Russian state reinsurer grabs 10% of premium

Legislation passed in the Russian Duma introduces compulsory reinsurance, with a retroactive provision to take 10% of premium on existing policies.

Russia is creating a national reinsurance company (NRC) to take 10% of all reinsurance premium, according to legislation passed by its parliament.

The State Duma’s “Law on Organisation of the Insurance Industry in the Russian Federation” was passed in the third and final reading on June 21, taking legislators two months to adopt.

The new bill introduces compulsory cession of 10% across reinsurance and retrocessional policies.

The new government reinsurer cannot have a credit rating above that of Russia’s government, which is currently rated at “BB+” by rating agency Standard & Poor’s.

According to legal firm CMS, the bill is a response to international sanctions on Russian government linked “persons”, since President Vladimir Putin annexed Crimea from Ukraine in 2014 and invaded parts of that country’s eastern territory.

“As a result, foreign reinsurers representing major international reinsurance markets started either to refuse accepting risks associated with such persons and sectors or to insist on the inclusion of the so-called sanctions clauses in contracts,” Leonid Zubarev, senior partner, CMS Russia, wrote in a post on legal blog site Lexology.

“That said, no case of non-payment of reinsurance indemnity due to these sanctions clauses has been reported since the end of 2014,” Zubarev highlighted.

The NRC plans to reinsure catastrophe risk across property policies, but with a focus on persons “subject to restrictions, which are directly or indirectly related to the decisions of foreign state bodies or foreign organisations that prevent the reinsurance of such persons’ interests outside the Russia”.

Its most controversial provision, Zubarev notes, which was removed and reinstated several times in the course of the law’s passing, is the compulsory cession rule for all insurance and reinsurance contracts concluded in Russia.

“It seems this provision tacitly makes the application of the law retroactive as obligatory reinsurance contracts could remain in force for many years…Apparently, reinsurers…will lose 10% of their premium income pursuant to the law and at the discretion of the NRC,” warned Zubarev.

He noted that the bill stated that “from 1 January 2018 the effect of the law will be extended to relationships arising from reinsurance contracts concluded prior to 1 January 2017”.

He claimed lawmakers disregarded a report from Russia’s Presidential Council for the Codification and Improvement of Civil Law which was strongly against the concept.

That report warned the retroactive compulsory session was “contrary to the basic principles of civil law – freedom of contract and equality – and creates unjustified advantages for the NRC”, Zubarev noted.

“Nevertheless, this provision was left intact in the final text of the bill,” he said.

The new state reinsurer is the brainchild of Russia’s central bank but during “protracted and painful discussions in 2015 and early 2016”, but Russia’s insurance and legal industry “voiced serious criticism against the bill”, he noted.

“Yet, the bill was hastily submitted to the State Duma, where it quickly passed through three readings with hardly any changes to the initial version and the second and third readings taking place on the same day and time,” Zubarev said.

“We will learn one day the reason behind such hurry,” he suggested.

The legislation states that the NRC will be formed by Central Bank as a joint-stock company, but with its shares fully held by Russia’s central bank.

The bill allows for an initial public offering at an undisclosed later stage, but no private entity will be able to buy more than 10% – the Central Bank alone holding that privilege.

An NRC board will be set up, with central bankers excluded from its membership composition, although it will report directly to them as sole owners of its stock.

There will also be a non-binding advisory group, the Reinsurance Council, made up of representatives from the underwriting, broking and actuarial community.

“Generally, it follows from the bill that the NRC will only report to its founder, i.e. the Central Bank of Russia,” said Zubarev.


Author: Hassan Khazaal

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