Sergei Katarguin – CEO at Independent Insurance Consultants and founder of Oncostrakhovaniye.rf
Insurance industry in Russia has numerous problems, of which five major ones are low demand for services, limited competition, lack of market transparency, poor operational standards, and fraud. Below, each problem is described in detail alongside with ways to resolve it.
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Low demand for insurance services
Insurance culture is nonexistent in Russia. People usually come to insurers when they are obliged to do that. One can not get a loan in a bank without a life cover; a driver is fined for absence of a third party liability insurance; a traveler insurance is a prerequisite to get an entry visa. People see an insurance policy as something imposed on them and hence do not perceive it as a financial protection means. Besides, Russians are always used to count on good fortune, and instead of insuring a newly bought apartment against accidents they keep hoping nothing can happen to them. Yet there is always a neighbor who thinks he can easily replace water pipes all by himself.
I believe low demand for insurance products is due to people’s mistrust and financial illiteracy. If in media articles, advertisements, TV and radio programs people are explained how insurance can protect against possible financial losses, that could improve the situation. It is no doubt a lengthy process, yet I am certain as years go by, the Russians’ attitude towards insurance will change for the better.
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Low competition
Competition is a positive aspect since it fuels business making it find new ways for development, appreciate clients, and maintain high levels of goods and services quality. In the insurance market, competition is at times limited artificially. If a client, for instance, intends to get a mortgage in a bank, a life cover to go along with it can only be granted by such bank’s partner. Same with medical insurance: if a client is interested in a specific clinic, there will only be one or two insurers (partners of the clinic) who can issue a respective medical policy. In small towns the situation is even more complicated as there hardly is any choice at all.
The government or regulator only can put an end to a limitation on competition. If legislation is amended to consistently regulate competition in the market, insurance companies will have more opportunities to develop their services.
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Low market transparency
Insurers are probably the only ones who really understand how insurance market operates. Such a non-transparency is a cause of insufficient confidence of potential clients. Why would one request services which are incomprehensible? Why would one trust a company which keeps essential documents and meaningful information secret?
Demand for insurance services will never grow unless people have confidence in the industry in general. It must become transparent, and the list of documents and data to be obligatorily disclosed must be expanded. If information is publicly available, people will see insurers are not concealing anything, which in fact is the case.
- Low operational standards
That is not a problem of the insurance industry only, but of all services in Russia. Would you remember the last time when you had a pleasant contact with a bank or online store employee? It is more likely you have some bad memories. Yet the quality of customer relations is just one of the problems. Low performance standards result in insurance companies failing to meet their obligations towards clients. After the Central Bank became the industry regulator in 2013, the overall situation started to improve. In 2015 and 2016 about 150 insurers were gone and only strong companies stayed. The main problem of those who lost their licenses was insufficient financial soundness. Such companies were initially aware of their inability to cover respective risks, yet they kept selling insurance policies to their clients.
Insurance market needs high standards. Apart from a financial stability, the regulator’s requirements should apply to the quality of services and amounts of compensations. Why in case of a traffic accident some drivers get sizeable compensations whereas others are only paid few pennies? That at times is fully at insurer’s discretion, but it should not be like that.
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Fraud
In the 1990s fraud was widespread. Insurance industry was also infected with the problem. While the 1990s are back in the past fraud in insurance is, regretfully, still a reality of the present. In 2015 and 2016 many companies had to leave the market since they undertook liabilities they could not honor. Yet, what did the executives of such institutions do after they lost their licenses? They registered new companies, sold insurance policies, collected clients’ money, and again abandoned new companies.
What happens with insurance of developers’ liabilities? Until 2017 that kind of insurance was formalistic. Companies collected clients’ money but never intended to really cover risks or make any payments. And only under 1% of all housing equity holders requested insurance disbursements, since in such a case they lost their property title.
There are many reliable companies among insurers. An adequate market regulation and a promotion of a proper image of the institutions will help overcome consumers’ mistrust and anxiety. National insurance market has big prospects. If people’s financial literacy is gradually improved, insurance advantages properly explained, and requirements to insurance organizations tightened, the development of the industry will accelerate alongside the confidence of the consumers.