It’s Friday

And we have decided to make today’s post a bit less business-oriented than usually… Turns out, it’s not so easy to do. (Re)insurance and finance may well be sexy, but they are rarely funny. So we have made a two-part post.

Those of you who want to have a laugh, scroll down to Part 2 right away

Part 1. Solvency

For the more dilligent rest, here is fresh news from the Russian (re)insurance community. The fast approaching introduction of Solvency II doesnt’ bother the market, since Russia is not an EU member state. However, numerous insurance bancruptcies have forced the country’s ministry of finance to toughen capital adequacy and asset allocation standards. The new requirements are expected to be introduced starting from June 30, 2011.

Currently, the ministry is holding discussions with the insurance community. At yesterday’s negotiations Russian players complained the 1.3-1.6 solvency margin ratio (depending on the insurance segment) set forth in the draft is too high, suggesting to keep it at 1, as now. The parties met half-way: the ratio figure may be reduced to just 1.3.

“The increase to 1.6 bothered players because it basically increased 60% the volume of supervised investments”, Oleg Pilipets, deputy head of the Russian insurance regulator FSIS, stated, as quoted by RBC daily publication. Meanwhile, most insurance insolvency cases in Russia are a result of “investments” in non-existing assets, he pointed out. As a result of such fradulent practice up to 50 insurers may lose their licences by the end of the year, according to the FSIS.

Part 2. Fun

I can’t believe we have missed this news! But it’s so good it’s worth repeating. A couple of weeks ago, Romanian lawmakers considered imposing a tax on witches and fortune-tellers. Too bad, the excellent idea didn’t pass in the country’s Senate (here are the details). According to a sponsor of the draft , senators were too afraid of being cursed by the potential taxpayers. We at The Insurer suggest another explanation: maybe some Romanian senators keep crystal balls at home?

Old News

Last week's Rendez-Vous in Monte-Carlo stirred little fuss in the global market. Apart from Munich Re's announcement of a new approach to covering oil platform risks one of the few more or less exciting stories was Lloyd’s confirming its plans to consider a Russian office. (In the absence of other sensations?) the news even made headlines in some daily Rendez-Vous publications.

Quiet Monte-Carlo or not, such attention to the conglomerate’s plans is rather puzzling, because, in fact Lord Levene announced them as early as this past May during his half-secret visit to Moscow. By half-secret, we mean that Russian insurance media learned about the visit shortly after the conglomerate team had left for London. Apparently, in the West, the secret was kept much better.

To fill the knowledge gap, we have decided to publish our summer column on Lord Levene’s visit.

Sweet Polish Deja Vu

“Poland-based insurance giant PZU has revealed that it could spend PLN5 billion on acquisitions.” Is this news of September 2010 or July 2008? We at The Insurer would say, both.

PZU’s senior management is clearly not content with running the largest CEE insurer by premium. They want to expand, to reach out to new horizons, to see the sky as the limit... Unfortunately, the only step towards expansion PZU has been making so far is regular announcements. The attitude and the wording are standard all the time, the acquisition budget somewhat reduced by the crisis: in July 2008, it reached PLN10 billion (around EUR2.5 billion). One would assume, if the financial storm hadn’t come ashore, PZU’s press department could just copy-paste the same annoucement each time the big bosses feel like reaching out to new horizons. So, what for us readers is a deja vu, for the PZU team may well be an idee fixe.

Just how likely is the Polish giant to finally make an acquisition within short-term period? Chances are rather low even if this time around PZU management is adamant. In the first half of the year, PZU saw its net profit dropping 49% on H1 2009 against the backdrop of weaker investment results and flood losses. The projected full-year net profit will be at least PLN1 billion lower than the 2009 figure of PLN3.8 billion, according to Andrzej Klesyk, PZU’s CEO. This doesn’t seem to be a good time for the company to enter new lands.

Finally, Central and Eastern Europe doesn’t have too many interesting acquisition targets: all the best women companies are taken. PZU has been eyeing the Belarusian state company Belgosstrakh – but just like PZU has been repeatedly promising to buy somebody, the Belarusian government has been promising to sell their insurance jewel...

So, we are not saying good-bye to this issue – something tells us we’ll be writing many more posts on it.

We tax you, we tax you not

Today’s FT issue features a story on upcoming changes in the Ukrainian tax system. At first sight, it seems that the country is about to adopt a fiscal approach that goes out of sync with the general CEE trend: while countries like Croatia and Poland are considering tougher environment for corporate tax payers, and Hungary has already implemented an extraordinary financial levy, Ukraine is lowering the fiscal pressure aiming to have “one of the most liberal tax codes” in Europe – all to attract foreign investors.

