In this section represented is the analysis prepared by the Association of Professional Insurance Intermediaries of Ukraine (APIIU). APIIU is the association of insurance intermediary firms. At present it has 19 members, among which are not only Ukrainian, but also Russian, Austrian and British insurance broker and agent firms.
Sections of Analysis:
Value of the Insurance Market
Current Situation at the Insurance Intermediary Market of Ukraine
The total amount of insurance premiums obtained by Ukrainian insurers in 1999 amounted to UAH 1.16 billion, which is 48% more than in 1998. As in previous years, in 1999, the rate of insurance premium growth was much (twice) higher than the inflation rate. At the same time, considering the hryvnia's 1999 devaluation by 52%, as compared to 1998, it can be concluded that the value of Ukraine's insurance market dropped last year by approximately 4.5% in real terms.
Despite the insurance market's nominal growth, this sector presently accounts for a very small share of GDP redistribution. Proceeding from the assumption that this sector should occupy a particular niche in Ukraine's financial system and be one of the driving forces behind the GDP's redistribution, it can be concluded that today, Ukrainian insurance companies do not accumulate sufficient investment funds and exercise no significant influence on the gross domestic product redistribution process.
In 1999, the growth of insurance payments exceeded the growth of insurance premiums. As a result, the dynamics of the average level of payments, after decreasing for a long period (from 61.1% in 1994 to 22.5% in 1998), reversed: in 1999, the average level of payments amounted to 31%.
The services demanded most are those related to property insurance (61.6% of the total volume of insurance services), the least popular is life insurance (0.7%). In Ukraine, obligatory insurance accounts for a small share in the total volume of insurance services — 14.6% (of that, state insurance — 1.4%). For comparison: in Russia, this indicator amounts to around 40%. This shows that potential exists for the development of Ukraine's insurance market at the expense of obligatory insurance, first of all non-governmental.
It should be especially noted that Ukraine's insurance market is characterised by an extremely weak life insurance sector, showing a steady decreasing tendency since 1995.
Every year, the specific weight of life insurance premiums in the general premium structure drops two-fold. Beginning from 1995, the total amount of life insurance premiums is also falling rapidly. The number of valid policies fell four-fold between 1994 and the beginning of 1998. Meanwhile, in foreign countries this kind of insurance accounts for the lion's share of insurance premiums, demonstrating a strong growth tendency.
According to the State Register of Insurers (Re-insurers) of Ukraine, as of January 1, 2000, 263 insurance companies were registered in Ukraine. Experts estimate the number of insurance companies active on the market in the previous year at around 200.
Compared to 1994, when more than 700 insurance companies were operating, their number fell nearly three-fold. However, this reduction had a positive effect, as it occurred due to the removal of insolvent companies and pseudo-insurance firms from the insurance market. It was partially conditioned by legislative regulation of the insurance business, strengthening of state control over the insurance market, and tougher requirements to insurance company authorized fund amounts. Such measures contributed to the sanation and, to a certain extent, stabilization of the insurance market.
Proceeding from specialization in specific kinds of insurance, a group of companies engaged in obligatory insurance services can be distinguished. Furthermore, there is a tendency towards the establishment of sectored insurance companies, which, behind the excuse of defending national interests or the population's social protection, monopolize some insurance market sectors.
Companies established by powerful industrial corporations or financial-industrial groups for servicing their own needs can also be distinguished. The sphere of their activity is usually limited by the founders' interests. At the same time, they bar competitor companies from the market.
Finally, we should name the group of, let's call them, classical insurance companies targeting the entire market and the broadest possible customer base. Such companies avoid engaging in a specific sector, and try bringing their entire range of operations in compliance with international standards.
Apart from the stabilisation of the number of insurance companies, Ukraine's insurance market is undergoing the process of establishing various insurer associations. Presently active are the League of Insurance Organisations of Ukraine and a number of insurance bureaus and associations (pools). For example, the Motor (transport) insurance bureau of Ukraine is a member of the international "Green card" system. The Bureau settles disputes arising with Ukrainian "Green card" holders abroad, and acts as a guarantor of insurance payments under obligatory civil liability policies on Ukraine's territory. Under this Bureau, a fund has been established to make payments to those who suffered in traffic accidents where offenders fled from the accident scene.
