Figure 1. Market structure in 2015 and 2020
Life insurance continued to grow in 2015 outpacing other segments, which was mainly due to surging investment life insurance, a product combining insurance protection with ample investment opportunities, including those outside Russia. An additional stimulus to growth might have come from tax deductions on life insurance premiums.
We expect the segment of life insurance to retain its outperforming pace in the medium term, supported by an anticipated stabilization of household income. However, as growth factors fade out and the segment wins a higher share on the market, this outperformance will gradually subside, unless supported by new tax benefits.
Motor insurance was the main outsider on the market in 2015, showing a drop in insurance premiums of over 14%. We relate this slump to the following reasons:
These negatives are likely to persist in 2016 resulting in further decay of insurance premiums. In particular, we expect a further decline in motor vehicle sales, although the government has increased its support for the industry to RUB134 bn. However, economic recession and declining real household income will most likely minimize the effect of this support.
On the other hand, on the back of anticipated improvement in the economic environment starting 2017 new motor vehicle sales are strongly bound to increase driven by accumulated deferred demand and stabilized household income. This in turn should prompt recovery in the vehicle insurance segment, which should see insurance premiums surging by around 20% in 2017-2019 followed by a slowdown to 14% in 2020, while the market share of the segment is expected to increase from 17% in 2016 to 23% in 2020.
The effect of an increase in OMTPL (obligatory motor third-party liabilities) tariffs seen in 2Q15 will be phased out in 2016. Premiums are expected to climb 9.7%, which is ahead of the market average of 8.1%, but much lower than 45% recorded in 2015.
Growing motor vehicle sales expected in 2017-2020 should be a positive, but with high tariffs remaining in place premiums are likely to show a limited growth.
Following a dramatic 10.9% squeeze in 2015, corporate property insurance premiums are expected to post a modest recovery of 4%, fueled mainly by partial monetary stabilization, in particular by lowering interest rates and increasing availability of loans for the real sector. Premiums growth will likely be limited by low capital investments.
As economy moves from stagnation to growth in 2017-2020, we expect a gradual increase in investments, at least in nominal terms. This should provide for a slow uptick in corporate property insurance, although the medium term is likely to see the segment stagnating.
We believe that weaker margins force companies to limit spending on voluntary medical insurance for their employees, as insurance premium growth rates were way behind inflation in 2014-2015. Individuals also moderated their demand for voluntary insurance relying on statutory health insurance system.
In view of relatively bleak macroeconomic prospects, we believe that voluntary medical insurance will show persistently weak growth rates until 2020, with a surge in real terms possible only on the back of economic revival and employee-friendly changes on the labor market.
We believe that other market segments will hardly see their market share change in the medium term, although some of them may well post a rather solid performance. The most pronounced recovery is expected in accident insurance, which is related to a projected increase in private lending.
Further growth is also expected in private property insurance. Apart from the low base effect, this segment may benefit from the government's efforts aimed at easing pressure on the budgetary system by supporting market mechanisms for protecting the population against natural disasters. Another impetus may come from insurance companies actively cross-selling this product to buyers of motor and voluntary medical insurance policies.
The remaining segments of the insurance market are expected to grow relatively in line with the economy.
An outperforming market growth expected in the medium term may be generally positive for credit profiles of insurance companies, but will most likely be unevenly spread between segments in different years.
Life insurers are in a relatively better position as they operate in a consistently growing segment. Motor insurance should also see better market conditions after a hard year of 2016. On the other hand, corporate property and private health insurers are likely to operate in a stagnating environment.
The aforesaid concerns only one of creditability factors and does not take into account regional and segment-specific issues. Some companies may operate in a relatively benign environment compared to competitors thanks to their access to clients in certain economic segments or geographical areas.
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