According to Borys Kolesnikov, Ukraine’s deputy prime-minister, as quoted by FT, “corporate profit tax will be cut from 25% to 16% by 2014. Small businesses will get a five-year tax exemption, while light industry and hotels will enjoy 10-year tax holidays”.

Considering the dire economic state of the country, such tax breaks seem too generous to be true – and unfortunately they are. We have asked our Ukrainian financial expert, Dmitry Efimov, to comment on the governmental move.

“The draft tax code presented to the Ukrainian parliament is a disgrace to the country’s government".

"In fact, the state is attempting not to lift, but to increase the tax burden on corporate and private taxpayers. To be eligible for simplified taxation, a company will need to have an annual income of no more than UAH300,000 compared to the current UAH500,000. Coupled with inflation, this measure will hit thousands of small businesses very hard”.

Monte Carlo Day 2: Solvency II and the Mystery of iPads

This morning, I was talking to a Europe-based reinsurance broker. "This is going to be a very quiet Monte-Carlo, no big issues to discuss", he said. "We are likely to see some movement only next year when our clients start to get ready for Solvency II, which may lead to price hikes". So far, he seems to be right - presentations at the two media events we have attended today (AM Best and AON Benfield) were more about PR and less about news than usually at Rendez-vous.

Moreover, according to AM Best, Solvency II isn't going to shake the global market to the core. Starting from 2012, demand for reinsurance services will indeed increase, Miles Trotter, the agency's general manager for analytics, confirmed. But considering that the US, where Solvency II will not apply, accounts for over a half of the non-life reinsurance industry, the impact of the new standards will be rater limited, he opined. So are we up for another quiet September?

In the absense of other major news stories and in view of substanial excess capital, innovations continue to top the list of topics discussed at media events. Bryon Ehrhart, chairman of the analytics and investment banking division at AON Benfield, mentioned using iPads for underwriting purposes as one of solutions for the future. This pretty much solves the mystery of the Apple product that has recently replaced paper underwriting slips in the offices of domr Lloyds players - the guys are exploring ways to productively use the extra capital funds they have!

Fortunately, industry players do not limit innovative approaches to buying trendy Apple gadgets: for the press brief AON Benfield prepared a publication listing several dozen more complicated solutions to new risks.

Monte-Carlo Day 1: Work Like It's 2007

For the global reinsurance industry, this year's Monte-Carlo Rendez-Vous feels more like one in 2007 than that in 2009, Henry Keeling, president and CEO of Guy Carpenter's international operations shared with the audience at today's press event. The reason for this mental time travel is very simple: reinsurance capital seems to have recovered from the crisis and demonstrated some growth - mainly due to unrealized gains.

Now reinsurers have to look for ways to make the excess capital productive. Share buyback programs at full swing in a number of companies and dividend payments "don't create profitable growth", Keeling opined. Guy Carpenter advises the industry to focus on emerging risks and markets, and invest in new technologies.

Guy Carpenter itself has started to look into Asian specialty risks (not a too large segment of the regional market) and into... microinsurance. Actually, it seems to be the first time heavyweights like Guy Carpenter are seriously speaking about microinsurance at such a global industry event as Rendez-Vous... This surprising move may indicate that when it comes to new risks and markets, reinsurers don't seem to have many lavish choices - or maybe we are wrong. After all, according to Guy Carpenter's estimations, the current volume of the global microinsurance industry is around US$1 billion and it has the potential to reach US$5 trillion some day. Too bad, the experts didn't indicate when exactly the day will come.

Speaking about industry surprises - reinsurance prices don't seem to grow. "And they will continue to stay at a low level absent major loss events", Christopher Klein, global head of reinsurance, predicted - and not just any major loss event. Indeed, over the first half of the year, we have seen quite a lot of catastrophes, both natural and man-made: starting from the Haiti earthquake to the Deepwater Horizon drama. And yet the rates continue the downward trend - or, at best stay flat. Rapid rate hikes will be possible after a surprise, ground-breaking  loss event, something like 9/11, Klein stated.

Incidentally, today is the 9th anniversary of 9/11. They say in 2001, when the news spread about the attack, Rendez-Vous de Septembre suddently stopped being a vanity fair.