The amount of the authorised fund is one of the objective indicators of the solvency of an insurance company. In Ukraine, however, this indicator is only approximate for a number of reasons. First, the control over authorised fund compliance with state-established minimum norms was suspended. Second, at present, there are neither regulatory documents governing authorised fund use, nor control over its employment. Third, only 60% of a statutory fund is in cash, while the remaining 40% may consist of any assets, including illiquid. Fourth, there is no established correlation between the authorised fund amount and an insurance company field of activity; this issue is not regulated by licensing rules.
According to 1999 results, the total volume of authorised funds of all insurers rose by UAH 177 million, or more than two-fold. As of January 1, 2000, it amounted to UAH 327.9 million. This growth was to a large extent achieved thanks to three companies: People's Financial Insurance Company (its authorised fund rose from UAH 1.3 million to UAH 24 million), "Oranta" National Joint-Stock Insurance Company (from UAH 960 thousand to UAH 22.3 million) and the Ukrainian Oil and Gas Insurance Company (from UAH 900 thousand to UAH 18.6 million).
In general, however, insurance company authorised funds remain low. Ukraine's average paid insurance company authorised fund is approximately UAH 1.2 million. More than two thirds of insurance companies have authorised funds below the established minimum amount, and only 60 companies (63%) have authorised funds exceeding UAH 1 million. This causes problems for Ukrainian insurers with risk reinsurance on the domestic market, and places the issue of the consolidation of domestic insurance capital on the agenda.
Compared to 1998, in 1999, insurance reserves rose by 20% and reached UAH 537 million. The growth of insurance reserves is a positive tendency, as it means the higher reliability and solvency of insurance companies. However, it is premature to speak about steady progress in the insurance business: the total amount of insurance reserves of all insurance companies in Ukraine is lower than the equity capital of Ukraine's "Prominvestbank" alone which, by 1999 results, totalled almost UAH 700 million.
The balance profit of insurers in 1999 amounted to UAH 234 million (in 1998 – UAH 179 million). Profit from the insurance business was equal to UAH 192.2 million (UAH 128 million in 1998), from other activities — UAH 42 million. According to 1999 results, Ukraine's insurance companies paid more than UAH 50 million in taxes.
The performed analysis creates grounds for stating that Ukraine's insurance market is highly concentrated, judging both by the index of the aggregate volume of insurance company insurance premiums, and from the regional point of view.
Today, more than half (55%) of all insurance premiums in Ukraine is concentrated in the 10 largest insurance companies, only 3.7% of their total number. The similar situation is observed in Russia where almost 50% of all voluntary insurance payments is collected by 10 biggest insurance companies. According to the latest data, 85% of all insurance premiums is collected by 50 insurance premiums, with the remaining 15% falling on 213 insurance companies.
Almost two-thirds of Ukrainian insurance companies are concentrated in five cities: Kyiv (more than one-third), Odesa, Kharkiv, Donetsk, and Dnipropetrovsk. At the same time, in some regions (such as the Kherson and Sumy regions) there are no such companies. As the Diagram shows, the whole of Western Ukraine (nine out of 25 regions) has only 11% of all insurance companies.
Considering the stagnant dynamics in the number of insurance companies in the last two years, the lowering of the business development expense share and its stabilisation at a level of 18-20% of all insurance premiums, one can assume that today, there are no significant investments in the development of insurance company infrastructures.
Current laws provide only for the presence of foreign capital on Ukraine's insurance market in the form of foreign company participation in joint ventures (their share in the authorised fund is limited to 49%). At present, 23 insurance companies with foreign capital are active on Ukraine's insurance market. Six of them have a 49% share of foreign capital, one — 36%, two — 25%, and 14 - 19-21%, respectively.
At the same time, after June 17, 1999, EU country insurance companies got a chance to work on the Ukrainian market directly. They were authorised to establish subsidiaries in Ukraine, 100% owned by foreign capital.
This created a conflict of laws regarding the activity of foreign companies on Ukraine's insurance market, as the draft Law of Ukraine "Amending the Law of Ukraine "On Insurance" provided only a 49% foreign share in authorised funds of Ukraine's insurance companies. The draft does not mention the procedure for establishing companies with 100% foreign capital at all. On the other hand, even after the adoption of the aforesaid draft, Article 46 of the Law of Ukraine "On Insurance" will remain valid, providing that international treaties have a priority over domestic insurance legislation. Therefore, non-resident EU country insurers will be able to establish their subsidiaries in Ukraine, while those from other countries will, as before, content themselves with a 50% block of shares of Ukraine's insurance companies.
