Market insiders are predicting Ukraine's insurance market is set for another year of growth, as the historically underdeveloped sector is buoyed by increased international investment, rising incomes and increased consumer awareness.
In 2006, insurance premiums reached $2bn, 2% of the country's GDP. In Western Europe, the percentage of gross premiums to GDP is between 8 and 10%. While these numbers are lower than the peaks recorded in 2004, approximately 65% of these premiums are now part of the regular insurance market. In 2004, the bulk of the market was tied up in captive insurance, which are insurance companies set up within larger companies in a tax-optimisation effort.
While macro-economic conditions and the increased adoption of standards and practices of major multinational firms almost guarantee growth, there are several challenges that continue to hinder the market.
Some industry analysts argue there is significant room for legislative improvement, citing a raft of pending laws, such as increased minimum capital requirements for company start-up, improved regulation of agents, and tax incentives that could further boost the sector. However, in the words of one executive, "political considerations" have thus far hindered the passage of such legislation.
Another often-cited problem is the low minimum capital required for start-ups. The current requirement for non-life insurance companies is (1m. Most industry insiders would like to see that increased. Ukrainian insurance executives have also called for that figure to include only available liquid reserves, not total assets.
There is continued uncertainty about the government's position on health insurance. Several draft laws designed to make the purchase of medical insurance obligatory have failed to secure approval. Companies are not given incentives to allocate money to provide medical insurance to their employees, further hindering uptake.
Though industry observers had expected significant legislative changes favouring the industry would be passed in 2007, the current political standoff between the president and the leaders of parliament make this less certain.
The past has also shown that passing laws is often not sufficient. Massive growth in the auto insurance business was anticipated after third-party liability insurance was made mandatory in 2005. While this has led to a growth in the number of policyholders, weak enforcement has left insurers disappointed. Some estimate this $50m market should be four times as large.
The sector has benefited in the last two years from foreign investment. Firms from the West and Russia have entered the market through greenfield operations or as shareholders of Ukrainian firms. For example, Italy's Generali Group took a majority stake in Ukraine's Garant Auto Group in 2006, setting up new companies for life and general business. American Insurance Group (AIG) has full ownership of two local firms AIG Ukraine and Alico AIG Life. Germany's Allianz group is present in the market via its 97% share in Russia's ROSNO, which entered Ukraine in 2005.
Though the effects of these investments are regarded almost universally as positive, some industry insiders feel the country is burdened by the number of companies in the market. There are currently over 400 general insurance companies operating in Ukraine. Most expect the market will consolidate, although legislative changes would help speed the process.
One of those changes would be a revamping of the tax code to dissuade businesses from establishing non-classical insurance companies. At the moment, Ukraine's legal framework still makes this a particularly attractive prospect for firms, as such insurance companies can be used to house income and lower or even avoid corporate taxes on profits. Changing the tax laws would likely find many more companies and individuals looking externally for insurance.
There is concern from traditional insurance firms regarding the large number of captive insurance companies and the effect they could have on public perceptions of the market.
As one managing director of a local traditional insurer told OBG, "these companies are not run by insurance professionals, but usually from within the particular industry of the parent company. Their knowledge is not sufficient to properly evaluate risks and provide effective product solutions."
On the client side, insurance companies have worked to grow consumer confidence. "People in Ukraine do not trust the insurance sector like other investments," said Irina Sirenko, president of Ukrainian insurer Providna. During the hyperinflation of the mid-1990s, many Ukrainian insurance companies went bankrupt. Insurance savings, levels of cover and payouts became worthless.
To compensate, large firms are focusing on improving consumer awareness, investing in training agents to international standards and focusing on client service rather than policy innovations to grow their market share. Indeed, customer service is where most insurers seek their competitive advantages. Nataliya Bezbakh, director general of Universalna, told OBG, "With the competition, every company is now trying to raise the level of service. I do not think you will see a price war."
An increasing foreign presence has helped. "The influx of foreign companies has led to the introduction of better products and services, with more customer-oriented products. This leads to more value for the client and, in the long term, more trust in the industry," Konstantin Bergmann, CEO of the Russian insurer ROSNO, told OBG.
Many in the industry predict future growth will be focused on the retail end. Growth in mortgages and consumer loans will lead more people to purchase property insurance in order to secure bank loans.