In the world of Waldemar Pawlak

This is a short text that we published in the most recent offline issue of The Insurer magazine some weeks ago. Although the Polish government doesn’t seem so radical anymore, discussions of the role of second pillar pension funds in the country are still quite heated, which makes the story rather relevant even now.

Channeling part of second-pillar moneys into the state social security system is by far not the most revolutionary change in the pension segment that the Polish government is considering. According to the country’s media, deputy prime-minister and economy minister Waldemar Pawlak suggests that every Polish citizen should pay a small contribution to the Social Insurance Institution (ZUS) and receive a similarly small pension. Citizens that want to have a higher standard of “golden years”, according to economy minister, would need to make voluntary contributions to private savings and investment funds. To put things differently, in the world of Pawlak, the mandatory private pension funds (OFEs) would be abolished.

Monte-Carlo Day 0

Today, we have arrived at Cote d'Azur. At the airport, we have seen a person with a sheet of paper that said "AON. Mr. and Mrs O'Halleran". Rendez-Vous de September is about to begin...

Tomorrow, we are attending a Guy Carpenter media event.

They Won’t Rob Banks

The Hungarian move has impressed and inspired other CEE economies: Croatia (less resolutely) and Poland (rather enthusiastically) are mulling over plans to introduce financial taxes of their own. Unfortunately – or fortunately, depending on the point of view – Donald Tusk and his Croatian colleague Jadranka Kosor do not have Orban’s crusading governance style, so the discussions are quite likely to last for a long time and at best end up with a pale copy of Hungary’s we’ll-make-you-pay-for-everything levy.

A couple of days ago, the Economist Intelligence Unit (EIU) has published an article analyzing which countries of the region have much higher chances to see financial taxes implemented. According to the experts, Slovenia could be the next “because of the character of the government and the political environment in which it operates”. Well, with all due respect for the British publication, Slovenia seems less likely than any other CEE state to impose tax on banks and insurance companies – exactly because of “the character of the government”.

Pauls and Peters

Yet another illustration to the current state of the Russian motor segment... On Monday, Ingosstrakh, one of the country’s key insurers, published its H1 auto subrogation data. “On the whole, the situation with subrogation payments remains unsatisfactory. Although a number of companies have started to partly cover their subrogation debts on a voluntary baisis, the overall amount of due payments <to Ingosstrakh – The Insurer> continues to grow, which indicates that the companies either have financial difficulties, or have adopted a strategy of minimizing their voluntary payments” (here is the Russian original).

The non-payers continue to break payment deadlines, cover subrogation claims selectively, and demand extra documents not specified by the Russian law on compulsory MTPL and the Code of Professional Conduct adopted by the Russian Association of Motor Insurers (RAMI), Ingosstrakh laments.

Before you take a closer look to the table, here are a few things worth noting: in H1, subrogation payments due to Ingosstrakh have grown 24% compared to year-end 2009. Debts of only six out of Ingosstrakh’s 23 subrogation partners reduced over the half-year – this is a disastrous dynamics. And it’s highly unlikely that Ingosstrakh is just being unlucky. The same situation must be typical for all other Russian motor insurance players, big and small (small obviously have it worse as their financial pillow is much thinner). And finally – almost all of the insurers featured in the table are either up for sale, or wouldn’t mind attracting foreing investment. Investors, beware, step away from the glass.

Hi, Tech!

Lloyd’s brokers have embraced iPad: for the next three months the Apple product will replace traditional underwriting slips at Marsh, Cooper Gay and RK Harrison Group. The paper-free mission has been entrusted to 30 brokers. If the experiment proves successful, it will be extended for an unspecified period.

So – are we finally going to see a technological revolution at Lloyd’s? If yes, then Apple designers and engineers can really be called geniuses. The London market has been basically tittering on the electronic cutting edge for at least ten years (Kinnect, RI3K, ACORD, Xchanging, anyone?), but somehow never really entered the paperless realms. We’ll keep watching the show.

By the way, the lucky 30 – if you are reading this, please let us know how the trial is going.

Catchup and Overtake America

After massive summer fires (and fire-related bills that will have to be footed by the state), high-ranking Russian authorities have started paying close attention to insurance business, previously somewhat of an unwanted child of the country’s economy. Unfortunately, to love insurance business doesn’t mean to know it.

At the August 30 meeting with representatives of key Russian insurers, President Medvedev stated happily that at least the country’s motor segment operates in line with international standards. Well, Medvedev’s ideas of international standards in insurance are positively curious...