The pandemic has halted the growth of the insurance market

An analysis of current trends and risks in the insurance market

  • The COVID-19 pandemic, the quarantine restrictions imposed, and the decline in business activity caused by these factors have had a negative impact on the growth of the insurance market. Instead of the expected increase of 10%, insurance premiums in 2020 will remain at last year’s level.
  • However, the financial efficiency of insurers is at its highest level in the last few years. This is largely due to the reduction in insurance payments as a result of quarantine measures.
  • According to ACRA, the insurance market will return to a growth trajectory next year, the increase in insurance premiums will be 9.4%, and the main trends that determined market dynamics before the pandemic will continue.
  • Indicators in the life insurance and accident insurance segments should be approximately the same, with a slight decline or stagnation for 2020 being replaced by an increase in insurance premiums by about 14% next year.
  • The auto insurance segment is expected to continue stagnating. ACRA does not see any prerequisites for the growth of this segment over the next few years given the limited demand for cars and high competition between insurers.
  • The pandemic has driven interest in the voluntary medical insurance (VMI) segment, with insurance premiums expected to increase by 25% next year.
  • Despite the stabilization of the sales channel structure and the concentration of the insurance market over the past year and a half, ACRA expects the bank channel share to continue growing next year. According to ACRA, increased market concentration is a medium-term trend supported by increased regulatory requirements and M&A transactions.

Table 1. Forecast of insurance premiums in 2020−2021

Indicator

Units

Actual

Forecast

2017

2018

2019

2020

2021

Life

RUB bln

332

452

409

390

445

Growth rates

%

53.7

36.5

-9.5

-4.7

14.2

Share in total volume

%

26

31

28

26

28

VMI

RUB bln

140

152

181

179

224

Growth rates

%

1.6

8.5

19.0

-1.0

25.4

Share in total volume

%

11

10

12

12

14

Motor hull

RUB bln

162

169

171

161

160

Growth rates

%

-4.8

3.8

1.1

-5.7

-0.7

Share in total volume

%

13

11

12

11

10

OMTPLI

RUB bln

222

226

215

216

216

Growth rates

%

-5.2

1.8

-4.9

0.6

0.0

Share in total volume

%

17

15

15

15

13

Corporate property

RUB bln

96

89

103

122

117

Growth rates

%

-10.7

-7.8

16.7

17.9

-3.8

Share in total volume

%

8

6

7

8

7

Accident

RUB bln

121

170

187

188

215

Growth rates

%

12.3

39.8

10.5

0.4

14.1

Share in total volume

%

9

11

13

13

13

Other

RUB bln

204

223

215

221

238

Growth rates

%

-1.1

9

-3.4

2.7

7.7

Share in total volume

%

16

15

15

15

15

Total

RUB bln

1,278

1,480

1,481

1,477

1,616

Growth rates

%

8.2

15.8

0.1

-0.3

9.4

Sources: Bank of Russia, ACRA

Figure 1. Market structure by insurance type, 2019

Source: ACRA

Russian insurers have not suffered significant losses as a result of COVID-19

The pandemic is the main factor determining the overall economic agenda for 2020, and in particular the situation in the global insurance industry. The total amount of losses incurred by insurers as a result of the pandemic is still far from a final estimate. According to PeriStrat, most forecasts indicate total losses in the range of USD 30−80 bln. The most pessimistic scenario, from Willis Towers Watson, shows a loss of USD 140 bln. If this scenario is realized, COVID-19 will become one of the most unprofitable events in the history of insurance in terms of the nominal amount of payments.

Unlike foreign companies, Russian insurers have remained practically unaffected by the pandemic. This is due to the low level of insurance coverage on the risks associated with the pandemic and the corresponding quarantine measures imposed by the authorities. Quarantine restrictions significantly reduced the total amount of losses for motor insurance and, paradoxically, VMI. According to data for 2019, these types of insurance account for about 75% of total insurance payments, with the exception of life insurance.

Figure 2. In Q2 2020, car insurance and VMI payments in Russia decreased significantly

Source: Bank of Russia

The removal of quarantine restrictions should obviously lead to restored car insurance payments. In the VMI segment, an increase in payments due to the postponement of planned treatment to H2 2020 is expected. Nevertheless, ACRA predicts that the reduction in payments in Q2 will have a significantly positive impact on the financial results of Russian insurers in 2020.

