Ukrainian insurance companies have staged their own analogue of a "bankruptcy"

In 2014-2016, a fifth of the market - 84 companies - ceased their insurance activities. 43 of them left the market in just three quarters of 2016.

They took out the trash

Insurance companies in Ukraine are used to working in extremely liberal conditions with a minimum of supervision and regulation. This is one of the reasons why they were unable to survive the second economic crisis that erupted after the events in Crimea and Donbas. Even a relatively small tightening of the requirements of the regulator - the National Commission for Financial Services - forced many insurers to significantly reduce the horizons of their activities.

"At the beginning of 2015, the assets of insurance companies amounted to 70 billion hryvnias. Their quality has always been questionable, in many cases they were, in fact, garbage. We have increased the requirements for the quality of such assets from the point of view of diversification. At the end of September 2016, insurers' assets amounted to 54 billion, says Oleksandr Zaletov, a member of the National Committee for Financial Services.

The requirements that Zaletov is talking about are spelled out in the regulation of the National Committee for Financial Services "On mandatory criteria and standards for the sufficiency, diversification and quality of insurer assets". The new rules have been in effect since May 12 of last year. They limited the possibilities of insurance companies in placing their funds, and it became more difficult for companies to cover their insurance reserves at the expense of already placed assets.

If risk-free investments (accounts in banks with a rating of "AA" on the national scale, government bonds, bonds of highly rated banks) can cover up to 85% of reserves, then assets that are, for example, on deposit in banks with a credit rating below "A-" can cover no more than 20% in total. According to the same principle, the National Commission for Financial Services discourages insurers from investing in shares of one issuer or working with a limited number of reinsurers. The main requirements of the regulator of the Insurance Commission had to be fulfilled by June 30 last year.

"Really high-quality assets placed in banks with a high rating, government bonds or real estate are now up to 30 billion. The remaining 25 billion are at the level of" junk activity ". These are shares, investment certificates, corporate bonds" - says Alexander Zaletov. That is, about half of the assets of insurance companies have an extremely low value in reality.

High-quality assets of insurers placed in banks with a high rating, government bonds or real estate are now up to 30 billion. The remaining 25 billion are at the level of "junk activity."

A serious blow to the state of insurance companies was also dealt by the bank collapse, as a result of which insurers lost at least a billion hryvnias. This is the amount estimated by the League of Insurance Organizations for the frozen funds of insurance companies in the accounts of Ukrainian banks at the height of the financial crisis in 2015. Insurers kept large amounts of funds in Delta Bank, Finance and Credit, and Nadra Bank."

The banking crisis forced many insurers to transfer assets to less risky government securities and deposits in state-owned banks. "Non-banking financial institutions - insurers, pension funds, and the Motor Bureau - gave us a very large increase in deposits last year. Over the past year, their funds have grown by UAH 2.8 billion," confirms Kyrylo Shevchenko, chairman of the board of the state-owned Ukrgasbank.

They speak English

The innovations of the National Commission for Financial Services only emphasized the general trend: smaller insurance companies are not ready to operate in the market under more or less serious pressure from the regulator and the objective market economy. For 9 months of 2013, the gross collections of insurance companies amounted to UAH 21.3 billion, and for the same period in 2016 - UAH 24.8 billion, but at a completely different exchange rate.

"Over the years of uncontrolled market operation, insurance companies have lost the trust of customers. They allowed themselves too much. Therefore, now there is a situation where only compulsory insurance remains really in demand: motor insurance, insurance for traveling abroad, "says Leonid Khorin, CEO of the Association of Insurers of Ukraine.

The National Commission for Financial Services has tightened the requirements for insurance companies not from a good life. This was the only way to identify companies with obvious problems. The issue is that the regulator, as before, is very limited in at least somehow promptly monitoring the market for problem players.

"Our main method is prudential supervision. The second is the analysis of complaints. But if a company ignores our instructions and does not make contact at all, then we have no other methods of influence except for contacting the police," admits Oleksandr Zaletov.

Prudential supervision is nothing more than an analysis of insurance companies' reports, which they submit to the National Commission for Financial Services once a quarter. There are at least two problems here. Firstly, nothing prevents the insurer from submitting "correct" reporting with false data. Secondly, three months is too long a period, which is enough for almost any fraudulent scheme.

