The Eurasian Model for Development of Ex-USSR Insurance Markets

1. The Eurasian Model for Development of Ex-USSR Insurance Markets IIS 48th Annual Seminar Rio de Janeiro, Brazil June 17 - 20, 2012 Sergey Sarkisov President and Chairman of Superior Council, Euro-Asian Insurance Union Chairman, RESO-Garantia and Chairman, RESO Group, Russian Federation

2. General Overview of Regional Markets

3. Annual GDP growth Belarus Kazakhstan Russia Ukraine 2000 10.0% 13.5% 11.4% 12.1% 1.2% -7.8% -14.8% 0.2% 2009 2010 GDP Growth Over the past decade, all countries of the region demonstrated high GDP growth rates. Until 2020, the regional GDP dynamics is likely to remain positive: lower than in the previous years, but higher than in developed West European and CEE economies. The region is likely to be the most dynamically growing part of Europe, with a population of over 200 million people. GDP Growth The region is highly vulnerable to crises as its economy is dependent on exports of commodities and other goods with low added value. As the regional infrastructure undergoes reforms, the vulnerability is set to reduce.

4. Annual Inflation, Consumer Prices Belarus Kazakhstan Russia Ukraine 2001 61.1% 21.5% 11.4% 17.2% 25.2% 7.7% 7.1% 6.9% 9.4% 2010 Inflation Over the past decade, the regional economies saw a significant reduction of consumer price inflation. Further decrease is likely, as a result of economic reforms aimed at demonopoliszation. If the reforms are successful, by 2020, the regional inflation is to reduce to 3-5% per year. Inflation High inflation in the previous years constrained development of the regional non-life market and had an extremely negative effect on attempts to establish a life insurance market. If the regional inflation drops to 3-5% per year and the inefficient state social funds are reformed, life insurance will gain momentum.

5. GDP per capita in current prices, 000 USD Belarus Kazakhstan Russia Ukraine 2000 5.8 9.1 10.4 3.0 2010 GDP per capita Between 2000 and 2011, the regional GDP per capita reached a level high enough to ensure stable development of insurance market. The trend was particularly visible in Russia and Kazakhstan.Insurance markets of Belarus and Ukraine are lagging behind, mainly due to their political landscapes. GDP per capita Although Russia and Kazakhstan demonstrate GDP per capita at levels comparable to those in a number of CEE countries, the economies are very much dependent on exports. The same is true for Ukraine, although the country’s GDP per capita is at a lower level. The Belarusian economy is closely tied to Russian, which makes it rather vulnerable.

6. Premium, 000 000 USD Belarus Kazakhstan Russia Ukraine 2001 672.9 1,354.0 22,367.2 2,554,6 2010 Premium The regional insurance markets vary by size: Russia’s annual premium exceeds $22 billion, in Belarus it is less than $700 million. At the same time, over the past decade, Belarusian insurance premium grew 7.6 times, Ukrainian 8 times, in Kazakhstan the growth reached 22 times. The Russian insurance market tripled over the period. Premium At the same time, the regional market development is flawed as it is based on short-term non-life contracts. Currently, the markets see active development of new non-life segments: crop insurance and casualty insurance among them. All countries adopted MTPL over the past decade.

7. Penetration, % Belarus Kazakhstan Russia Ukraine 2001 1.23 0.74 1.21 1.58 2010 Penetration The regional penetration level is not only below that demonstrated by developed Western European markets, it also lower than that of CEE. The reason for it is the same in all countries of the region: over the past decade the economies grew dynamically and the currencies depreciated. Besides, as it is clear from the charts, insurance watchdogs in Russia, Kazakhstan and Ukraine declared war on the so-called tax optimization insurance schemes. Penetration In the next ten years, the regional penetration is likely to grow at a faster pace due to lower GDP growth rates and development of new non-life segments. In case the governments launch pension reforms, life insurance may also gain momentum. By the end of the current decade, penetration levels in the regional insurance markets will reach – and in a number of countries even exceed – CEE penetration.

