RUSSIA: MTPL liberalization will boost competition price, says FITCH

MTPL insurers in Russia are likely to compete more strongly on price if further liberalization of the market takes effect next year, FITCH Ratings says in a new report, published on November 5, 2018.

Based on the planned liberalization insurers would be allowed to set prices in a significantly wider range, with a higher ceiling and lower base tariff floor. The Central Bank of Russia is negotiating with the legislative authorities and the proposals are expected to come into force next year. A wider pricing corridor gives insurers more flexibility to reflect risk factors such as regional variations and drivers' claims history in their prices.

FITCH believes that a higher ceiling on prices would lead insurers to compete for high-risk business. The current ceiling forces them to write this business at a loss. They are required to accept it, but some have sought to limit their exposure. A higher ceiling would create scope to write some of this business at a profit. Insurers with the most sophisticated customer data and underwriting capabilities should benefit, as they are best placed to determine the level at which premiums will be profitable, while others may lose out.

The agency expects price competition would become a theme for low-risk business, as well. This business is currently priced at, or close to, the base tariff, and generates large profits (offsetting the losses on high-risk business). The proposed lower base tariff would lead insurers to cut prices with a view to gaining market share while still writing business at a profit. Again, insurers with the strongest underwriting capabilities would have a competitive advantage.

MTPL insurance represents about a quarter of the Russian non-life insurance sector in terms of GWP. MTPL insurance became compulsory in Russia in 2003, pricing has been heavily regulated. The first notable step towards liberalization was the introduction of a pricing corridor in 2015, set at 20% of the base tariff. The lower tariff and much wider corridor (80%) now proposed would be a significant further step. However, according to FITCH, full liberalization is a remote scenario.

Recent trends suggest that average MTPL premium rates may start to decline. Claims frequencies and average claim sizes have reduced each quarter since mid-2017, and the rapid shift towards online sales is reducing insurers' costs for acquiring customers. The full effect of the business migration from former MTPL market leader ROSGOSSTRAKH to other insurers is still seen. ROSGOSSTRAKH cut its market share from 42% to 10% at end-2Q18 due to restructuring after large underwriting losses. The losses were largely due to high exposure to regions where maximum premiums were insufficient to reflect risk. The migrated business still shows higher loss ratios even though it is now written by other insurers, but these are starting to normalize, says FITCH in its report.

For more details on the reforms and analysis of leading MTPL insurers' underwriting performance, see "Motor Third-Party Liability Insurance in Russia - Further Liberalization Coming Soon", available at MTPL Insurance in Russia

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