Amidst Economic, Political Woes

Moscow never sleeps, they say, and it seems that for more than 300 actuarial professionals currently working in insurance and pensions in Russia, this was a painful yet welcome reality over the last two years.

On November 2, 2013, President Putin had signed a federal law governing actuarial activity in the Russian Federation, with many changes and implied challenges for the profession that would follow in 2014 and 2015. The entirety of 2014 was spent accurately interpreting the federal law and understanding the actual requirements, leading to a road map for how actuaries and their employers or clients would function under the new regulations. In the following year, the industry saw many “firsts,” from standardized actuarial examinations and the required development of practice standards to the introduction of the role of the Appointed Actuary and issuance of the first actuarial opinions. This pivotal moment in the maturation of the actuarial profession in Russia coincided with an economic anxiety that Russians have not seen since the late 1990s, primarily driven by the plummeting price of oil and increasingly weaker ruble as a result, in addition to added pressures from the Ukrainian crisis and the sanctions from the U.S. and the European Union.

With the collapse of the Soviet Union in 1991 and the preceding years of Glasnost and Perestroika, enormous changes were observed in the financial sector, including the insurance industry. The first insurance regulations were signed into law in 1992, with numerous developments following. The insurance industry grew from basically nil to 374 billion rubles (at today’s foreign exchange rates, a little under $6 billion) in written premiums in 2004, and almost tripled a decade later, reaching 1 trillion rubles in 2015. Early post-Soviet years saw the creation of many new companies and, often, defaults that subsequently resulted from undercapitalization and lack of experience. In some instances, defaults were deliberate: Companies quickly grew the premiums and extracted the cash, consequently leaving the policyholder without protection. Actuaries had little say in the affairs, with very few exceptions. While insurance penetration in today’s Russia continues to be far below that of more mature economies, Russian businesses and consumers are now used to insurance as a path to financial stability. This is largely driven by a consumer boom over the last 15 years and a dramatic increase in auto ownership together with the introduction of OSAGO (compulsory personal auto third-party liability insurance).

The passage of the federal law governing actuarial activity is probably the most momentous event for practicing actuaries in Russia over the last two decades. It not only brings accountability and structure to the profession, but also recognition that gives actuaries a definitive voice in the industry.

The insurance industry has seen significant growth in the last decade in both life and P&C segments.  (Like in many parts of the world, health insurance is included in the definition of non-life, with many P&C companies also writing health.)  Life insurance continues to comprise a relatively small piece of the pie, but P&C represented close to 90 percent of total written premiums at the end of 2015. Ironically, an average Russian actuary is likely to be more versed in life actuarial matters rather than P&C; this familiarity with life insurance is a testament to a strong academic influence and reflects earlier regulations for non-state pension funds that require actuaries with life and pension expertise.

Currently there are 326 insurance companies in the Russian Federation, which is a third of the number of companies operating a decade earlier. The top ten insurers accounted for a little over 60 percent of the market by premium volume in 2015, and the concentration is likely to grow as smaller companies will have an increasingly difficult time staying competitive in a struggling economy while simultaneously satisfying progressively stricter regulatory requirements. The P&C sector is dominated by personal auto with 45 percent of P&C written premiums coming from CASCO (comprehensive and collision insurance) and OSAGO.

The passage of the federal law governing actuarial activity is probably the most momentous event for practicing actuaries in Russia over the last two decades. It not only brings accountability and structure to the profession, but also recognition that gives actuaries a definitive voice in the industry. Other contributing factors have also helped raise awareness around the profession and emphasize the value of actuaries. The continued implementation of International Financial Reporting Standards, with an implied requirement to apply liability adequacy tests when evaluating reserves, has motivated insurers to employ and develop actuaries with proper skills and knowledge. Deteriorating underwriting results in personal auto added further pressure on reserving and highlighted needed refinement in pricing and risk classification. Transfer of insurance regulatory authority in 2013 to the Central Bank of Russia, a “mega-regulator,” not only strengthened and centralized the insurance industry oversight, but also allowed for a robust dialogue around actuarial input that continues today.

Some of the key provisions of the federal law governing actuarial activity include:

• Defining an actuary and actuarial activity.
• Establishing requirements for “qualified” actuaries (qualified to work as an actuary) including a mandatory qualification examination administered by the Central Bank of Russia.
• Defining the role and requirements of the Appointed Actuary, with the right to prepare and sign an actuarial opinion.
• Introducing mandatory annual actuarial opinions and reports for insurance companies, self-insured organizations, non-state pension funds and organizations responsible for compulsory insurance rate studies.
• Establishing the frameworks for developing actuarial standards of practice and recognizing self-regulating actuarial organizations, as well as creating an actuarial advisory board.

The profession is currently served by two, arguably competing, self-regulating actuarial organizations: the Russian Guild of Actuaries and the Association of the Professional Actuaries.  Created in 2002, the Russian Guild of Actuaries is a member of the International Actuarial Association (IAA) and has a prominent P&C presence among its 145 full members. Initially sponsored by the actuaries representing the national association of non-state pension funds, the Association of the Professional Actuaries was created in 2013 and has 97 full members. Both organizations are represented on the actuarial advisory board, work closely with the Central Bank of Russia, and actively administer actuarial examinations. As of early 2016, the Central Bank of Russia recognizes a total of 99 Appointed Actuaries who service the entire insurance industry, over 300 companies and around 100 non-state pension funds. Most companies had to produce and publish their first actuarial opinion by July 1, 2015 — with little guidance and an apparent shortage of Appointed Actuaries — while anticipating subsequent inquiries from the regulator and potential disciplinary actions from the two self-regulating actuarial organizations. (Before the end of 2015, two members had lost their Appointed Actuary status and a number of members had been fined.)

While Russian actuaries are still adapting to the new requirements, their continued dialogue with the industry will be critical — especially since the Central Bank is aggressively eyeing a more robust approach to solvency regulation and is actively deliberating the concept of rate regulation.

Overall, the changes are undoubtedly positive, albeit with a hands-on regulatory oversight not unfamiliar to Russians. Under the right circumstances, the changes provide the profession with a renewed vision and growth opportunity in a structured environment. As if to recognize the apparent progress and welcome the changes, the IAA Council and Committee meetings will be held in Saint Petersburg at the end of May 2016. This is the first time in over a century such an event is taking place in Russia. Before this an International Congress of Actuaries was organized in 1915, also in Saint Petersburg, but was not held because of the onset of World War I.

Gregory Babushkin, FCAS, is a former actuarial practice leader for PwC Central Eastern Europe and is now second vice president & senior actuary at Travelers Companies in Hartford, Connecticut. Nickolay Kuznetzov is an Appointed Actuary and chief actuary for SOGAZ Insurance Group in Moscow, Russia.