Training on sovereign risk credit analysis, October 24

Life insurance takes market lead, car insurance is driven back

Russian insurance market 2020 outlook update

  • Expectations are up for insurance market growth in Russia. Compared to the March 4, 2016 forecast entitled "Insurance market in 2016 will grow by 8%: all segments, except for the hull, will show positive dynamics", ACRA has upgraded its forecasts for growth of life insurance and OMTPL, whereas the motor hull market outlook has received a downward revision.
  • Life insurance is to outpace the other segments, owing mainly to investment life insurance, whose development will be spurred by banks’ active involvement in policy sales and the dropping deposit interest rates. Although after 2016, growth of investment insurance will lose momentum, this product will still be driving life insurance market share gains from 13% in 2015 to 23% in 2020.
  • Motor hull sales are to slide again in 2016, following the previous year’s trend. Auto sales are projected to reach 50-60% of the 2012 volume, and by 2020, we anticipate the slow recovery of the market to have resulted in the motor hull share dwindling down to 17% from 23% in 2013. Concurrently, OMTPL premiums will grow due to the expected surge in the number of insured vehicles.
  • Insurance market growth rate is to outperform the average economic growth, which will have a favorable effect on insurers’ credit profiles.  On the whole, the upward revision of the market forecast is positive in terms of insurance companies creditworthiness assessment.

Table 1. Insurance premiums forecast for 2016-2020 

Source: ACRA estimates, Bank of Russia reporting2

Figure 1. Comparative market structure analysis of 2015 and 2020

Source: ACRA estimates 

[1] Most notable revisions are color coded in purple.

[2] Growth rates and market shares in 2013–2015 were estimated on the basis of Bank of Russia statistics.

Life insurance continues its rapid growth 

Life insurance remains the most dynamic segment on the Russian insurance market. Its impressive 2016 growth rate (45% year-on-year) is mainly owed to the development of investment insurance. Moreover, a revival of consumer lending entitles one to expect credit life insurance to gain momentum as well.

Figure 2. Life insurance share in total premium will continue its steady growth

Source: Bank of Russia, ACRA estimates

The fast-paced growth of investment life insurance in in turn attributed to the combined effect of the following factors:

  • Insurers have launched a new “packaged” product that requires no underwriting and can be sold through the banking channel.
  • In the face of a lending decline, banks are showing interest in investment life insurance as an additional source of commission income.
  • Clients see investment life insurance as an alternative savings tool that both guarantees a return of capital and gives them access to various investment products (including those on foreign markets). The recent deposit rate reduction has sparked a keener interest in this product.

ACRA expects the outstripping growth of life insurance to stretch well into the medium-term. Going forward, investment insurance may trigger consumer interest in the traditional types of life insurance — primarily, endowment insurance. Furthermore, according to ACRA’s September 12, 2016 macroeconomic forecast entitled “Russian Economy: No Knock Out to Recession Yet”, in 2017-2020 the total volume of consumer loans will be gaining an average 10% per annum, and against this backdrop, credit life insurance is expected to recover from its 2015-2016 slump and regain upward momentum. 

The slow auto sales recovery hinders motor hull growth

See ACRA research “Consumption: Absence of Growth to be Offset by Quality Change” dated June 6, 2016

ACRA has revised downward its medium-term forecast on new auto sales. Reclaiming the performance level of 2011-2014 will be hindered by the following factors: stagnation of real incomes, moderate potential for spurring consumer lending, and the waning effectiveness of state support. Insufficient market saturation of regions outside of Moscow and St. Petersburg and the ageing fleet will serve as market boosters.

Figure 3. Motor vehicle insurance market faces a slow recovery

Source: Association of European Businesses, ACRA estimates

The motor hull insurance premiums forecast has been accordingly revised downward: namely, growth expected in 2017 has been reduced from 21% to 13.9%. In the medium-term, motor hull growth rate will only slightly exceed the market average: in the 2016-2020 timeframe, the share of this segment will increase from 16% to 17% of the total insurance premium, but it will be unable to restore itself back to the 2013 level (23%).

OMTPL premiums climb due to surging numbers of insured vehicles

Despite the downward revision of the new auto sales forecast, ACRA has not applied the same treatment to OMTPL premiums, which are determined primarily by the total number of vehicles. On the contrary, we believe that the initiatives by the Bank of Russia and the Russian Association of Motor Insurers against the use of forged insurance certificates and in support of better access to insurance products for consumers (via implementing the Single Agent system and e-policies) will be instrumental in increasing the share of insured fleet. ACRA assumes that the effect of these measures will most notably be manifested in 2017. This gives us reason to believe that the growth rate of insurance premiums in 2017 will amount to 8.7% (compared to 3.8% in the previous forecast).

See ACRA research “OMTPL: Higher Chances for Change" dated June 7, 2016

That said, due to a pronounced uncertainty in the segment and the instability of the current OMTPL model the ACRA forecast does not take into account possible changes in OMTPL premiums. Presently, the Ministry of Finance, the Bank of Russia, insurance companies, and car enthusiasts are involved in a vigorous discussion of various reform scenarios, which, if implemented, may result in significant market changes.

Corporate property insurance premiums recover alongside with capital investments 

As part of revising its September 12, 2016 macroeconomic forecast, ACRA has upped its growth rate estimate for investments in fixed assets. Since this indicator is one of the key factors of the corporate property insurance model, we have done an upward forecast revision for premiums in this segment. Our adjustments are supported by the actual 1H2016 data (a 13.2% year-on-year increase). Overall, we expect an 11.5% hike in 2016 and a 2.8% increase in 2017 (versus the previously forecasted 4% and 0.8%, respectively).

Forecasts with regards to the other insurance market segments have not undergone any notable changes.

The upward forecast revision to have a therapeutic effect on insurers' credit profiles 

A comparison of the forecasted GDP dynamics and total premiums shows that the insurance industry is ballooning faster than the economy as a whole. In 2016–2020, nominal GDP is expected to grow by 5.7% annually, while the insurance market is expected to grow in 10% increments annually. This is explained by the meager share of insurance industry in the Russian economy as compared to the developed economies. Thus in 2015, Russia’s total insurance premium amounted to 1.3% of GDP, while according to Swiss Re, this figure reached 7.3% in the U.S. and stayed within the 5 to 12% range across Western Europe.

The Guidelines for the Development of the Russian Financial Market in 2016–2018 (approved by the Bank of Russia Board of Directors on 26.05.2016) call for insurance premiums to amount to as much as 1.5% of GDP by 2018. In accordance with the baseline forecast by ACRA, however, this figure will not be reached before 2019. It should be noted that the regulator and the government have in their hands the necessary tools to accelerate insurance market growth — specifically, tax incentives.

By ACRA estimates, the expected market growth, which has been further increased through forecast revisions, has an overall therapeutic effect on external environment rating factor assessment and, consequently, on insurance companies’ credit profiles. At the same time, the reduction of the forecasted growth of motor hull premiums has an adverse effect on motor insurers’ creditworthiness (companies, whose principal portfolio shares are made up by motor vehicle insurance).

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