Ukrainian insurance sector expecting more growth

Ukraine's insurance industry continues to grow against a backdrop of statistics that suggest domestic companies are being used less to facilitate tax evasion schemes and more to provide the public with financial protection.

Growth in the industry has been fueled by the arrival of international players, as well as increasing capitalization at home.

"The insurance industry in Ukraine is growing dynamically," said Inga Sherina, an insurance agent for ProInsurance insurance agency, which has been operating on the Ukrainian market since 1999.

According to Sherina, policy purchasers are being motivated primarily by two factors.

The first factor is the development of Ukraine's banking industry, which is churning out more consumer loans for goods like cars and apartments. Ukrainians are now more inclined to protect such investments with insurance.

"When people get money from insurance companies, they tell their friends ... earlier, Ukrainians looked at insurance as some kind of fraud," Sherina said.

The second factor motivating insurance purchasers is that foreign insurance companies are "providing an example" to Ukrainian insurers on how to make money by providing a service that can enjoy widespread demand.

According to the League of Insurance Organizations of Ukraine (LIO), an insurance sector advocacy group, there were 399 insurance companies in the country as of October 2005. One year earlier, that figure was 378.

But in the first three quarters of last year, Ukrainian insurance companies collected only Hr 9.9 billion ($2 billion) in gross premiums from insurance and reinsurance. This is a drop of Hr 4 billion, or 29 percent, from the same period of the previous year.

According to the LIO, however, the drop relates to so-called financial risk insurance, which is used as a tax optimizer. Premiums collected on classic insurance – people buying insurance for their cars, homes, and so on - increased between 2004 and 2005 by 40 percent, totaling Hr 1.2 billion ($235 million).

"A large part of financial risk insurance is in one way or another connected to tax avoidance by companies that use the insurance companies. Often, the companies are part of financial groups that own the insurance company," said Tetyana Mosichuk, deputy chairman of the State Commission for Regulation of Financial Services Markets.

Due to tougher state regulation, which was first implemented in 2001, insurance companies are being forced to clean up their act.

"Regulation of the market has gotten tougher," said LIO President Oleksandr Filonyuk.

Legislation was passed in 2001 that subjected insurance activities to licensing and set minimums for insurance companies' statutory funds. For life insurance, the minimum is 1.5 million euros; for risk insurance, 1 million euros. More importantly, legislation made it more difficult for Ukrainian financial groups to send fictitious premiums to foreign registered insurance agencies. As a result, the industry is becoming more transparent, creating room for real growth in classic insurance.

According to information provided by investment and brokerage house Dragon Capital, insurance expenditures per capita in Ukraine are only a fraction of those in Poland and the Czech Republic, where figures go into the range of hundreds-of-dollars. Industry experts claim that only around 10 percent of all risk is insured in Ukraine.

And despite the large number of market players, only around 50 of Ukraine's nearly 400 insurance companies collect 80 percent of the premiums on risk insurance (cars, apartments, health), and only about 10 companies control 90 percent of the life insurance market.

The total number of Ukrainian insurance companies could drop significantly if mandatory insurance for automobiles kicks in.

At the start of last year, a law on mandatory auto insurance went into effect, promising not only to drive out marginal companies with insufficient capital, but to lead the way in developing other lines of insurance.

According to Yuriy Lakhno, CEO of Garant-Auto, one of Ukraine's largest insurers, mandatory auto insurance will boost the overall insurance market by enhancing public trust. However, enforcement of the law has been lax, stalling significant development.

Lakhno and other industry insiders said that auto insurance is currently among the least profitable, as payouts are high. The real benefit of widespread auto insurance would be one of scale.

"The smaller a company's share on the market, the harder it is to operate," said Lakhnko.

Ukraine's insurance market currently has many players but little capital, although that is changing, according to Lakhno.

"Capital growth is actively occurring due to domestic capitalization, as well as foreign investment," said Filonyuk.

Large foreign insurance companies in Ukraine include Australia's QBE, Poland’s PZU and U.S. Alico/AIG Life.

"They will definitely influence the Ukrainian market very strongly," said ProInsurance's Sherina.

Large Ukrainian insurance companies include, in addition to Garant-Auto, Ingo, Aska and the once state-owned Oranta, currently the leader on Ukraine's insurance market.

Most Ukrainian insurance companies are concentrated in big cities, including Kyiv, Odessa, Kharkiv, Donetsk and Dnipropetrovsk. Only 51 of the 399 insurance companies in the country offer life insurance.

Determining the exact market share between Ukrainian insurance companies, foreign or domestic, is difficult based on available statistics precisely because of the industry's shadow sector.

Lakhnko describes most companies' statutory funds as "fictitious," adding that only 20 or 30 firms are actually selling "classic" insurance. For these, the profitable areas are property and cargo, with auto insurance and medicine at the bottom.

"If companies [selling auto insurance] want to make a profit, they had better be big and offer other types of insurance to balance them out," said Sherina.

This is what attracts big foreign companies. Only after passage of the 2001 legislation were international insurance agencies allowed to have 100 percent stakes in Ukraine.

On the other hand, Ukrainian authorities have threatened shady domestic firms. For example, an agency that doesn't obtain a rating of its operations is subject to tax penalties.

Lakhno said his firm received a rating from international credit rating agency Moody's and has been audited by PricewaterhouseCoopers.

Meanwhile, insurers like Lakhno see a lot of potential in mandatory auto insurance, particularly when fines are introduced to encourage car owners to pay for policies.

Experts cited by Dragon Capital claim that only around 7 percent of all motor verhicles are insured.

"The only reason it [the current mandatory auto insurance law] is working poorly is because no one is enforcing it," said Lakhno.

John Marone, Kyiv Post Staff Writer
Mar 29 2006