Insurance market of Ukraine may shrink by 40-60% this year
A blitz interview with Director General of the Insurance Business Association Viacheslav Cherniakhovsky
- The National Bank of Ukraine (NBU) currently does not publish information about the work of insurance companies as well as makes no forecasts about the future of the market. What is your assessment of the situation in general?
- Experts say Ukraine's GDP has declined from 30% to 50%. Hence, the insurance market will drop even lower, to 40-60% as compared to 2021, adjusted for inflation.
By the end of the year, if the war situation does not get worse, we might expect some recovery in the market, first of all, as regards mandatory types of insurance. In particular, we are already observing a more than a double growth in the number of Green Card contracts due to the fact that thousands of refugees flee abroad on their own cars.
The members of our Association have started supplementing various standard insurance contracts with clauses on the coverage of war risks, both primary and secondary. This should contribute to retention of customers for whom the coverage of such risks is very important today.
- How can you describe the situation with the assets and solvency of Ukrainian insurers?
- The main asset in insurance are people. Unfortunately, some companies in the eastern regions have faced numerous cases when employees remained in the temporarily occupied territory, suffered from shelling or were drafted into the Armed Forces of Ukraine (AFU), serve in territorial defense units or were evacuated, including abroad, which greatly complicates the work. A part of material assets of many insurance companies, including their regional offices, were affected by the war. They [the offices] were destroyed or remained in the occupied territory. The hryvnia assets have been devaluated by more than 30% due to the weakening of the hryvnia and inflation. The assets invested in government bonds are exposed to a high risk of restructuring, which we have seen on the example of foreign currency government bonds.
The majority of insurance amounts were tied to the hryvnia, however, taking into account the rising cost of recovery of any asset, the amounts of actual payments have already grown by 15-20%. Raising of the official hryvnia exchange rate against the U.S. dollar by the NBU to UAH 36.6 will result into even higher expenditures of insurance companies, in particular due to the NBU's ban on payments to foreign reinsurers and accumulation of retained payments in hryvnia if the exchange rate grows by a third, and require insurers to pay UAH 500 million more when buying currency under the prior period obligations.
Formal over-reserving due to regulatory requirements and a decrease in insurance premiums will result into a paradoxical situation when insurers' capital will temporarily be even higher as compared relative to other obligations. Meanwhile, the volume of payments decreases while maintaining the volume of expenses for doing business, which will lead to an increase in the share of expenses in total payments. In the future, this will produce financial losses and put pressure on capital. Ukrainian insurers with foreign shareholders have the opportunity to receive additional funding from parent structures. While many Ukrainian shareholders of insurance companies have their core business (agriculture, development, etc.) affected by the war, and it will be difficult for them to capitalize their insurance companies.
Even earlier, before the war, the insurance market experienced a decrease in return on capital due to excessive regulatory requirements. In the conditions of active hostilities, the problem continues to worsen.
- What underwriting challenges do Ukrainian insurers currently face?
- A new challenge for the market is that clients are demanding the inclusion of war risk coverage in standard contracts. However, the market is now in the process of accumulating data that will allow making statistically valid underwriting calculations to add such options.
Certain changes have taken place in auto insurance. The regions of transport operation have changed significantly. The huge number of internally displaced persons and refugees forced to go abroad has affected the frequency of road accidents in the regions, which cannot but affect the underwriting and tariff policies of companies. The conditions for storage of vehicles and some other standard terms of motor insurance have changed. All this requires updating approaches to underwriting and pricing.
- How do you assess the ability and desire of Western reinsurers to support the Ukrainian insurance business, and what steps might be of interest?
- We now have a very difficult situation with making payments to foreign reinsurers. In fact, they are temporarily suspended for all types, except for four types (insurance of nuclear and aviation risks, travel insurance and the Green Card), due to restrictions on transferring foreign currency abroad introduced by the central bank.
Our Association has repeatedly applied to the NBU with a request to allow the transfer of foreign currency abroad under all reinsurance contracts, given the extremely small share of such payments in the total volume of the foreign exchange market (less than 0.3%). Already now the country has problems with facultative placement of risks in reinsurance, the next acute issue will be the extension of obligatory contracts.
The impossibility of reinsuring war risks jeopardizes any serious plans for the post-war recovery of Ukraine. The continuation of such a moratorium by the NBU threatens the economic and financial stability of the country, increases the risks not only for the insurance business, but for all clients of insurance companies. This issue was raised at the discussion of the working group of the draft recovery plan for Ukraine, developed by the National Council for the Recovery of Ukraine from the War, in the working groups under the Verkhovna Rada Committee on Finance, Tax and Customs Policy.