The financial results of insurance companies remain strong

The decrease in payments has supported growth trends in the return on assets and equity of insurers over the past few years. Return on assets and equity, calculated as the ratio of pre-tax earnings over the past 12 months to the average value of the corresponding indicators, reached its highest values in the last five years by mid-2020.

Figure 3. Insurer profitability has reached maximum values

Source: Bank of Russia

The assets and equity of insurance companies continue to show high growth rates, exceeding 14% in Q2 2020 compared to the same period last year. The growth in assets is mainly due to the accumulation of long-term reserves by insurers in the life insurance segment. High profitability also allows insurance companies to maintain the capital gains required due to the increase in solvency requirements announced by the Bank of Russia.

According to ACRA, strong financial indicators remain a reliable basis for the development of the insurance market. Despite significant strategic uncertainty and risks, ACRA assesses the creditworthiness of Russian insurers as generally positive, which is reflected in their credit ratings.

Growth in insurance premiums stopped during the quarantine

The pandemic and ensuing quarantine measures have had a significantly negative impact on insurance premiums. After the actual stagnation in 2019, the volume of premiums in Q1 2020 showed a significant increase both in the life insurance segment (16%) and in all other segments (12%). It was expected that the total increase in insurance premiums could be about 10% for 2020.

This scenario is all but impossible because of the pandemic. Growth in Q1 was followed by an equal decline in Q2 in both market segments. As a result, the insurance market showed zero growth in H1 compared to the same period last year.

Figure 4. Growth in Q1 was followed by an equal decline in Q2 in both market segments

Source: ACRA

ACRA expects that market performance for all of 2020 will be at last year’s level as well. This forecast takes into account both the recovery in premiums in Q3 2020 and the risks of a second wave of the pandemic starting now.

Further market dynamics will depend on the state of the economy after the end of the pandemic. ACRA’s base case scenario assumes the market’s return to a growth trajectory in 2021, with total insurance premium growth expected at 9.4%. However, the dynamics of indicators in certain market segments will be fundamentally different.

Life insurance and accident insurance will show similar dynamics

The life insurance segment seems to be one of the beneficiaries of the general trend of redistribution of part of the population’s financial reserves from bank deposits to other instruments. This trend has been observed since 2015 and coincides with the beginning of a rapid increase in life insurance premiums. However, growth was recorded in other segments of the financial market that offer alternative savings options to deposits. For example, the number of brokerage accounts owned by the population is rapidly increasing.

In 2019, life insurance premiums decreased due to measures taken by the Bank of Russia to prevent violations when selling policies. In particular, rules were established on informing clients about the risks associated with investment life insurance. In addition, many policyholders were disappointed with the low rate of return on policies.

Figure 5. The growth of alternative savings instruments exceeds the growth of household funds in banks

Source: ACRA

Nevertheless, the sale of life insurance policies continued in Q1 2020 and the volume of premiums resumed its growth. In ACRA’s opinion, this means that life insurance products remain in demand among some categories of customers and in the medium term, while the rate of accumulation of reserves in the life insurance segment will outpace the growth of bank deposits.

The drop in sales in Q2 2020 was due to bank offices being closed. Banks remain the main sales channel for life insurance products (85% of insurance premiums are received through credit institutions). Given this drop, ACRA expects that the life insurance segment will record a decrease in premiums of about 5% for 2020 compared to 2019. According to ACRA, growth will resume next year and the increase in premiums will be about 14%.

ACRA expects similar dynamics in the accident insurance segment in 2020 and 2021. Insurance for borrowers accounts for the predominant share of premiums in this segment. Accordingly, the main factor determining the growth rate of accident insurance (as well as life insurance for borrowers) is the volume of consumer lending.

In Q2 2020, banks significantly restricted the issuance of new loans in response to the potential decline in household creditworthiness under quarantine restrictions. This caused a sharp decrease in premiums for accident insurance (-19% compared to Q2 2019). In Q3, ACRA sees a recovery in consumer lending and expects further growth next year. In this scenario, ACRA’s forecast model shows that premiums for accident insurance in 2020 will remain at last year’s level. In 2021, the growth rate should be about 14%.

