«Russian reserves under threat as value of rouble plummets», — «Insurance Day», 17.03.2009

Dmitry Beygul

Russian reserves under threat as value of rouble plummets

Russian insurers are wrestling with a currency quandary that could eat into reserves, a leading brokers has warned.

Dmitry Beygul, general director of Malakut Insurance Brokers, said the falling value of the rouble against the dollar and euro meant that rouble sums insured and the respective insurance premiums may decline this year compared to those nominated in hard currency.

Russian legislation allows the use of «conventional units» (usually linked to dollars or euros) as the currency of an insurance contract, with payments being madу in roubles at the exchange rate on the date of payment. A switch to «conventional units» is increasingly becoming market practice.

«The danger insurance companies could face very soon in case of further weakening of the national currency is a deterioration of reserves invested generally in rouble instruments», Beygul told Insurance Day.

In the past seven months, the Russian central bank has spent more than $ 200bn on stabilization efforts, although the exchange rate has continued to come under pressure. With crude oil and other commodity prices well bellow levels a year ago, the outlook for the economy continues to be shaky.

Beygul said two key tendencies will affect the Russian insurance market in the short term — the decrease in demand for insurance in general (as a logical result of recession in the real estate and financial sectors) and hardening competition for clients leading to a reduction in rates. Medium-term tendencies depended on the world the overcoming the downturn in the next two to three years.

As the largest broker in its region, Malakut has a keen perception of the market. Beygul said that during recent renewals of programmes, average spending on insurance was cut by between 20% and 30%. Clients have been revising limits of indemnity (especially on business interruption) and deductibles in line with their reduced budget.

2009 focus is on Malakut’s strongest lines, such as aviation

Moscow-based Malakut’s share of its market is estimated at around 20%, based on available official statistics for total gross brokerage of all registered brokers, including daughter companies of international broking firms. «Our revenues grew on average 30% annually during 2005-07 but 2008 was closed at less impressive levels», Beygul said. «Our core lines of business remain the same: aviation and space, energy and reinsurance».

Malakut has won international awards for excellence in its nine years of activity, during which it opened offices of varying status in Ukraine, Kazakhstan, Azerbaijan, Colombia and Vietnam.

Beygul said: «In 2009 we are going to continue focusing on lines where we have strong market position and expertise — aviation and space, energy, reinsurance. For instance, in 2008 we set up the Malakut Constellation broking company to emphasise our efforts in providing insurance and reinsurance services for space, high technology and defence industries».
He added: «We believe that in the current economic situation some new niche products will be in demand and we are working on it. In addition, we have not ceased our plans for geographical expansion and in 2009 new offices in Latin America and the Middle East will be launched».

About two-thirds of Malakut’s revenues come from reinsurance business split equally between treaties and facultative placements. With regard to treaties, about 50% are non-marine, 30% aviation and 10% marine. On the facultative side the broker specializes in traditional areas like oil and gas, power, space and more local risks for particular countries, like personal accidental and natural death combined covers, some liability covers and loss of title.

Russian businesses and individuals still buy little insurance compared to other developed nations and Beygul expects little expansion in demand in the short term. Despite this, his team strongly advises that during these turbulent times and with a shortage of financing, business should buy more insurance with lower deductibles.

«Damage or loss you suffer during the crisis could kill the company much more easily. We are trying to bring this message to all our clients, existing and potential», Beygul pointed out.

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