Economies of scale: why the need for consolidation of the Russian insurance market

Competition in the insurance market needs to be managed — that is my belief. The insurance business is a big responsibility to the society, so, of course, the behavior of the players need to follow. This happens in any civilized country.

It should be noted that when we received in the form of mega-regulator of the Central Bank, the us has become more difficult. In addition, we have to put pressure other Federal agencies: FAS, Rospotrebnadzor and other regulatory authorities. Often this pressure is excessive.

I remember the evolution of the Russian insurance market, which got ten years ago, essentially by accident. My experience in insurance began with a mid-size company. As one of its leaders, thinking about her future, I came to some conclusions. Since then, my ideas about the development of the industry has not changed much.

Rookie mistakes

Many insurers in Russia is absolutely unsustainable in the long term. Why? Mainly because that insurance companies were often created by people who didn’t understand how things work. Their fate, unfortunately, was initially predetermined. For example, when the Manager does not understand the difference between the loss ratio and the level of payments and considers the insurance reserve cash flows, not the financial result, this leads to catastrophic errors and catastrophic consequences for the insurance company and, of course, to its customers. But it is very difficult to understand, honest in front of them, the insurer or not. Still, it was one thing to consciously take the money in a financial pyramid, like MMM, and deep down understand that you may not have time to get them out, and quite another — to buy the hull and it is vain to assume that your car is protected in good faith.

To my great regret, some insurance companies were created from frankly fraudulent reasons. These companies grew rapidly due to the huge marketing investments, and then the money was derived, and all — some shareholders and managers are still looking for Interpol.

A huge problem most existing companies today — they are critically undercapitalized. And for insurers, the availability of capital that allows you to meet commitments to customers — a point of principle. It suffered and the insurance company where I began. Because after a year of work we have come to the shareholder with the recommendations urgently to sell it, if he wants to earn in this business is not fraudulent. And in the end, sold the large Western strategist that we’ve been looking for a buyer who would have the experience of development of insurance in different countries and can apply it to us). In my opinion, the decision then was only possible.

In the course of the transaction I became acquainted with many leaders of the largest international insurance companies. I had the unique opportunity to learn how they see the development of the industry to hear what they think, what strategies are followed. And all this was consonant with my own thoughts.

Today I see the only way of formation of the Russian insurance market, competently and efficiently to develop a few major players that now control most of it.

Russian specificity

Our country misquotation. Up to 80% of the decisions associated with some movement or use of capital, is accepted in Moscow. And even in our company more than 50% is a Moscow based business. Another city that is in our portfolio at least more than 1%, — Saint Petersburg (share 4%). And any of the other cities, even one million — less than 1%. That is our insurance business with a very thin layer spread over the country. That is why our activities are largely centralized in Moscow.

Regional insurers must be certain characteristics thanks to which the company is small or relatively large cities will have a competitive advantage relative to the major Federal insurance company. I often hear that small insurers, there are unoccupied market niches, but we cover all types of services. We are engaged in any insurance activities, which we believe is attractive from the business point of view. Why a small player will have a competitive advantage in relation to us? I don’t see why not.

I know companies — even small and medium — where on the sidelines saying, “We Institute underwriting is not needed, we take the rate of major insurers, subtract from it the 15% and get our rate.” But the problem is that we earn is conventionally 5%. This means that our competitors are giving 15% less lose 10%. And if they consistently lose 10%, sooner or later, their financial stability will go into such a deep disadvantage, or that the Central Bank will close them, or they themselves would be unprofitable to exist.

Big players have much more stable structure. Potential losses in one type of insurance cover they profit in other types — and nothing terrible happens. A particular year, for example, was very difficult in the field of insurance, but large companies have survived at the expense of a diversified risk portfolio. And if they were startups that had insurance? They would have had. That, in fact, we see many small companies.

Another reason why running the economies of scale that digital technology. Once is enough to establish a system of online sales, so that she could take advantage of people in any part of the country. In the development of such things the big players are investing billions of roubles. The average company this is comparable to the annual turnover, it just physically can not afford.

Is there a place for the little ones?

We often hear that the reduction in the number of insurance companies leading to monopolization of the industry. But even if the market will be three companies, they will compete with each other, especially in retail. To compete very hard — at the expense of customer service levels, quality risk assessment, respectively, as expressed in the tariff.

Perhaps the only thing large companies yield little, is speed. I with some envy look at conditional startups that sit a hundred people doing one thing. However, this applies not only to insurance but also any other business. And as soon as the company becomes a little more speed advantage is lost, too.

As shown by Western experience, this speed can be used for segmentation. Still, a large insurance company trying to choose if not the best, at least the good part of customers. And risky they tend not to work. Those startups in the West, which I’m quite envious of you, guided by narrow and unprofitable segments. If to speak about car insurance, they don’t just give their customers high tariffs, and are doing everything to reduce the accident rate. They affect how people travel, they have a lot of training and educational programs that affect young people through schools, institutions, parents. Think we, too, will come.

But whatever was the development of the industry, all the same, each insurance company must be well capitalized. Each player in our market we need to understand that the business will have to invest — and invest long. Quick money insurance not paid.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.