Stagnation in the auto insurance segment will continue next year

Unlike other retail types of insurance, the auto insurance segment, which includes land transport insurance (motor hull), as well as mandatory and private liability insurance for car owners, has shown resistance to the impact of quarantine measures. This may be due to the following reasons:

1.     Obligatory motor third party liability insurance (OMTPLI) is mandatory. The efforts of insurers and the Ministry of Internal Affairs for several years have been aimed at monitoring the OMTPLI policies of car owners.

2.     The online sales infrastructure has been developed to the greatest extent for auto insurance, which has allowed contracts to be concluded when insurance company offices are closed.

3.     During the pandemic, personal vehicles had additional advantages over public transport, which encouraged car owners to increase insurance coverage (at least regarding the period of use of OMTPLI)

Figure 6. Declining new car sales limit demand for auto insurance

Source: Associate of European Business, ACRA

Despite stable demand for auto insurance, ACRA does not see any way around stagnation in this segment. The volume of insurance premiums has essentially not changed since 2016, and ACRA expects this trend to continue in 2021. The key reasons for the stagnation are the weak dynamics of new car sales and high competition in the auto insurance market.

New car sales will continue to decline. ACRA forecasts that about 1.5 million cars will be sold in 2020, which is significantly lower than in 2019 (1.76 million). Such a significant drop is mainly due to the closure of car dealerships in Q2 2020. Next year, ACRA expects sales to grow to 1.7 million, but this figure will still remain below the level of 2018−2019.

Amid limited demand, price competition between insurance companies continues, which leads to a reduction in car insurance rates.

Figure 7. The average premium for OMTPLI and motor hull is falling

Source: ACRA

The average premium per contract is lower for both motor hull and OMTPLI. However, there is a high correlation between the dynamics of average premiums for both types of car insurance. In ACRA’s opinion, this is due to a single factor: increased price competition between car insurers. ACRA believes that this factor will remain relevant next year. Therefore, ACRA does not expect an increase in car insurance rates, despite the transition to an individual tariff in TPLI and an increase in the cost of spare parts due to the depreciation of the ruble.

Interest in VMI will grow

The pandemic will strengthen the position of the VMI segment as a growth point for the entire insurance market. Last year, ACRA noted an acceleration in the growth rate of this segment, which, in ACRA’s opinion, was associated with increased public interest in staying healthy, as well as with the development of medical and information technologies. ACRA believes that the pandemic will give additional stimulus to these trends.

However, ACRA does not expect an increase in VMI insurance premiums in 2020. The impact of positive trends will be offset by a decrease in premiums on insurance for citizens traveling abroad, as well as the desire of employers to reduce the cost of staff insurance in conditions of economic instability. However, ACRA forecasts the growth rate of VMI insurance premiums at about 25% for 2021, given the reduced base in 2020 among other things.

Figure 8. Growth trends for VMI premiums will continue

Source: Bank of Russia, ACRA

The structures of sales channels and market concentration have not changed

The shares of the main sales channels in the total volume of insurance premiums in 2019 and 2020 have stabilized. Banks remain the largest sales channel, accounting for 37% of insurance premiums. Based on ACRA’s forecast for the insurance market, this share may grow amid the expected positive dynamics in those insurance segments where the banking channel’s position is particularly strong (i.e., life and accident insurance). Banks are also active in the growing segments of VMI and personal property insurance.

During the quarantine in Q2 2020, sales volumes through company offices, banks, and car dealers simultaneously fell by 21% compared to the same period last year. However, agency sales increased by 10%.

The efforts of insurers to develop digital technologies are reflected in the growth rate of online sales outside the TPLI segment, which has exceeded 50% over the past four quarters. The total share of these sales is still small at about 1%. However, at this rate, online sales could become a very significant channel in a few years.

ACRA notes a temporary slowdown in the growth of insurance market concentration. The share of the ten largest insurance groups in the total volume of insurance premiums has stabilized at 80%. This figure has been maintained since 2018. However, ACRA expects that concentration growth will continue in the future under the influence of increased regulatory capital requirements for insurers, as a result of M&A transactions, etc. Therefore, one or two major M&A deals related to the optimization of the business structure of financial groups could come within a year.

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