The First Russian Conference on Life Insurance met on Monday May 27 to recognize an unpleasant fact: the rapid insurance market growth of the past few years has halted and even reversed.
This reversal of trend is even more sensational because, until very recently, the market was not just expanding steadily; it showed booming growth, overtaking both the Russian economy as a whole and most other types of insurance. Since 2009, the average growth rate in life insurance has been 38% per year. In 2018, the market grew by 36.5%, with total premiums collected reaching RUR 452.4 bln ($7 bln), up from RUR 331.5 bln ($5 bln). At the same time, market concentration progressed as Sberbank Life Insurance’s share increased from 32% to 40% over the year.
In the first quarter of 2019, we saw a drop of more than 5%, and without the market leader, Sberbank Life Insurance, more than 16%.
The main reason for the decline is the slowdown in the investment life insurance segment. Essentially, this type of insurance policy is a purely financial product that competes with bank deposits and securities; the client delegates the management of their funds to the insurance company for 3 or 5 years and waits for them to return the money with interest. Until recently, investment life insurance was the main insurance market driver. Over seven years – between 2012 and 2018 – the life insurance market increased more than eight-fold, and the investment life insurance market grew more than 50-fold. The investment life insurance’s share in the life insurance segment increased from 10% to 60%, correspondingly. However, in the first quarter of 2019 this segment drastically plummeted by 26%. General Director of the insurance company VSK – Liniya Zhizni (VSK – Life Line) Oleg Volyanik made an assumption that by the end of 2019, the investment life insurance may drop twofold.
The experts addressing the conference provided numerous reasons for the trend’s reverse. Starting in mid 2018, an internal standard of the All-Russian Insurance Association (ARIA) was introduced that required detailed disclose of information on the offered investment services. The effort aimed at combating mis-selling – that is, deliberate misrepresentation of a product or a service whose features a client does not understand. This, however, resulted in selling becoming more difficult. There is also a fact that the main channel of investment insurance product sales in Russia is not insurers or their clients but commercial banks. In these conditions, banks begin to act faster to offer broker and managing companies’ products to clients (for instance, the so-called structured notes), whose regulation is less strict. This has led to regulatory arbitrage emerging between the insurance and the stock markets.
“Banks are seeking products that are easier to sell”, Oleg Volyanik explained.
Also, as Director of the Central Bank’s Insurance Market Department Philipp Gabunia assumed, banks have grown interested in attracting deposits as their interest rates became more favorable starting late 2018.
Vice-President of the All-Russian Insurance Association Maxim Danilov says that it might have been the market fatigue that caused stagnation. There are some 10 million Russians with above average salaries among potential clients of life insurance, but their number is not growing. At the same time, investment life insurance products have not changed for five years; sales managers keep calling their potential clients but cannot offer anything new.
“The growth was extraordinary, it was meant to stop at some point,” said State Duma deputy Anatoly Aksakov.
But perhaps the main reason of market stagnation was the low profit-making capacity of investment life insurance contracts. According to the data provided by Philipp Gabunia,returns onthe three-year contracts in 2017 were 1.3% (1.9% in 2018), and 2.3% (2.9 in 2018) on five-year contracts. According to Gabunia, it means that insurers offer their clients a negative real rate of return.
The market growth driver has changed: insurers are developing accumulative life insurance projects, which include products that allow saving for your children or pension. The accumulative life insurance market grew by over 49% in the first quarter of the year. According to PPF Life Insurance General Director Sergei Perelygin, “Accumulative life insurance picked up the flag dropped by investment life insurance.”
Investment insurance in Russia accounts for an excessively big share of the life insurance market while in Western countries it never exceeds 15%.
However, despite the success of accumulative life insurance, the aggregate returns in the life insurance market will not increase and will even fall this year. Yevgeny Gurevich, CEO of Kapital Life, said that the realistic forecast is that the life insurance market will set back to the level of 2017, or fall by approximately 15%.
Insurance companies will have to experiment and look for new business models. Specifically, one solution could be a combination of insurance products with various services (such as elements of health insurance in the accumulative insurance or even concierge services).
As concerns investment life insurance, it could be improved by introducing a new type of products to the market such as unit-linked insurance plans – hybrids of ordinary and accumulative life insurance policies with an investment component (shares in financial instruments). In the West, this type of products is quite popular but in Russia they will require certain legislative changes. In particular, lawmakers will have to authorize insurance contracts with a floating insurance benefit, says Maxim Danilov.
By Konstantin Frumkin