This financial service has become the least comfortable and most controversial

“Are you and your property insured by the State Insurance?” I remember seeing this poster as a kid. And now in front of me is a 1990 statistical collection on state insurance, published by the USSR Ministry of Finance. I read: in 1989, the State Insurance of the USSR (there were no other insurance companies at that time) collected 10.4 billion rubles on the territory of the RSFSR, two thirds of which were insurance premiums of citizens under 121 million voluntary insurance contracts – there was no compulsory insurance for citizens then either.

And Gosstrakh spent 9.9 billion rubles in the same territory, of which 87% went to the payment of insurance compensation and sums insured, 6% – deductions to the funds for future life insurance payments, additional pensions and reserve funds for property insurance, 5 % – expenses for doing business and 1% – deductions for measures to prevent the loss of property and finance civil aviation rescue services. The contribution of insurance to Russia’s GDP (more precisely, the GNP of the RSFSR) in that year amounted to about 2%.

Since then, the risks to life, health, property, permanent income of citizens have not decreased, but rather increased. They get sick and, alas, they die no less often, also because effective treatment often requires a lot of money, which is too much for many. As a result of the transfer of municipal housing and land plots to private ownership, income growth, universal motorization and computerization, people have much more property, funds have appeared in bank accounts, they are more likely to update household appliances, communications, furniture, and massively use a variety of paid services. Material losses due to illness, loss or damage to property, including theft of money from bank accounts, are their personal risks. Like the loss of a job, unemployment benefits will only allow you not to die of hunger, and then if you do not pay for housing and a “communal apartment”. Moreover, an old-age pension, and even more so a disability pension, without any other income will not allow you to live at the level of pensioners in the 1980s.

So, it would seem that the demand for voluntary insurance of one’s life, health, property, current and future income should have increased many times over. Especially this year, when many new, very significant risks to their well-being have appeared. Alas, this is not visible. In 2021, RUB 1.5 trillion was collected for all types of voluntary insurance. insurance premiums. This is 1.2% of GDP – 7.5 times lower than the average for OECD countries, three times lower than in Brazil, one and a half times lower than in Indonesia, not to mention a significant lag behind the level of the RSFSR in 1989. And in the first half of this year (later data is not yet available), the situation has not changed significantly.

Why is this great invention of civilization – insurance – so little demanded in our country? Often the reason is the low financial literacy of the population. At the same time, they refer to the data of a study conducted by the Central Bank in 2015, which showed that the main purpose of insurance is clear only to every sixth adult citizen surveyed, and almost the same proportion of the population participates in voluntary insurance. Hence the conclusion: if you convincingly explain its benefits to others, the demand for such services will expand many times over.

I do not think so. For success in the market, it is not enough to offer something that can be useful in principle. The offer will be widely demanded by consumers only when they believe in its usefulness for themselves. However, in our country, insurance is the least comfortable and most controversial sector of the financial market. This is evidenced by hundreds of thousands of claims of citizens coming to insurance companies, tens of thousands of complaints against them to authorities and public organizations, lawsuits, most of which are recognized as justified and subject to satisfaction. I think this is only the visible part of the iceberg, since, according to Russian tradition, most of the victims do not apply anywhere. But at the same time they decide: to voluntarily contact insurers – never again! Will the lessons of financial literacy convince such people? Rhetorical question…

Well, from a purely economic point of view, this is the most unprofitable sector for the consumer: for every ruble paid to the insurer, he receives an average of 32.5 kopecks of insurance payments – two and a half times less than in other countries and than it was in the RSFSR in 1989. As for the so-called imputed insurance – one without which you will not be issued a loan, will not be allowed to enter another country, etc., here even less is paid per ruble of contribution – an average of 17 kopecks. Where does the rest of the insured’s ruble go? Mainly for remuneration of agents – intermediaries between the insurer and policyholders and for the profit of the insurance company. Let me remind you that the State Insurance of the USSR spent on doing business and accrued 5% of its income into profit. Expenses aimed at preventing insured events are negligible for insurers, although it is precisely their prevention that could not only save people and property, but reduce the costs of the insurance business, increasing its profitability.

Do you know what this ratio of the amount of insurance payments to the amount of collected insurance premiums is officially called? Loss ratio. Is it any wonder that all insurance companies are fighting to reduce it – not to increase the unprofitability of them to fight!

How they are fighting for this, they cannot but see in the Central Bank, which for the insurance industry is both a regulator and a supervisory body. In his strategic document “The main directions of financial market development for 2022 and the period of 2023 and 2024”, the situation is described more delicately than above, but quite accurately: “The reason for the weak penetration of insurance in Russia is not only the lack of an established insurance culture, but also the high the cost of distribution and the low value of insurance products for customers (highlighted by the authors of the document). This is due to the relatively low level of insurance payments, as well as the high transaction costs of obtaining them for the insured person. For insurance products, especially those sold through bank sales channels, premiums typically include a high proportion of agency fees.”

What to do with it? In the document, I only found that the number of insurance companies with the help of the Central Bank has decreased by a quarter over the past three years and that “additional adjustment of the legal regulation of imputed insurance is required to increase its value for citizens”, and also that “the development of marketplaces and own remote sales channels and services by insurance companies”. In other words, we are pursuing a policy of small deeds.

But small deeds will help if you need to overcome a gap of a few percent, maybe even a few tens of percent, but not many times. Here it is necessary to look for the roots of evil, and I see them in the long-term humility of the regulator with the established ugly practices of the prosperity of insurance companies due to discrimination and deception of their consumers.

This is basically impossible in a competitive market. But how competitive is the insurance market? In the “Guidelines” it is noted that the CMTPL market has a rather high level of competition, while “segments of voluntary insurance services are characterized by a higher level of monopolization.” The largest company has a share of 28% here, the next four account for a total of 37%, the remaining 146 companies share the remaining 35% of the market. At the same time, three of the top five insurance companies are included in banking groups, including two in groups with state participation. “In 2019-2021, the competitive environment in the insurance sector as a whole remained relatively stable,” the document states. It seems that the Central Bank, as a representative of the state, is satisfied with such stability, and this means that in the foreseeable future, voluntary insurance, equally beneficial to insurers and consumers of their services, will remain an unattainable dream for us, which means that confidence in it will not increase, and the scale of the insurance market, so important for citizens and the economy, will not expand dramatically. Although the top five insurers, and maybe the top ten, this is unlikely to get worse.