"The National Commission for Financial Services simply does not have a system of preventive measures and operational control. The insurance company throws up its hands and says" you know, we have nothing to pay" or disappears altogether with the money.

The National Commission for Financial Services, even once a quarter, seeing the reporting of insurance companies, understanding the level of fees and the level of payments, could already draw its own conclusions and play ahead. If the level of payments is abnormally low, this already indicates that the company has problems. But we see none of this," says Leonid Khorin.

The National Commission for Financial Services simply does not have a system of preventive measures and operational control. The insurance company throws up its hands and says "you know, we have nothing to pay" or disappears altogether with the money.

Last year, the National Commission for Financial Services applied 285 "influence measures" on insurance companies. Of these, 164 were orders to eliminate various violations and 185 resolutions to impose fines totaling 2.151 million hryvnias. In 2015, there were incomparably fewer fines - only 632 thousand hryvnias.

But when asked how the National Commission for Financial Services can influence a company that simply ignores the regulator's instructions, Oleksandr Zaletov answers directly - no way. The commission does not even have the authority to conduct raids on "suspect" - due to a moratorium on inspections among small and medium-sized businesses.

There are stories like the case of the Garant-Life company, which worked quite successfully until the fall of 2016, but then disappeared along with customers' money. It simply did not appear at the place of registration. Moreover, the National Commission for Financial Services found out about this not even after customers flooded it with complaints, but only when Garant-Life violated all deadlines for submitting quarterly reports.

According to the Insurance Top resource, in 2015 Garant-Life took 12th place among life segment companies, having collected 14.4 million in insurance premiums. Among other relatively large bankruptcies last year were the companies "Garantia" and "Skyde" (52nd and 31st places in the overall ranking by the volume of insurance premiums).

According to Leonid Khorin, the problem of supervision over insurance companies cannot be solved without the NBU. "It is necessary to organize account control. But not once a quarter, but much more often, perhaps the National Bank can provide the National Commission for Financial Services with more operational access to this information. Only in this way will companies not be able to withdraw their assets without the knowledge of the regulator" - he says.

Another serious problem of the National Commission for Financial Services is that it cannot independently initiate the bankruptcy of an insurance company. Only creditors should do this. "For us, the ability to initiate is extremely important, because while at least some money can remain in the company, it can be distributed among the affected clients", - explains Zaletov.

The joy of giants

The Garant-Life case is more of an exception to the rule. Usually, smaller companies leave the market. Another relatively rare case is the voluntary bankruptcy (sometimes due to the introduction of temporary administration) of an insurer that does not stop working until it fulfills the terms of all existing contracts. New clients are not attracted in this case.

"We are observing a stable trend: increased market concentration by large players against the background of the departure of small, little-known insurance brands. First of all, in the non-life segment. It is quite possible that such a trend will continue in the near future", - says Tetyana Pinchuk, Director of Retail Sales and Network Management of ASKA Insurance Company.

In recent years, market concentration has really increased in this segment. If three years ago the top 3 largest companies on the market generated about 13.5% of all insurance premiums, and the top 20 accounted for exactly half of the market, now these figures have increased to 18.2 and 63%, respectively.

In the life insurance segment, there is a reverse trend: the power of the largest players is weakening, although the level of concentration there is incomparably higher. In 2013, the three largest life insurance companies controlled 51.7% of the market, now their share has decreased to 42.9%.

"Concentration increased about 2-3 years ago due to the deterioration of the general economic situation in the country and the reduction of solvent demand for insurance services. In such conditions, many simply could not cope with the problems that arose at the management level. Although, in addition to the forced withdrawal of small insurance companies from the market, there are known examples when large players also left the Ukrainian insurance industry. For example, in 2016, the well-known international brand Aegon left Ukraine, "says Tetyana Pinchuk.

According to expert estimates, no more than 100 companies were engaged in real insurance in Ukraine before the crisis. Almost all of them remain in business today, although the requirements of the National Commission for Financial Services make their lives much more difficult. Another two hundred insurers are present on the market either formally or for the sake of scheme insurance and money laundering. In the event of a personnel and functional strengthening of the National Committee for Financial Services or the transfer of the insurance market under stricter supervision of the NBU, their supervision is a matter of time.

Source: LIGA.Finance

Author: Sergiy Shevtsov

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