A slowdown in market growth against a backdrop of deterioration in the general economic situation in the country was the new reality for insurance companies this year. The economic downturn is adversely affecting insurance market growth drivers such as household spending power, lending and auto sales.
In the current unfavourable conditions, insurance company bosses are concentrating on maintaining profitability, focussing mainly on reducing expenses, including by improving their portfolio and holding back on its expansion, particularly in regions known to be unprofitable.
The market leaders view the situation calmly and expect favourable conditions for increasing their market share, while smaller players that do not have enough funds built up risk coming close to bankruptcy or having their licence revoked.
Details of the main conclusions are presented below.
Despite double-digit growth in life insurance, market growth is slowing
According to the survey respondents, growth in the Russian insurance market will slow down in 2014: for all lines except life insurance, the rate of growth will not exceed 10 percent, while the life insurance market will increase by 25-30 percent as a result of the rapid expansion of mortgage lending. However, this segment accounts for a relatively small share of voluntary insurance, so it will not significantly affect insurance market growth overall.
The main reason for the slowdown in growth is the deterioration in the economic situation in the country. Apart from the direct impact of negative client expectations in terms of a possible economic downturn, growth in the insurance market is closely connected with increased household spending power and lending, which in turn directly depend on the economic climate.
The priority objective is maintaining profitability
With the economy stagnant and close to recession, the Russian insurance market is taking active measures to maintain profitability. The majority of market players are waiting to see how events pan out. Insurance industry leaders are trying to stick to their long-term growth strategies and optimise business processes, increasing profitability by cutting staff and salaries. Smaller players are also having to tighten their belts, which could have serious adverse consequences for them.
In addition, insurers are pinning their hopes on a new law set to regulate the sale of policies online. This innovative sales channel enables insurance firms to significantly reduce their acquisition and personnel costs.
Cutting costs and increasing rates are the main measures being used to maintain profitability
Average expected loss ratios for all insurance lines are higher than in 2013. CASCO, OSAGO and VMI remain the least profitable lines in 2014; liability insurance and accident insurance are the most profitable. Property insurance was less attractive compared to last year's expectations, possibly a result of the high loss ratio on contracts for compulsory insurance of hazardous facilities.
Among the measures planned to reduce the loss ratio in 2014, the respondents highlighted improving relations with partners and increasing rates.
As in 2013, reducing administrative and acquisition expenditures remains a priority for insurers. The main ways of cutting the costs of doing business are optimising the company's organisational structure and implementing new operating models. Meanwhile, the survey participants plan to reduce their acquisition costs by developing their online selling.
The loss ratio for auto insurance is increasing
The application of the consumer rights protection law to the insurance industry has had a negative effect on the auto insurance, increasing the loss ratio. The main reasons for this trend are an increase in fraud, and higher legal costs.
90 percent of the respondents report that a high share (about 30 percent) of their claims settled under the consumer rights protection law are fraudulent, but insurers would prefer to wait for progressive anti-fraud measures from the regulator rather than act independently.
Most of the insurance company bosses surveyed plan to reduce the loss ratio for their portfolios by increasing rates as appropriate and limiting sales in regions known to be unprofitable. Almost half of the respondents would like OSAGO rate regulation to be completely abolished, which would enable them significantly to reduce their loss ratio for this line.
Insurers welcome the creation of a mega-regulator
The insurance market has given a positive reception to the creation of a mega-regulator under the Central Bank of Russia. However, many areas of the Russian insurance market, such as pricing policy, capital adequacy and the development of online selling, require additional legislation and supervision.
Market consolidation is expected
According to the respondents, there are companies in all segments of the insurance market that are on the verge of bankruptcy or having their licence revoked. Most of those surveyed expect the insurance market to consolidate. In particular, they mentioned potential changes in the structure of the market for companies in the top ten.
You can download the full version of the survey here.