CIS: according to A.M. Best the regional insurers navigate geopolitical instability and regulatory changes
One of the main reasons, based on the review, is uncertainty of the insurance development due to the western sanctions against Russia, the presence of which is the most significant in CIS. Despite some economic improvement in CIS in 2018 the main challenges for the insurance remain. Among the most challenging factors A.M.Best pointed out evolving regulatory environment, limited investment options and currency fluctuations. Most companies have to adjust to the constantly changing regimes while local regulators are making progress towards risk-oriented supervision.
As A.M.Best noted, CIS markets are generally small and have low penetration degrees (at the average rate of a bit above 1%). Some of the local regulators are making efforts towards liberalization of insurance tariffs, but still regulatory and political risk is rather high due to significant impact of the government and legislation on insurance products, prices, distribution channels and ownership structure of companies. Since the markets are rather underdeveloped, investment possibilities are limited, credit quality tends to be weak, portfolios normally consist of conservative asset classes against the limited risk control around asset/liability management in CIS. Technical results of insurers may have a negative impact from currency devaluation and high inflation.
Despite the mentioned negative influence A.M.Best believes that regulatory changes may also improve capital standards and underwriting controls, for example, by focusing attention on capital adequacy, reinsurance protection quality, diversification of investments holdings, etc.
As of December 31, 2018 about a third of the rated CIS insurers had A.M.Best Issuer Credit Ratings in the range of bb+ and below, constrained by their marginal performance, deficiencies in risk management or low levels of risk-adjusted capitalization, while those of bbb- and above show good performance or established market positions. Upgrades and downgrades were a relatively small part of the change in CIS ratings in 2018. Under review rating actions amounted to 18% mostly due to volatility of the markets. The key driver for rating actions is changing balance sheet strength mainly based on exposure to high investment market risk. Negative rating factors included rapid premium growth, susceptibility to changes in the operating environment and inconsistent business strategy.
A.M.Best in general expects further market consolidation as insurers seek to improve efficiency and strengthen business profiles. Smaller companies experience difficult operating environment, while larger ones can withstand volatile market conditions. According to the agency, risk management capabilities across the region may improve based on the market standardization and resilience of insurers to market fluctuations may increase.