The first priority of any state at the time of the globalisation of the world economy and the financial crisis is to ensure the competitiveness and protection of domestic producers of goods and services. Nevertheless, accidents, natural and technological disasters are causing serious damage to economic entities and to economies in general.
In 2009, Ukraine experienced 49,000 fires, which killed 3,183 people. In addition, the annual damage associated with floods, estimated at EUR1,000 per hectare, totalled almost EUR200m, down from EUR450m in 2008. As a result, annual economic losses due to car accidents were valued at EUR2.0-2.5bn, those due to man-made disasters - at EUR20m and those due to fires - at EUR45m.
During 2009 the number of new projects undertaken by various construction companies using their own resources fell by 48.2%. Currently, some two-thirds of house building projects have been mothballed or shut down for an indefinite period. At the same time, the demand for new cars fell by thee quarters: total volume of car sales decreased by 74% compared with 2008. At the beginning of the year, the number of registered unemployed totalled 531,600 people.
Impact of the international financial crisis on the Ukrainian insurance market
As of 1 January 2010 there were 469 insurers on the local market, including 73 that specialised in life insurance, the same as the previous year. During 2009, 20 insurers – 15 general insurers and five life insurers – were excluded from the State Register but at the same time 20 new companies – 15 general insurers and five life insurers – were added, down from 45 in 2008. The number of active brokerages was of 60, while there were 25-30,000 insurance agents.
Insurance companies underwrote UAH20.44bn (EUR1.88bn) in gross premiums in 2009, down 14.9% on the year. General insurers underwrote UAH19.61bn (EUR1.80bn), while life insurers underwrote UAH827.3m, (EUR7.18m), or 4% of total written premiums. The volume of paid claims totalled UAH6.73bn (EUR619.77), down 4.4%, representing a claims ratio of 33%, up from 29.4%.
Last year, Ukrainian insurers ceded UAH8.88bn (EUR817.66m) to reinsurance companies, 1.9% less than a year earlier, including UAH1.10bn (EUR101.56m) to non-resident reinsurers (up 6.4%), and UAH7.78bn (EUR716.09m) to resident reinsurers (down 3%). At the same time, local companies received premiums of UAH242.1m (EUR22.27m) from non-resident reinsurers, down 23.7%, and paid reinsurance claims of UAH1.05bn (EUR96.5m).
According to the Financial Services Commission, insurance reserves at the end of last year totalled UAH10.1bn (EUR932.93m), down 7% on 2008, which included life insurance company reserves of UAH1.78bn (EUR164.58m), up 11.2%. The authorised capital of Ukrainian insurers posted a 12.6% increase to UAH14.87bn (EUR136.85m).
In addition, insurers’ assets totalled UAH41.97bn (EUR3.86bn), with an additional UAH23.69bn (EUR2.17bn) directed to the provision of insurance reserves.
Overall in 2009, 22.343m contracts were concluded, excluding mandatory insurance for transport accidents, which was 2.1% less than in 2008. The retail segment accounted for 19.18m contracts, up 2.7% on the year.
Cause and effect
During 2009, Ukraine was seriously affected by the financial crisis and this contributed to a reduction of sales channels, including motor insurance sold by auto dealers, bancassurance, mortgage and travel insurance.
potential…
For 2009, almost all indicators related to insurance activity showed a decline compared to the previous year. Insurance contracts fell by 2%, written premiums by 21% and insurance reserves by 7%. The claims ratios for MTPL and mandatory health insurance exceeded 100%.
Also, insurers faced a new problem: the volume of current assets held in troubled banks seriously affected their solvency. Additionally, they were faced by increased costs for foreign reinsurance and a fall in invested asset values.
Generally, however, companies had not invested their insurance reserves in precious metals, mortgage certificates or long-term loans. Rather, more than 44% of insurance assets were placed in the banking system, mainly in current and short-term deposit accounts.
How popular is insurance?
Insurance density in Ukraine increased by four times to reach some 1% in 2009. Currently, 3.1m people have a life insurance policy, about 2m have mandatory health insurance, 5.9m MTPL and 1.7m property insurance. It should be mentioned that MTPL and mandatory health insurance have undergone an important evolution over recent years as interest in these classes has grown. The total volume of written premiums in the retail segment totalled UAH5.9bn, down 20.4%. The most popular segments were Motor Hull, where written premiums totalled UAH2.8bn (EUR 257.78); MTPL, UAH1bn (EUR92m); and life insurance, UAH641 (EUR59m).
The average price for a Motor Hull policy in 2009 was UAH4,700 (EUR472), compared with UAH4,640 (EUR426) a year earlier, for MTPL it was UAH173 (EUR16), for mandatory health insurance and property insurance it was UAH142 (EUR13), and for civil liability it was UAH109 (EUR10).
According to INSURANCE Top Magazine research, general insurance companies were doing better in the retail segment in the third quarter of the year and in the corporate sector in the fourth.
The inverse-pyramid effect: During 2007-2008, which saw a boom in motor insurance sales, the owners of many insurers embarked on a rapid scale-up of their insurance portfolio, using dumping practices, with the intention to subsequently sell the company. The result was the formation of a pyramid insurance company, which paid claims from the new customers’ contributions. The market situation in 2009 resulted in insurance claims rising faster than written premiums and consequently insurers that reduced insurance rates during the boom became insolvent during the crisis. Such companies will be forced to reduce and optimise their spending, cut investment projects, regional expansion and operational staff and close unprofitable offices.
The poor-owner effect: The crisis has had a significant impact on insurance companies controlled by financial or industrial groups that are experiencing financial difficulties. In an attempt to improve their situation these groups are trying to get rid of non-core assets, for example, insurance companies.
The market outlook
This year will be a more difficult one for Ukrainian insurers than last. However, many have made preparations for the challenges ahead. The main problems in the market are an inadequate legal framework, and the poor development of health and agricultural insurance.
A strengthening state supervision of the insurance business will contribute to an increase of the ËrealË insurance share of the market. In addition, 30-40 insurers may quit the market in 2010, including companies with foreign capital. This applies especially for those that are focused on bancassurance through car dealers and travel agencies that are not able for the moment to enter other insurance segments. Mergers and acquisition deals are most likely to occur in three types of companies: between subsidiaries with foreign capital, well-positioned players on the Ësecond tierË and leading players that are potential candidates to merge with foreign insurers.