The volume of the reinsurance market is increasing. In 1999, reinsurance contracts earned UAH 238.5 million (11.5% of total revenues from all types of insurance), which is 90% higher than in 1998. UAH 262.8 million were paid to re-insurers, or 35.2% of total insurance proceeds.
Non-resident companies remained leaders on the reinsurance market. Due to limited Ukrainian insurance company authorised funds and the low capacity of Ukraine's insurance market, the lion's share of insurance premium amounts (which could potentially be used for domestic investment in Ukraine) goes to foreign reinsurance companies.
According to the Law of Ukraine "On Insurance", if the insured amount for a specific insurer object exceeds 10% of the paid authorised fund and formed insurance reserves, the insurer is obligated to enter a reinsurance contract. Whereas the formed insurance reserves and the authorised funds of all insurance companies amounted to UAH 865 million in 1999, risks valued in excess UAH 86.5 million (or $16 million, which is what an aeroplane costs) were to be reinsured abroad.
For this reason, in 1999, 61.5% of the total amount of all reinsurance contracts was reinsured outside Ukraine. Ukrainian insurance companies transfer up to 90% of insurance premiums for the insurance of air and marine risks to foreign re-insurers, up to 90% of premiums for health insurance of travellers abroad, up to 60% of "autokasko" premiums, and up to 50% of premiums of insurance of large property risks.
Risk reinsurance abroad has both negative and positive consequences. The negative ones include the outflow of currency, and significant pressure on the hryvnia. On the other hand, foreign re-insurers have sufficient assets to reimburse large losses, and consciously fulfil assumed commitments. They successfully demonstrated this when reimbursing their share of damages after the "Zenit" rocket failure.
At the same time, a group of market leaders may be distinguished among Ukraine's insurance companies, ready to provide reinsurance of significant risks and capable of expanding the range of such services. According to expert estimates, such companies include, among other, "Ostra-Kyiv", "Oranta", "Garant-AUTO", and "ASKA"
The state's regulatory functions on the insurance market presume the establishment of regulatory-legal fundamentals and control over their observance. This is to guarantee target-oriented use of funds for investors, profits for insurance companies, reliable sources of long-term investments for the national economy, and budget revenues for the state, at the expense of civilised taxation of the insurance business.
The state's regulatory role is especially important during the insurance business establishment period, particularly in the present critical situation being experienced by Ukraine. However, from the analysis of the state's attitude to insurance, one can conclude that the latter is not very interested in establishing civilised rules for Ukraine's insurance market, taking world experience into account. Over the entire period of economic reform in Ukraine, the Government has not adopted a single programme document setting conceptual fundamentals for the development of Ukraine's insurance business. Not a single comprehensive target-oriented programme has been developed, and plans for events proposed by separate agencies were never adopted.
Today, the state's role is becoming more important, especially in executing supervisory functions. According to the head of the former Insurance Business Control Committee I. Yakovenko, there is a real threat that the "trust" period will repeat itself. These words are being proven by the latest events in Dnipropetrovsk, Shostka and Kyiv, where thousands of individuals were deprived of millions of dollars. The economic mechanism of social insurance is similar to that of a "trust". According to Mr. Yakovenko, "Today, social insurance is closely related and merged with non-banking financial capital. This is normal. Around the world, non-banking financial markets interact with social insurance, but there is a relevant infrastructure there, regulating this process. In Ukraine, there is no such structure. That's why it is very important to solve the problem of the non-banking financial market together with social insurance in 2000".
As of today, Ukraine operates a weak, underdeveloped and economically insignificant insurance market that accounts for the redistribution of only 0.4% of the GDP. This means that Ukrainian insurance companies are presently unable to accumulate sufficient volumes of investment resources and exert noticeable influence on the process of gross domestic product redistribution.
Most in demand are property insurance services (61.6% of the total volume of insurance services). Life insurance is the least important source of investment resources on Ukraine's insurance services market (0.7%), although in economically developed countries its share amounts to 50-60%. Moreover, the share of life insurance payments in the overall payment structure drops two-fold every year.
