Underdeveloped reinsurance – Newspaper Kommersant No. 165 (7366) of 09/08/2022
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In the second quarter of 2022, the Central Bank recorded a significant decline in reinsurance in the Russian market. Part of the segment, which was previously mainly occupied by foreign companies, passed to the RNPK controlled by the regulator. But private companies have not yet been able to form reinsurance pools. The issuance of catastrophic bonds, the payments on which are tied to predetermined events, could help. But stock market participants doubt that such securities will be of interest to a wide range of investors.
The volume of premiums transferred to reinsurance in April-June decreased by almost a third compared to last year, follows from a review of the Bank of Russia. Such dynamics, according to the regulator, is associated with a reduction in premiums for property insurance of legal entities, as well as the inability to place risks abroad in the same volume due to increased anti-Russian sanctions. The share of companies from “unfriendly countries” among the contributions transferred to reinsurance abroad was 86% last year, the Central Bank indicates.
Now the main volume of reinsurance falls on the Russian National Reinsurance Company (RNRC) owned by the Central Bank. In early March, the regulator increased its capital to 300 billion rubles. At the same time, the Central Bank expanded financial guarantees for the company’s obligations to 750 billion rubles.
As a result, RNPK became the main reinsurer for Russian aircraft and sea vessels.
According to Yevgeny Sharapov, director of ratings of insurance companies of the NKR agency, in fact, the insurance risk of the industry for major insurance events is concentrated on the regulator.
However, the private sector is limited in creating reinsurance protection. In April, a reinsurance pool was created only in the OSAGO segment. According to RegBlok chief analyst Anna Avakimyan, the Russian insurance market does not have the degree of autonomy to instantly form an equivalent reinsurance pool. We need new mechanisms for sharing insurance risks, especially for property types of insurance, she notes.
Market participants believe that under the current conditions, the issue of catastrophic bonds could become an additional reinsurance tool.
Payments on such securities are tied to the occurrence of predetermined events, in particular natural disasters or man-made disasters. In the event of their implementation, the insurance company receives funding to cover the losses incurred by the insurers. Investors, on the other hand, receive coupons on bonds until the specified conditions occur. If the losses from the catastrophe exceed the amount of funds raised from the placement of bonds, investors lose their invested funds. According to the Central Bank, the maturity of such bonds is three to five years. In 2021, the world issued bonds worth $14 billion.
Aleksey Bredikhin, Director of the Financial Institutions Ratings Group at ACRA, notes that the high concentration of risk in the RNPK and the virtual absence of competition are of concern to the regulator and market participants, so that “the idea of issuing catastrophic bonds gains additional importance.” Tatyana Nikitina, Senior Director of NRA Financial Companies Ratings, believes that issuing catastrophic bonds is attractive for issuers due to minimizing the risk of default by the reinsurer, lower cost and longer term compared to traditional reinsurance protection.
However, investors are skeptical about such securities, calling them “an exotic tool.”
Alfa Capital Portfolio Manager Evgeny Zhornist notes that catastrophic bonds are inherently more like structured bonds and have, of course, a higher risk than conventional bonds, so they are unlikely to suit investors who choose classic bond products. Alexei Tretyakov, head of Arikacapital, adds that there is a lot of risk in these securities: credit risk, liquidity risk, incorrect calculation of an insured event, etc.
Therefore, financial market participants believe that the demand for these instruments will be very limited. As Ruslan Mustaev, portfolio manager at Otkritie Management Company, notes, these bonds are suitable for “private traders and hedge funds, but they will take such bonds, not having calculated well, but simply with the aim of trying.”
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