By Kirill Savrassov, CEO, Phoenix CRetro
The granting of a special license to the Ukrainian insurance company, Brokbusiness, by the National Bank of Ukraine (NBoU) to post collateral abroad represents the culmination of developments in both the global catastrophe reinsurance markets and the local insurance markets in the central and eastern Europe (CEE) and Commonwealth of Independent States (CIS) regions. It is envisaged this will enable regional companies to provide around $100m retrocession capacity to the global insurance market by insurers in the CEE region over the course of the next three to five years.
One the one hand, there is the collateralised reinsurance and insurance linked securities (ILS) markets, which are growing very rapidly because of the involvement of non-insurance capital. These markets provide a number of different instruments to enable those who are not professional insurers or reinsurers to participate in the international catastrophe reinsurance market.
On the other, there are the local markets within the CEE, the CIS and the Middle East where there is the capacity and understanding to participate in the international cat markets, but where the local markets are not quite developed enough. But these markets have no exposure whatsoever to global cat events; they are not able to participate because almost no company in these markets has an adequate financial strength rating as the sovereign rating in these countries, which limits the scope of individual corporate ratings, is well below the minimum requirements of the security committees of international brokers.
At present the possibility of CEE insurers making use of letters of credit confirmed by A-rated western banks is very limited. This issue is further complicated by the negative attitude on the part of western banks’ towards the region. This makes the whole process very expensive and very complicated for CEE insurers.
However, one of the broader benefits of the license issued by the NBoU is it also opens up the possibility of the use of escrow accounts in insurance transactions between companies in Ukraine and companies based elsewhere.
It is also now possible to Collateral Trust Agreements (CTAs) within the insurance context. CTAs are widely accepted internationally as a simple, clear and efficient way of collateral provision and are frequently used in transactions between local and international banks. So if local financial systems use collateral as the way to attract credit for the economy why can insurers not use it as a way of guaranteeing their financial performance and reap the added benefit of generating inward premium income for the region as well as increasing the diversification of their portfolios?
However, the CTA concept does not widely exist or is not implemented in the existing legislation in CEE. Indeed, some countries in the region have legislation in place but it is not implemented.
In terms of this diversification, the CEE region represents a primary insurance market with US$45bn to $50bn of gross written premium annually, with a good combined ratio and minimal exposure to global catastrophe events. Indeed, many countries in CEE region usually have one national reinsurer to which the local insurers cede their reinsurance. These national reinsurance carriers are therefore ideally positioned within their local markets to write ILS business to diversify their portfolios. In this regard, they can act as a hub for the amalgamated capacity in their country.
Again, this complements the risk/liability profile of the local markets: many of the domestic insurance companies in the region are part of larger financial groups, usually with banks or asset managers as the shareholders who understand the role of ILS as an alternative asset class for investors.
This trend also coincides with current World Bank’s policy to encourage emerging states to resort to the ILS market to in order to provide another level of protection for their economies in the event of the country being struck by a major catastrophe. For example, the recent success of the issuance of a cat bond by Turkey should encourage other emerging country governments or insurance groups to follow that example.
There is, however, one major challenge which needs to be overcome. And this is the lack of understanding and almost complete absence of communication between the state and regulatory authorities in the CEE and the global financial centres. One prime example would be how Bermuda is perceived by central banks and regulatory authorities in the CEE. In a number of CEE countries, there are significant regulatory restrictions on transactions with entities based in Bermuda. This is despite the fact 15 out of the 40 global reinsurance groups are based there and Bermuda is a well-established and highly regarded part of the international ILS environment.
To transform this state of affairs will require a sustained process of engagement between the global financial centres and the state and regulatory authorities in the CEE.
Also republished this article on 28th October 2014, to see please click here