Models do not stick to insurers – Newspaper Kommersant No. 58 (7503) dated 04/05/2023

Insurers are experiencing serious difficulties in complying with the instructions of the Central Bank, which determines the requirements for financial stability. They explain that the new requirements do not allow building a reliable model for calculating capital, but at the same time, insurers need to carry out complex calculations that are of little use for business. According to experts, the requirements in the current conditions should be simplified.

Participants in the insurance market told Kommersant about the difficulties in meeting the new provision of the Central Bank (which entered into force at the beginning of the year) on the requirements for financial stability and solvency in terms of reinsurance payments. Previously, the share of reinsurers was considered proportional to the total payments. Now, explains the chief actuary of Rosgosstrakh, Tatyana Orekhova, the share must be estimated for each reinsurance contract separately and build the expected reinsurer deficit (ERD) for each reinsurance contract.

At the same time, extremely time-consuming, but mandatory from the point of view of the provisions of 781-P, the calculations very often have an extremely insignificant impact, says Ms. Orekhova. It is necessary to carry out a huge number of calculations on an individual basis, which often correspond to formalized requirements, but are of little use for business, the VSK specifies. In “Sovcombank Insurance” they say that such difficulties “faced one way or another all market participants.”

The problem is the lack of statistical information, which is necessary to build a reliable model for calculating capital. In particular, Sovcombank Insurance explained that in two or three cases, for example, large property losses, it is impossible to build a correct statistical model. And there are also such losses for which contracts are concluded, but for all the time there has not been a single payment, the company added. At the same time, according to Tatyana Orekhova, the analysis of complex reinsurance contracts and the forecast of future cash flows require significant time for analysis and calculations by actuaries and departments involved in reinsurance.

The regulation came into force in January, and already in February, insurance companies began to submit reports in accordance with the new requirements. Their failure to comply may result in sanctions from the Central Bank up to the revocation of the license (see “Kommersant” dated February 4, 2022). According to Alexander Tsyganov, a professor at the Financial University under the Government of the Russian Federation, the regulation was developed in 2021 and “did not take into account the current reality with the rejection of reinsurance in unfriendly countries.”

For insurance companies, both the complication of calculation algorithms and the reliability of model parameters have become a problem, experts confirm. To more accurately determine the dynamic reinsurance flows, it is important to be tied to longer-term statistics, explains independent expert Andrei Barkhota. Due to the limited retrospectiveness of the new parameters, the accuracy of determining cash flows may not increase, but decrease, he clarifies. This process is complicated by the departure of foreign rating agencies and the termination of cooperation with foreign reinsurance agents, adds Anna Avakimyan, chief analyst at RegBlok. A dilemma arises: either heavily discount incoming cash flows, or spend time and money to create your own systems of statistical metrics.

According to experts and insurers, in such a situation it is necessary to simplify the requirements. Only significant risks should be assessed that are not associated with either mandatory types or contracts under which RNRC is the reinsurer, the VSK explains.

It would also be possible not to count the RCT for reinsurers with a certain rating level, which could also significantly reduce the scale of calculations, they believe.

The Central Bank did not answer Kommersant’s question. Experts and market participants see a gradual transition to a new settlement procedure as a compromise. The period can be stretched for two or three years, according to Mr. Barhota, respectively, and the resulting additional costs can be “amortized over time.”

Julia Poslavskaya