out of Russia. It seems that the trend of scrutinising reinsurance contracts and introducing barriers for frivolous reinsurance arrangements will continue to evolve in the Russian regulatory environment.

ESG

The ESG agenda is probably one of the hottest topics among businesses in Russia. Both the government and businesses alike are considering various initiatives aimed at decreasing carbon footprints and promoting “green” technologies, products and services. For instance, the Central Bank, as the securities market regulator, has issued guidelines for publicly traded companies regarding the consideration of the ESG factors and sustainable development issues in the corporate environment.

The insurance industry is not immune to this trend. The All-Russian Union of Insurers, a leading insurance industry association, has created an ESG working group to explore the ways for developing “green” initiatives the insurance sector.

A related topic is the growing demand for ecological insurance. After the Norilsk Nickel fuel spill in May 2020, the need for additional sources for compensation of the environmental damage has become obvious. It would be reasonable to expect the government to look towards introducing compulsory cover for environmental risks of hazardous industries in addition to the compulsory accident and health insurance already in place.

M&A

Any analysis of the changes under way in Russia would be incomplete without mentioning the ongoing M&A activity in the Russian insurance market. It seems that the exodus of foreign insurers from the Russian insurance industry continues. The most recent examples include ERGO selling its life and non-life subsidiaries to Russian insurers, Metlife exiting the life insurance market and selling its business to a Russian bank which has also acquired the life insurance subsidiary of Talanx.

At the same time, Russian private equity funds are demonstrating a growing interest in the insurance industry. They are considering both minority and majority stakes in general insurance companies as either a pre-IPO move or as a longer strategy aimed at financing expansion and business growth.

Another area of interest for investors is insurtech, including marketplaces and other e-commerce solutions that continue to increase their presence in the insurance industry.

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leonid.zubarev@cmslegal.ru www.cms.law
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Trends and Development

Author



SEAMLESS Legal is an alliance of independent law firms allowing clients to benefit from high-quality, business-focused advice in law and tax matters. Over 5,000 lawyers in 45 countries from this firm offer clients business-focused advice tailored to their needs, whether in the local market or across multiple jurisdictions. SEAMLESS Legal has been supporting many of its clients in the challenging Russian economy since 1992. Over 50 experts qualified in Russian, French, English and German law advise international clients on every aspect of business in Russia, and assist Russian clients in Europe and beyond. The firm's insurance sector lawyers work with some of the market’s largest insurance businesses, offering exceptional depth and breadth of expertise to deliver comprehensive solutions to the sector. The firm has developed the SEAMLESS Legal Insurance App to help heads of legal and heads of claims stay abreast of the latest legal developments and emerging risks impacting the market.

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