Russian insurance study reveals conflict of interests between shareholders, management
MOSCOW. Dec 5 (Interfax) - A study by international management consulting firm Oliver Wyman, carried out with the All-Russian Insurance Association (ARIA) and based on a poll of Russian insurance company chiefs, has revealed a basic conflict of interests between shareholders and top managers in Russia's insurers, Oliver Wyman Senior Manager Goetz Kuras told the press Monday.
This sheds light on various conflicting conclusions that can be drawn from an analysis of the results of the poll conducted on 2010-2011 results.
Many insurance companies are building their businesses on the cash flow model. This envisages insurer liabilities being met with premiums that have just been received. "Such a model counts on constant business growth and is at risk when premium collections drop, in times of crisis," Kuras said.
"Top managers at leading insurance companies are highly professional and have a deep understanding of the processes on the insurance market; they are oriented towards long-term strategic development models and aims. Often insurance company shareholders and participants follow different aims and are oriented toward cash flows that can be counted on in the short term. Thus, the plans of managers and owners of Russian insurers do not always coincide on this. It is not unusual for insurance not to be the main business for the owners and they do not have a deep enough understanding of the nature of the business or its possible risks," Kuras said. These circumstances can explain the conflicts that the Oliver Wyman survey has revealed, he said.
The survey of Russian company chiefs shows that their optimism and hopes for achieving a stronger insurance market in 2012 are growing. However, they consider further any chance to further economize on spending to be virtually exhausted. They expect to increase spending on core business management and on salaries and lease payments. Insurers that have a rather high combined loss ratio do not expect it to go down. They do not have high expectations about improving the loss indicator.
The survey showed that the retail business accounts for 50% of Russia's insurance market (without mandatory medical insurance). Yield in this segment is not very high - around 10%, Kuras said. "Thus, the western investor cannot be sure that serious spending on expanding the distribution network in Russia can pay for itself in the foreseeable future," Kuras added.
The largest sector within retail insurance - third party liability motor insurance is loss making, the survey shows.
In times of crisis, motor insurers largely rely on agency sales. However, the study shows that company profits are concentrated in the sales office channel. Agent, dealer and retail broker sales do not provide high yield or simply yield losses.
Insurance company chiefs point out the problem of insufficient capitalization on the insurance market. They expect further consolidation and note destructive competition as a major threat.
Destructive competition refers to the application of unreasonably low prices and paying costly commission to intermediary sellers, Kuras said
Almost 50% of the insurance company representatives polled fear for the stability of their company's liquidity.
Insurers say the results of their investment are positive but they play a smaller role in company profits than they do in western countries.
The products offered by Russian insurers has not seen any serious changes recently, the study shows.
"The survey showed that most small insurance companies do not have long-term development strategies, while large insurers are seriously concerned with these issues," Kuras said.
He said the preferences of foreign non-residents in the 9 year transition period after Russia joins the WTO will become evident after legislative clarifications on the status of foreign company branches on the Russian insurance market (9 years after Russia joins the WTO, such branches can be opened in Russia).
When legislation on this issue is established, predictions can be made on whether it is beneficial for non-resident companies to open their own branches in Russia or to acquire stakes in Russian insurance companies.