You're reading: Insurance industry to find strength in consolidation

Ukraine’s undeveloped insurance market shrank last year, leading to further consolidation and lower premiums. Meanwhile, the ongoing recession will continue to put pressure on domestic insurance companies in 2014.

Last year was characterized by rising gross written premiums in the first nine months of the year followed by a sharp decline in the fourth quarter, market consolidation and a decline in insurance rates. According to Halyna Hudyma, president of the League of Insurance Organizations of Ukraine: “The market suffered a 5 percent decline in insurance premiums, while according to preliminary data, Hr 20.3 billion in gross written premiums was collected, or 5.5 percent less than in 2012.”

Insurance remains a financial sector with vast long-term prospects because Ukraine, despite being a large industrial nation, spends very little on protecting property and persons so far. According to Fitch Ratings, per capita expenditures for all types of insurance in Ukraine is a paltry Hr 680, while in Asia it is four times bigger and in Europe – more than forty times.

The industry regressed also in terms of regulation. Alexander Zaletov, chief editor of the leading industry review publication Insurance Top, says “the changes in the tax code that improved the market situation in 2012, which was the first year of better qualitative development of domestic insurance, flopped in 2013 and the industry returned to its old diseases. Almost Hr 5.5 billion comprised transactions related to tax optimization.”

Andrey Peretyazhko, first vice president of AXA Insurance, one of Ukraine’s largest insurance companies, argues that “2013 was a year of lost opportunities and negative trends than a year of great breakthroughs and successes. The market continued to stagnate and remains unattractive to investors. Many shareholders, particularly small and medium-sized insurance companies are not willing to support them financially, so the actual number of bankruptcies increased.”

Part of the problem lies in the sector’s stunted growth. “The Ukrainian insurance market continues to lag behind the economy, and the forecast results of 2013, the share of insurance in gross domestic product was just 1.61 percent, which is 0.49 percentage points lower than in 2010,” Hudyma says.

In addition, while KASKO (vehicle insurance) and OSAGO (drivers’ and passengers’ liability insurance) are compulsory, health insurance is not. However, voluntary medical insurance and life insurance too have yet to catch the eye of the Ukrainian insurance consumer, although insurance companies are working to bring new products to the market in response to consumer needs and affordability.

The industry did have a few successes last year. “There were improvements in gross figures. In 2013 we saw an increase in revenues from households, Zaletov says. “As usual, property insurance took the lion’s share of gross written premiums at Hr 3.5 billion, followed by KASKO, even though in the past five years KASKO insurance has dropped by half. OSAGO ceased to grow at Hr 1.9 billion.” For Peretyazhko, the insurance sector together with the financial sector and retailing developed new products, such as insurance for credit and installment sale. “This is already a big business,” Peretyazhko says, “which de facto did not exist five years ago. This suggests that the market is able to find new niches to provide themselves with new financial flows.”

This year should see a return to qualitative improvements to the industry, although profitability should remain hard to come by. Stress-testing for insurance companies, which the State Commission for Financial Services made compulsory on Feb. 13, should help weed out the weak companies and boost consumer confidence, according to Anatoly Chubinsky, chief executive officer of NGS insurance company.

These qualitative improvements should be boosted by great unity of purpose within the industry. “Last year, all three associations of insurers for the first time together came up with a single proposal to the regulator and parliament to protect their interests,” Peretyazhko explains. “Despite the polarity of opinions, the unions were able to find a compromise and negotiate in the name of progress for the first time in five years. The greatest impact may be following the enactment of the new law “On Insurance”, which is now ready for a vote on second reading.”

Another expected trend in all segments of insurance will be tougher price competition between the leaders. According to Hudyma, the domestic insurance market will continue the process of redistributing business amongst the top 30 insurers because the ongoing economic recession will pressure companies and individuals into reducing spending on insurance, preferring cheaper policies. However, in 2014 the insuring of legal entities should grow by 10%.

One area of projected growth is the usually underwhelming life insurance, which was valued at just Hr 1.6 billion in 9M 2013, or 35 percent up year-on-year, yet comprising less than 10 percent of GWP. Zaletov, Hudyma and Peretyazhko all agree. “Also expected is a relatively high growth rate of life insurance, as insurance premiums continue to provide credit to life insurance borrowers and accident insurance,” Zaletov explains. “We launched a life insurance company last year, despite the unattractive investment climate and the most favorable forecasts of the economy for the near future,” Peretyazhko said.

Kyiv Post business journalist Evan Ostryzniuk can be reached at [email protected].