8. Density, USD Belarus Kazakhstan Russia Ukraine 2001 82.4 71.0 156.6 56.0 2010 Density Regional density levels vary significantly: in Russia it is three times higher than in Ukraine. Such a development is a result of both economic and infrastructural trends. In legislative terms, the Russian market is at a much higher level. Density The density level in the Russian insurance market has reached that of CEE markets. If Russia’s inflation rate continues to decrease, development of the life market will start growing at a much faster pace. In other markets of the region, the legislative base continues to develop, which creates conditions for a very positive growth of life insurance.

9. Conclusions Over the past decade, the Russian, Ukrainian, Kazakh and Belarusian watchdogs set the regulatory basis for development of private insurance services, with the exception of life insurance. If the regulators continue to work actively, over the next 10 years they are likely to complete the challenging task. Social reforms combined with decreasing inflation are likely to open the way for development of life insurance services, which currently account for only a fraction of the regional insurance premium. We may expect particularly impressive life premium growth in Russia and Kazakhstan. Further economic growth in the region, which is set to exceed that in Europe, will likely support the regional investment attractiveness despite the fact that the ex-USSR countries will continue to demonstrate high vulnerability to crises. The European mentality of the regional population, combined with regulatory reforms add to the regional investment attractiveness. The Russian, Ukrainian and, to some extent, Kazakh markets over the past ten year saw entry of the first strategic insurance investors. Although success of the investments was marred by the crisis, in the next several years we may expect further investment inflow due to the ongoing market growth and openness. We also expect to see the Belarussian market open for Western investments. Strong ties between the regional markets (in the reinsurance segment, also due to a high level of Russian investments in the neighbouring markets)make Russia the regional center, although the crisis has somewhat weakened the ties. Therefore, the most efficient way to invest in the regional insurance is to enter Russia and then expand to other markets. Infrastructure of the local market continues to develop: the companies are switching to the IFRS, actuaries and surveyors are emerging as a vital part of the industry. This development is set to lead to the region gradually reaching the development level of European markets. Many Russian and Ukrainian citizens already work in Western insurance, reinsurance, brokerage and consulting companies. This factor will support international investments in the regional markets.

10. Comparisons to Europe

11. European Insurance Markets Penetration Density

12. Insurance Markets of CEE and ex-USSR Penetration Density

13. Regional Dynamics in 2002-2011 Penetration Density

14. Conclusions The development path of all European markets is quite similar but due to special features of national economies, the market of each individual country is at a different development stage. Russia, Ukraine, Kazakhstan and partly Belarus are still making their first steps. Overall, the regional insurance market has reached the level demonstrated by the less developed markets of Central and Eastern Europe (CEE). However, the regional market growth is set to exceed that of CEE due to higher economic growth. Some markets of the region, most likely Russia, will reach the level of most developed CEE markets earlier. The development lag demonstrated by ex-USSR markets is a result of the fact that the Soviet model had a longer impact on their economies, compared to CEE economies, not to speak of Western Europe, which never experienced its negative effects. The regional mentality is gradually changing. Over the past years, a whole new generation emerged, which is not familiar with the Soviet economic and social system. The new generation will likely to have an ever stronger impact on the consumer behavior and general mentality of the local population. Social reforms that Russia and, perhaps, Ukraine, are launching, will likely become a long-term driver for development of the regional private insurance market, primarily the life segment. High GDP growth combined with negative demographic dynamics will likely result in a relatively stable penetration rate and a growing density in the first years of the next decade, as it can be seen on the last chart. The regional investment risks are likely to decrease. As the local economies continue their infrastructural reforms, the country risks are likely to become less pronounced. Market risks are likely to diminish as a result of decreasing number of Russian and Ukrainian insurance companies and implementation of new regulative norms: IFRS, anti-trust measures, actuarial assessment.

15. Key Features of Regional Markets

16. Russia: key features Current environment Penetration in Russian non-life market, % Regulation Russia is one of the few sizeable (population of 142 million), under-developed, yet rapidly growing economies Penetration Insurance sector in Russia remains highly underpenetrated with a GWP to GDP ratio of 1.2 in 2011 (Western European average of 3.1%). Russian life insurance market is in its infancy. The cap for the foreign capital level in the market has been increased to 50%. Full switch to the IFRS is set for 2013. Regulation Russian Insurance Market, by class General market situation: The market is recovering from the crisis and entering a new development stage. The main growth driver is the motor hull segment, although a significant premium increase is also recorded in the corporate segment. In 2013-15, if social reforms are successful, we may expect a strong growth of private insurance. The market is consolidating as the weaker players are leaving the industry. By end-2013, the profitability is likely to return to the pre-crisis level. The quality of insurance services is also growing. However, the market still demonstrates a strong dependence on sales channels, primarily in new sales. Competitive environment 2012 has seen a higher level of domestic M&As. Only one foreign investor – Liberty Mutual – entered the market. 2013-15 is likely to see renewed interest of foreign investors in Russian insurance. M&A

