2016 Russian insurance market survey

Transcription

1 2016 Russian insurance market survey 2016 KPMG in Russia and the CIS kpmg.ru

2 2 Russian insurance market survey Introduction Julia Temkina Partner, CIS Head of Insurance Services Вступительное слово KPMG is proud to present this seventh annual survey of the Russian insurance market. You are invited to come with us as we explore the key directions in which the Russian insurance market is moving, and to look at the trends as seen by the chief executives of insurance companies that will determine short-term market development, and get the views of leading KPMG insurance professionals. In 2015 the volume of gross written premiums fell in real terms, despite significant growth in such lines of business as CMTPL and life insurance. The main reason for this decrease was a fall in demand for Casco insurance products. For the first time in recent years premium income from voluntary vehicle insurance fell due to the unfriendly macroeconomic climate and a decline on the automobile market. In 2016 the heads of insurance companies will try to regain their positions in this segment. In order to accomplish this, measures such as optimising underwriting, distributing deductibles and the cessation of tariff growth will be undertaken. However, according to the survey respondents, these measures will only bring a significant positive effect if the economic environment in Russia stabilises. In 2015 the consolidation of the insurance industry continued: only the leaders were able to retain their positions, through increasing premium income by approximately the level of inflation. Small and medium market players are more vulnerable in a challenging economic environment, and do not have sufficient internal resources or options at their disposal to make additional cash injections. This allows leaders to occupy freed market segments and leads to the further consolidation of the industry. Respondents expect a positive influence on the insurance market from upcoming legislative changes, due to the Central Bank of Russia continuing to actively communicate with agents operating in the insurance industry. Although insurers need to make significant efforts and incur expenses to implement legislative initiatives, most insurance company heads are willing to do so and are expecting positive changes in the market environment. We invite you to explore the findings of our survey, and we hope that the information it contains will be useful and enlightening. We would also like to take this opportunity to extend our gratitude to all respondents, without whom this survey would not have been possible, and to thank the KPMG professionals who agreed to contribute their opinions and thoughts. Best regards, Julia Temkina CIS Head of Insurance Services

3 Russian insurance market survey 3 Contents 04 Main findings 06 Insurance market development 17 Economic environment 21 Legislative changes 25 Loss ratios and expenses 33 Motor insurance 39 Life insurance 2016 JSC KPMG. All rights reserved.

4 4 Russian insurance market survey Main findings The insurance market declined in real terms, while consolidation continued 1 In 2015 CMTPL and life insurance demonstrated growth which exceeded inflation, whereas other lines of business declined in real terms. An increase in CMTPL gross written premiums was primarily due to an increase in tariffs. Market consolidation continues to be influenced by the economic crisis and a strengthening of regulatory supervision. The share of Top-10 insurance companies in terms of gross written premium stands at 71%, while the share of the Top-5 segment exceeds 50%. In 2016 insurance companies expect further consolidation: market growth will be driven by market leaders. In 2016 the main factors negatively influencing the development of the insurance market will be a decrease in purchasing power and a reduction in lending as in the previous year. The spread of new technologies could be a driver of the non-life insurance market, while life insurance market dynamics will be determined by the activity of main market players. Heads of insurance companies are planning to increase their portfolios, despite the negative nearterm insurance market development outlook 2 In the next two years growth rates will slow, according to the expectations of heads of insurance companies. Nevertheless, most respondents plan to develop sales in the near term. The highest priority measures to increase portfolios are raising customer retention levels and the development of new products, as in the previous year. In terms of increasing profitability, there is a shift in focus, from cost-cutting to improving portfolio quality, including more detailed underwriting and restructuring of business segments.

