Ukrainian insurance market froze, unable to reinsure abroad. What decisions do insurers expect from the new NBU Head Andriy Pyshny?

Ukrainian insurance market froze, unable to reinsure abroad. What decisions do insurers expect from the new NBU Head Andriy Pyshny?

The sharing option of financial risk is necessary for the normal opeartion of business and the economy

Ukrainian insurance market froze, unable to reinsure abroad. What decisions do insurers expect from the new NBU Head Andriy Pyshny?
Photo: NBU Press Service

The National Bank of Ukraine should return the possibility to reinsure risks abroad to insurance companies. This was reported to Mind by Pavlo Tsaruk, CEO of the TAS Insurance Group. According to him, the National Bank should allow insurance companies to resume payments in foreign currency abroad under previously concluded agreements on international reinsurance. It may happen before the end of this year. Mind has looked into why domestic insurers are waiting for this decision and how it will affect the market.

What is reinsurance? In simple terms, it is delegation and sharing of financial responsibility for a fee.

Insurers cannot keep large risks without reinsurance. When they occur, the company can go bankrupt, giving away all their money for one large insured case. To prevent this from happening, part of the risks is always transferred to the international market. The insurer shares part of the premium with a pool of insurers that can be based worldwide.

For instance, a factory is insured against fire for UAH 1 million. The cost of insurance, or insurance payment, makes 1%, or UAH 10,000. The insurance company sells half of the risk to reinsurers, i.e. UAH 5,000 is divided among a pool of other insurance companies. In case of an insured event – a fire, the reinsured part of the risk, that is 50%, or 0.5 million UAH, is paid by a pool of international companies.

This is the international practice of reinsurance in the world. However, in Ukraine, this system temporarily does not work due to the inability of Ukrainian insurers to pay for the services of foreign reinsurers.

Why was the Ukrainian market cut off from the global reinsurance market? With the beginning of the war, the NBU logically began to impose restrictions on the transfer of money abroad to protect the Ukrainian economy and increase the effectiveness of assistance from our foreign partners. The structure and the list of restrictions changed, except for critical imports.

However, it is impossible to transfer money outside of it. This applies even to the dividends of some companies. It is also impossible to pay reinsurance premiums abroad. Earlier, Mind wrote about restrictions on the number of card transactions and other measures taken by the team of NBU Governor Kyrylo Shevchenko to reduce capital outflow abroad in wartime.

In addition to the actual problem of withdrawal of funds, according to market representatives, the NBU feared that reinsurance would be used for money laundering. These fears were reasonable: it was the scheme of international money laundering in the format of reinsurance, due to which Ukraine was blacklisted by the FATF in 2003-2004. Viktor Suslov, then the head of the insurance market regulator, the State Commission for Regulation of Markets of Financial Services, blocked this scheme. Since then, the volume of reinsurance in Ukraine has fallen significantly.

Thus, reinsurance has not been used for money laundering or other schemes, except in very rare cases, for more than 10 years. There is a suspicion that some insurance companies with foreign shareholders transferred dividend money through reinsurance, but this is not officially confirmed, perhaps not yet. At least the NBU has not officially fined any player with foreign shareholders for doing this.

What is the volume of the reinsurance market? According to Insurance Top, in the pre-COVID 2019, Ukrainian insurers paid non-residents UAH 3.3 billion of outward reinsurance premiums. According to the World Bank, the volume of direct foreign investments in Ukraine amounted to $5.8 billion in the same 2019.

Given that as of December 31, 2019, the dollar exchange rate was, according to the National Bank, UAH 23.68/$, UAH 137.3 billion of direct investment came to Ukraine in terms of the national currency. Most of the money in this figure is believed to be  reinvestment. Actually, the money earned in Ukraine – the hidden profit – is withdrawn abroad through various schemes. The volume of outward reinsurance is 40 times less. Thus, the volume of abuse, even if it does exist, is incomparable.

Furthermore, payments from Ukrainian companies are accepted, in particular, by respected international giants, which are often listed on international exchanges and avoid all dubious operations. Among them are American Gen Re, German Hannover Re, etc.

According to Insurance Top, in 2019, the largest share of the total amount of paid shares of insurance premiums for reinsurance to non-residents was received in Germany – 22.3%, followed by Austria – 19.4%, Great Britain – 17.3%, Poland -- 10.0%, Switzerland – 7.0%.

At the same time, according to the same source, outward reinsurance operations in the first half of 2022 fell by half (-51%) – from UAH 4.7 billion to UAH 2.3 billion, compared to the same period last year. Reinsurance within the country has decreased four times, from UAH 1.9 billion to UAH 0.5 billion.

Among the reasons for the rapid reduction are administrative restrictions. "So far, the situation is that since February, the entire insurance market has been growing debts to foreign reinsurers. The NBU has long promised to allow reinsurance payments abroad", says Sergy Avdeyev, Head of Arsenal Insurance.

How do reinsurance restrictions affect the economy? Some foreign reinsurance companies have met their Ukrainian colleagues halfway and are still waiting for the Ukrainian regulations to be simplified in terms of payment for services abroad. Most foreigners will, obviously, not conclude contracts without guarantees of payment. Because of this, there is a situation in the Ukrainian market when after the reinsurance contract is expired it is impossible to prolong it due to the position of the Ukrainian regulator.

It primarily creates a problem for the insurance of large industrial and business facilities, in particular large cargo transportation, factories, business centres, etc. Insurers cannot accept such objects for insurance because the NBU prohibits paying commission for their reinsurance abroad.

The whole financial sector suffers from this. Firstly, because insurance companies have to bear large risks without being able to provide them with external support.

Secondly, it makes loans on the pledge of large objects partially impossible, because banks do not accept uninsured property as collateral. Only foreign insurers, which have guarantees from their parent companies, are still able to continue working on large risks.

In theory, the guarantees of parent structures replace international reinsurance. In case of critical risk, their parent structure guarantees that the contracts will be performed. It is unknown how they will behave in practice, but it significantly narrows the range of companies that can insure the large property.

As a result, lending is now mostly possible in a way of small consumer loans or under government programmes. All other lending has stopped. Thus, the entire market is waiting for the National Bank's decision on liberalization for the insurance sector.

Why is it important to unlock the possibility of reinsurance before the new year? When planning their work, insurance companies usually start from the calendar year. However, according to Vyacheslav Cherniakhivsky, Chairman of the Insurance Business Association, Ukraine’s insurance industry is on the verge of terminating all contractual relations with foreign companies on reinsurance.

"We already have several messages from the world's leading reinsurers that from January 1, Ukrainian insurance companies will not be extended reinsurance contracts, which will stop the possibility of concluding almost all insurance contracts in Ukraine for industrial, agricultural, construction and other enterprises, will block mortgage and collateral insurance for banks by legal entities-borrowers, will make Ukraine an unreliable partner in the international market," he explains.

The market is waiting for the unlocking of the possibility of payment under reinsurance contracts. "Such contracts should be concluded by the end of the year. But most reinsurers still refrain from signing them because they do not understand when these contracts will be paid. The previous management of the NBU promised to take the issue off the table by the end of October, but it is still open. We hope that the National Bank will resolve this problem soon", adds Pavlo Tsaruk.

He is supported by Viacheslav Cherniakhivsky: "We would like to see the draft, submit suggestions and comments, as the regulator must publish drafts for public discussion before making decisions on important issues. Every day counts until the non-residents who still work with Ukraine stop cooperating with insurance companies in Ukraine," he emphasizes.

Currently, the NBU has reached a verbal agreement to allow Ukrainian insurers to settle debts with foreign reinsurers. As a preliminary, new contracts can be concluded only if they include war risks. However, as Mind has previously reported, now these risks are almost not insured in Ukraine. It means that the issue can still be revised.

"At the beginning of the year, obligatory reinsurance contracts are traditionally renewed. Against the background of the existing lack of desire of foreign reinsurers to provide coverage to Ukraine, the inability to pay reinsurance premiums in principle threatens the further existence of the market", says Sergiy Avdeyev.

Their expectations are supported by the fact that even during the war, the National Bank can hardly be accused of inattention to the insurance market. "During the war, the NBU under the previous management was actively engaged in the development of a more complex and costly regulatory framework. It has prepared documents introducing new principles and forms of reporting, documents on corporate governance and internal control systems of insurers, risk management systems, and new methods of debt provisioning. Many changes were made to the licensing conditions – the document on them alone is about 200 pages long," says Vyacheslav Chernyakhivsky.

According to him, on November 2, a meeting of representatives of the National Bank and the Ministry of Economy of Ukraine was held, where the problematic issues of reinsurance were jointly discussed. "But there are no solutions. In a month and a half, Ukrainian insurance companies will be disconnected from the international reinsurance market", says Chernyakhivsky.

Therefore, insurers hope that the new management of the National Bank headed by Andriy Pyshny will lend an ear to the wish to be more liberal to the market.

This project uses cookies from Mind to deliver its services and to analyze traffic.Learn moreOK, Got it