17. Ukraine: key features Current environment Penetration in Ukrainiannon-life market, % Regulation Key problems of the market are weak regulation and low transparency. The two factors help weak and captive players to remain in business. Regulation Market players continue to engage in grey tax optimization schemes; dependence on state financing remains strong. Full switch to the IFRS is expected in 2013-15. Ukraine demonstrates a relatively high penetration level compared to other countries of the region, but this is a result of Ukraine’s weaker economic recovery. In fact, the Ukrainian insurance market is less structured than other regional markets. Penetration Ukrainian Insurance Market, by class The market is yet to see full recovery from the crisis, it remains extremely dependent on the banking sales channel. Profitability of local insurers is affected by strong price competition. The main growth drivers are MTPL and personal insurance, i.e. low profitability lines. 2013-2015 should see further market growth. General market situation: The market continues to consolidate. Technical and real bankruptcies of weaker players are expected in 2012-15 as a significant part of local insurers engage in price dumping. With weaker players leaving the market, we may expect to see quality competition. Companies with foreign capital (AXA, Uniqa, PZU) are likely to see capital increases Competitive environment We see no real interest of potential investors in 2012, and the multiplier in Ukraine is be situated within 0,2-0,8 of annual premiums. We may expect further foreign investment inflow in 2013-15 as the market recovers from the crisis. M&A

18. Kazakhstan: key features Current environment Penetration of Kazakhstan non-life market, % Regulation The market demonstrates the strongest and the most concise regulatory system in the region, with key norms necessary for further development already in force – MTPL, casualty, annuity and crop insurance norms among them. Regulation The market has a strong actuarial institute, brokers have to undergo licensing. The number of players is limited, with weaker companies under surveillance of the regulator or in run-off. Guarantee funds have been set up. Penetration Insurance penetration is limited to large cities (Astana and Almaty), most corporate clients are large industrial and financial groups. The market is strongly dependent on the banking sales channel and consumer loans development. Kazakhstan Insurance Market, by class General market situation: The growth drivers are compulsory classes, primarily industrial risks. Credit insurance, which is vulnerable to crisis effects, is popular in large cities. In life insurance, MLM generate a significant part of the total premium. Competition in the market remains modest, except in the bancassurance segment. Due to strong regulation and the key role of large industrial and financial groups, entry to the market is limited and business success is determined by whether an insurer has access to the financial groups. Competitive environment In the next several years, robust M&A activity is unlikely. Moreover, it seems that in the local market, a greenfield Is a good alternative to an acquisition. M&A

19. Belarus: key features Current environment Penetration of Belorussian non-life market, % Regulation Although private insurance companies exist, the state takes up a significant market share, as government-controlled companies have the monopoly on compulsory insurance. Recently, the government indicated it plans to liberalize the market. Regulation The market experiences a strong control of the finance ministry, which sets the development targets and monitors all indicators. Access of foreign insurers is limited, although some Russian and overseas investors are present. Penetration The penetration level is close to that in Russia, but is a result of strong state control and premiums in compulsory corporate classes. Belorussian Insurance Structure, by class General market situation: Key growth drivers are compulsory classes. Voluntary insurance is underdeveloped due to the low average income ($400 compared to $700 in Russia). Competition is strong only among privately-owned insurers, but even there it is lower than in Russia, Ukraine and Kazakhstan. The role of the banking channel is less important that in other countries of the region. The agency channel is rather more developed than elsewhere in the region. Competitive environment M&A opportunities are limited and depend on the state policy for foreign investors. The government contemplates opening the life segment for overseas investors. M&A

20. Thank you for your attention Sergey Sarkisov President and Chairman of Superior Council +7(495)7374455 sarkisovserg@eaiu.net