Ukraine's insurance market is characterised by a high level of concentration, both judging by the index of the aggregate volume of insurance company insurance premiums, and from the regional point of view.
Insurance company authorised funds remain low. Ukraine's average paid insurance company authorised fund is approximately UAH 1.2 million. This causes problems for Ukrainian insurers for the reinsurance of risks on the domestic market, and places the issue of the consolidation of domestic insurance capital on the agenda. Due to limited Ukrainian insurance company authorised funds and the low capacity of the domestic insurance market, foreign companies retain leading positions on the reinsurance market.
The lowering of the share of expenses spent on business development and its stabilisation at a level of 18-20% of all insurance premiums point to the fact that today, there are no significant investments in the development of insurance company infrastructures.
Ukraine's insurance market is now witnessing the process of establishing various insurer associations. Presently active are the League of Insurance Organisations of Ukraine and a number of insurance bureaus and associations (pools).
So far, the state does not display much interest in the establishment of civilised rules on Ukraine's insurance market, taking world experience into account. There is an urgent need for the working out a Concept and a State programme for the development of Ukraine's insurance market.
current situation at the insurance intermediary market of Ukraine.
At the insurance market of Ukraine intermediaries exist from the moment of the market’s appearance at the end of 80-ies. They were represented by the only category - insurance agents. Insurance agents were mostly natural persons, working under contract or agreement of employment. Legal entities also acted in the capacity of insurance agents, though insurance mediation was not the main kind of their activity (railway cash departments, travel companies, savings-bank etc.). Insurance companies fulfilled and continue fulfilling the functions of insurance intermediaries while selling insurance products of foreign insurers.
Professional insurance intermediaries appeared on the insurance market in the middle of the 90-ies, represented by insurance brokers, working mainly in favor of insurers, providing reinsurance coverage for them both in the Ukrainian and foreign reinsurance markets. The basis of the insurance broker professionals was formed by former upper and middle managers of insurance companies. The 2nd half of the 90-ies is characterized by occurrence of professional insurance intermediaries that put as a basis of their activity protection of consumers’ interests on the insurance market. In September 1997 nine professional insurance intermediaries have founded Association of professional insurance intermediaries of Ukraine (APIIU). After one year of its activity, i.e. in 1998 APIIU achieved recognition both in Ukraine and abroad. In May 1998 APIIU took part in the state Program of enterprise development for 1999 - 2000, in August the association participated in the joint program of the World Bank and Government of Ukraine EDAL -1 in the component «Technical support of professional associations in the financial market», in October APIIU joined the International federation of insurance and reinsurance intermediaries (BIPAR) during the General Assembly of the federation in Athens (the only member association from the CIS and Baltic states).
The joint work together with the Committee on state supervision over insurance activity and the League of insurance organizations allowed APIIU to achieve registration and introduction of the state register of the insurance brokers in 2000, this fact is considered to be the beginning of the civilized insurance intermediary market in Ukraine. At present there are 22 registered insurance brokers in Ukraine, among which 15 firms, 5 natural persons and two representative offices of foreign insurance brokers.
1. Insurance brokers
a. Legal entities, subjects of enterprise activity;
b. Natural persons, subjects of enterprise activity;
c. Representative offices of foreign insurance brokers.
2. Insurance agents
a. Legal entities (intermediary activity in the insurance market – main kind of activity);
b. Legal entities (intermediary activity in the insurance market – auxiliary kind of activity);
c. Insurance companies – residents selling insurance products of foreign insurers on conditions of the agency agreement;
d. Specialized associations of insurers with the right of realization of insurance products of their participants;
e. Representative offices of foreign insurance agents, legal entities;
f. Natural persons, subjects of enterprise activity (kind of activity - exclusively intermediary activity in the insurance market);
g. Natural persons, subjects of enterprise activity (intermediary activity in the insurance market, not an exclusive kind of activity);
h. Natural persons, working under the contract of employment with insurance company;
i. Representative offices of foreign insurance agents, natural persons, subjects of enterprise activity.
Due to the absence of registration of insurance agents and as a result – absence of the official statistical data on them, it is not possible to determine the market share for each subject of insurance intermediary market and the shares for realization of these services.