5 Russian insurance market survey 5 Credit life insurance is ceding market share to endowment and investment products Insurers should enhance anti-fraud measures in relation to online insurance policy sales 3 4 A decrease in bank lending is the primary reason for a slowdown in sales of respective insurance policies. At the same time, combined investment and insurance products demonstrated a sharp increase and made up over a third of the life insurance segment in The CMTPL loss ratio will continue to grow, while Casco is expected to become more profitable According to the survey participants, due to continuing insurance fraud and as a result of an increase in the cost of spare parts and works according to CMTPL manuals, the loss ratio will be higher than in the previous year. Thus the issue concerning CMTPL tariff sufficiency will still be relevant in Respondents believe that the market tariffs for compulsory motor insurance should exceed those which already exist by 17%. In contrast to CMTPL, Casco s prospects appear more optimistic. According to the heads of insurance companies, the effect from measures taken in 2015 (such as the active distribution of deductibles and tariff increases) aimed at reducing the motor insurance loss ratio will bring results in the near term. The expected average loss ratio will fall to the level of 2012 and stand at 79%. This will allow insurers to allocate additional resources to develop new products, and implement other measures to restore sales. 5 6 The management of insurance companies believe there is a positive effect from online insurance policy sales, in terms of reduced acquisition costs. However, they take a negative view towards compulsory online CMTPL sales, expecting that these will increase insurance fraud and have a negative impact on the combined loss ratio of compulsory motor insurance. The market welcomes upcoming Central Bank of Russia initiatives A range of insurance market regulation measures were implemented for the past few years.upcoming changes, such as the adoption of a new industry standard and chart of accounts, will be tough to implement, but, according to respondents, will have a positive influence on the market. The survey participants feel that the insurance industry has significant exposure to the influence of court practice and insurance fraud, thus the Central Bank of Russia should pay specific attention to these issues.

6 6 Russian insurance market survey 2016 JSC KPMG. All rights reserved.

7 Russian insurance market survey 7 Insurance market development +4% The volume of the insurance market rose by 4% in 2015, fully in line with the forecast from the previous year s survey 1. Amid crisis events in the segment, the level of Russian insurance market consolidation is becoming higher. In view of the Central Bank of Russia plans, we will potentially get a couple of years of consolidation growth, but, taking into account the experience of other global markets, the stabilisation of the Top-10 market share will be at 75-80%. Daria Kernatsenskaya, Associate Director, Deal Advisory 1 Ongoing change: the Russian insurance market survey: KPMG, JSC KPMG. All rights reserved.

8 8 Russian insurance market survey Gross written premiums per market segment Number of insurance companies Inflation +11% +13% +6% Forecast Average annual growth rate +9% +4% +4% RUB billion % 14% 62% +9% 4% +12% 23% 13% 64% -20% -10% +15% 18% 11% 71% -5% +2% +7% 16% 11% 73% Top-10 Top-11 to Top-20 Outside Top-20 Source: Central Bank of Russia, KPMG analysis. Growth in the insurance market was determined by such lines of business as CMTPL and life insurance. Hence companies orientated towards these lines of business experienced growth. Owing to this, by the end of 2015 the premium income of the Top-10 companies had achieved a 71% market share. For 2016, respondents expect further growth in the insurance market by 4% primarily due, as before, to an increase in the premium income of the Top-10 companies (by 7%). The expected growth appears rather optimistic given that the inflation rate for 2016 is expected to be 6% 2. At the same time, insurers expect growth to slow down in the next two years, and that the pre-crisis level will be reached only by Top-10 Russian insurers by gross written premium, 2015 Company Market share in 2015 Change in GWP in 2015 Change in market share in Rosgosstrakh 17.7% 19.2% 2.3 p.p. 2 SOGAZ 13.0% 13.9% 1.2 p.p. 3 Ingosstrakh 7.7% 12.7% 0.6 p.p. 4 RESO-Garantia 7.6% 19.4% 1.0 p.p. 5 AlfaStrahovanie 6.6% 15.5% 0.7 p.p. 6 VSK 4.7% 27.6% 0.9 p.p. 7 VTB Strakhovanie 4.6% 29.7% 0.9 p.p. Sberbank Life 8 Insurance 4.3% 20.7% 0.6 p.p. 9 Soglasie 3.0% -9.2% -0.4 p.p. 10 Renaissance Strakhovanie 2.0% 6.9% 0.1 p.p. Source: Central Bank of Russia. 2 Economist Intelligence Unit forecast. According to Rosstat the inflation rate varies at around 11% in 2016.

9 Russian insurance market survey 9 Consolidation level of the insurance market 71% Top-10 market share 64% 62% 53% Top-5 market share 44% 47% Forecast 73% Source: Central Bank of Russia, KPMG analysis. The economic crisis and strengthening of Central Bank of Russia controls is causing ongoing market consolidation. In 2015 the Central Bank of Russia revoked the licenses of 69 insurance companies (four companies had their licenses renewed). By the end of 2016 the market share of the Top- 10 will reach 73%, according to our respondents forecasts. Moreover, consolidation continued in the Top-10 segment: at the end of 2015 the Top-5 collected more than 50% of insurance market premiums. