Insurance for the few: The National Bank tried to resolve the collapse in the reinsurance market. However, not all players will be able to fully resume operations

Insurance for the few: The National Bank tried to resolve the collapse in the reinsurance market. However, not all players will be able to fully resume operations

The NBU will create a list of insurers to work with the global market. Which companies will be lucky enough to get there?

Insurance for the few: The National Bank tried to resolve the collapse in the reinsurance market. However, not all players will be able to fully resume operations
Photo: depositphotos.com

News that could have become comforting for the insurance market turned into a scandal. The ability to reinsure risks abroad was suspended for almost a year. Last Friday, the NBU lifted these restrictions by its resolution. However, most insurers are very sceptical of the regulator's new requirements.

In particular, the NBU wants to allow only companies from the new List, which it will compile itself, to enter the reinsurance market. The conditions for being included in this list are a transparent ownership structure of the insurance company, compliance with solvency and capital adequacy ratios, as well as norms of the riskiness of operations. Foreign reinsurers must have an A- rating from international rating agencies.

Mind has analysed why it does not suit everyone, how the market has functioned under the restrictions, and how it will work now.

When did the problem with reinsurance arise? After February 24, 2022, Ukrainian insurers were prohibited from paying for the services of the international reinsurance market. "Due to almost year-long restrictions on the payment of reinsurance payments and reimbursements abroad, the insurance market has suffered significant losses, both material and image. The quality of coverage for insurers has deteriorated significantly, risks for insurance companies have increased, and their capabilities have shrunk," describes the problem Andriy Semchenko, underwriting director of one of the largest and oldest insurance companies, INGO.

The ability to share insurance risks is important for the development of the entire economy. Without it, the largest facilities and businesses in the country, including critical enterprises, cargo carriers, as well as portfolios of the medical, hull and other risks, are basically left unprotected.

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

As Mind wrote, insurers were deprived of the opportunity to insure such objects because the NBU banned paying a commission for their reinsurance abroad. Only foreign insurers, guaranteed by their parent companies, were able to continue to work on large risks.

What are the consequences of these restrictions? The ban on reinsurance has begun to destroy the business chains that Ukrainian insurers have been building over the past decades. In particular, INGO Insurance Company announced the closure of its large health insurance program, Global Medicine, which tens of thousands of clients were using to protect from critical illnesses.

"At the beginning of 2023, we, like several other insurance companies, were unable to continue cooperation with reinsurance companies important for this program. After all, according to the National Bank's Resolution No. 18 of 24.02.2022, Ukrainian insurance companies are prohibited from conducting financial transactions to pay insurance premiums under reinsurance contracts... Existing reinsurance contracts continue to be covered until the expiration date," INGO said in a statement on January 20, 2023.

ARX, the largest insurance company in the Ukrainian market owned by Canadian investors, also faced the inability to fulfil its obligations to pay premiums to non-resident reinsurers.

How did the global market react? Most of our international reinsurance partners were sympathetic to the Ukrainian situation. They confirmed that they would continue to fulfil their obligations under reinsurance contracts. "We managed to renew all our obligatory reinsurance contracts for a new term," says Nataliya Chernova, Director of Product Management at ARX Insurance Company.

Sergiy Avdeyev, Chairman of Arsenal Insurance, clarifies that large international insurance companies have actually renegotiated reinsurance contracts in advance, but, at the same time, they have set a number of new requirements.

"Some reinsurers refused to work with our market, while others significantly raised their prices and set new restrictions, in particular on war risks. The foreigners also have said that if there is no payment by such and such a date, the contract will be recognized as invalid from the date of conclusion. We are talking mainly about payment by July 1, 2023," says Pavlo Tsaruk, head of TAS Insurance Group.

He clarifies that foreign reinsurers have removed the causal link for war risks and significantly expanded the interpretation of what is or can be considered war risks: "Basically, they can now decide themselves that a particular risk is a war risk and refuse to cover it, even if there is no clear causal link, or it is not proven."

Obviously, not all reinsurance companies are currently ready to take on risks from Ukraine. "However, it's not the moratorium on payment of reinsurance premiums that is decisive, it's the war and the indirect negative factors and risks associated with it. Our company did not have to close insurance programs due to the lack of reinsurance. However, many companies – subsidiaries of international groups that were previously insured under global international insurance programs were forced to seek insurance directly from their Ukrainian colleagues," says Nataliya Chernova from ARX.

Read also: The rules for war risk insurance have become stricter. How does it threaten maritime export from Ukraine?

How do insurers assess the NBU's new requirements? Market participants' opinions on the consequences of the resolution are divided. Some companies believe that the problem has been solved. "The new resolution allows transferring reinsurance premiums abroad regardless of the date of the contract. Now, if an insurer complies with all the standards set by the National Bank and has no violations in its activities, it can freely transfer reinsurance premiums abroad in favour of reinsurers with appropriate ratings," says Sergiy Avdeyev.

Previously, he was wary of the National Bank's ban on payments to foreign reinsurers. However, in his opinion, the situation may improve now. "The issue has been completely solved," Avdeyev is sure.

Andriy Semchenko, Underwriting Director of INGO Insurance Company, has a different opinion. According to him, the speed of development of the list of insurers with the right to reinsure abroad raises doubts. "We have  long expected these restrictions to be eased. Let's hope that the changes offered by the regulator will be fully implemented. It is not yet known how quickly the register (List) of ICs will be created. However, even these positive changes will not allow us to quickly return the Western reinsurance companies that have already left the Ukrainian market," says Semchenko.

Vyacheslav Cherniakhovsky, CEO of the Insurance Business Association, also considers the future List of Insurers to be a "narrow neck of the bottle." Another questionable point is the need for each company's norms and reputation to meet the NBU's requirements every month. After all, the insurer's indicators can change every month. And it is unrealistic to terminate the reinsurance agreement and cancel the obligation to pay for previous periods.

"In any case, it will be the foreign reinsurer that will suffer, as it will not receive its legitimate payments for the services it has honestly provided. In private communication with international market players, we are already hearing questions about how their Ukrainian partners can get on this List of insurers," says Cherniakhovsky.

He also reminds that not all of those foreign companies that have met Ukraine halfway and have been fulfilling their obligations under reinsurance contracts without payment for almost a year now meet the NBU's requirement of a rating of at least A-.

Who will be left overboard? Reinsurers with ratings lower than A- cannot and will not be able to receive their money from Ukraine. These are almost all second-tier companies. For example, the Indian reinsurance company Gicre, the Azerbaijani AzRe, and the Kazakhstani Eurasia Insurance Company. These and other companies have been actively working with Ukraine. Gicre is one of the 15 largest reinsurance groups in the world.

"Now the NBU is simply taking away their ability to receive their legitimate payments and continue to operate in the Ukrainian market. And we know that the reduction of participants number contributes to the increase in prices for reinsurance of risks from Ukraine, which have already increased by 1.5-2 times per year," criticises Vyacheslav Cherniakhovsky.

According to him, foreign reinsurers have been waiting for this restriction to be lifted for a long time. The current decision of the National Bank satisfies only the reinsurers that are among the top companies in the world. However, it will leave lower-tier companies dissatisfied, which often take on reinsurance of facilities in Ukraine.

"From the international agreements point of view, the extended restriction for such reinsurers is a violation of Ukraine's commitments in the financial services sector when it has signed the WTO accession agreement," Cherniakhovsky warns.

"It is important for international reinsurers to understand that the moratorium or any restrictions are a temporary phenomenon. And that Ukraine is aware of the economic importance of the insurance and reinsurance mechanism to protect business, in particular, creditors and investors," summarizes Nataliya Chernova from ARX.

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