10.05.1993 - Decree of the Cabinet of Ministers of Ukraine (further CMU) «On insurance»;
07.03.1996 - Law of Ukraine «On insurance»;
18.12.1996 – CMU Enactment No1523 «On the order of the execution of insurance intermediary activity»;
14.09.1998 - CMU Enactment No 1428 «On the adoption of the Program of development of the domestic insurance market for 1998 – 2000»;
29.04.1999 - CMU Enactment No 747 «On the regulation of insurance brokers’ activity»;
09.09.1999 - CMU Enactment No 1662 «On amendments to the Regulations on special conditions of insurance brokers’ activity»;
26.10.1999 - Order of the Committee of state supervision over insurance activity No78 «On the adoption of the Instruction «On the order of certification of insurance brokers, keeping the state register of insurance brokers and regulation of their activity»;
11.04.2000 – Enactment of the National Bank of Ukraine No135 «On application of foreign currency in insurance activity ».
1. Press – in general, positive attitude to insurance intermediaries, however quantity of the publications explaining importance of an insurance intermediary is insufficient. A low level of knowledge of this profession by the journalists, as a consequence, leads to numerous discrepancies and mistakes in the publications. APIIU carried out several joint projects with magazines «Financial services», «Business», «Office», «Economist», «Share market».
2. TV and radio – complete ignoring of the given topic.
3. Internet – there is the informational web-site of the APIIU. The Association fulfilled joint informational projects in the Internet together with Russian and European owners of web-sites.
4. Press-services of official bodies and organizations working in the insurance market – passivity in illumination of their work and in distribution of the open information on activity of the participants of the insurance market. Usage of outdated information channels of public relations.
The professional training of the insurance intermediaries is carried out by the following ways:
1. Courses of qualification upgrading for experts of insurance business - Center of professional training, retraining and upgrading of League of insurance organizations of Ukraine (further CENTRE), Center «Market», Ukrainian financial-banking school.
2. Seminars on professional themes -APIIU, CENTRE.
3. Round tables with participation of the experts from official bodies and organizations acting on the insurance market – APIIU;
4. Professional training of insurance agents - Insurance companies which have signed contracts of employment with agents.
International contacts of participants of the insurance intermediary market are carried out in the following directions:
1. Participation in professional international non-governmental organizations;
2. Mutual visits to the professional experience and knowledge exchange;
3. Organization and participation in the international conferences and forums;
4. Information interchange via Internet;
5. Rendering of technical and financial support to insurance intermediaries at realization of the joint projects;
6. Investment activity on creation of joint ventures.
Creation of necessary starting conditions for building the modern insurance intermediary market;
Presence of professional association of insurance intermediaries, as an organization protecting interests of insurance intermediaries and consumers of insurance services;
Recognition of APIIU at the insurance market of Ukraine and by international professional associations;
Positive experience of joint work with League of insurance organizations of Ukraine, Center of training and retraining at LIOU, official bodies and organizations dealing with insurance;
Introduction of the state register of insurance brokers and their registration;
In general, positive attitude of mass media to the activity of insurance intermediaries;
Absence of negative attitude to the insurance intermediaries at public;
Occurrence of international broking companies in the insurance intermediary market of Ukraine (Marsh, AON, Heath Lambert).
Absence of the state program supporting development of insurance intermediary market, as an integral segment of the insurance market of Ukraine (within the framework of the state program of development of the insurance market till 2005);
Making amendments to the Draft Law of Ukraine «On amendments to Law of Ukraine «On insurance» without taking into consideration of opinion of the insurance intermediaries.
Absence of Law of Ukraine «On insurance intermediary activity» (within the framework of the Insurance Code of Ukraine);
Registration of only one category of insurance intermediaries - insurance brokers and absence of any supervision over the insurance agents;
Restrictions at the insurance brokers’ financial activity;
Ignoring the suggestions of the participants of insurance intermediary market and their professional association at the process of development of regulatory documents;
Opportunity for insurers to work on the capacity of insurance agents of foreign insurance companies;
Weak informational support by mass media of the image of insurance intermediary as a necessary participant of the insurance market.
Low level of financial opportunities of the participants of insurance intermediary market;
Absence of compulsory professional indemnity insurance for insurance intermediaries.
Absence of insurance intermediaries’ representatives from APIIU in Expert Council by the Cabinet of Ministers of Ukraine.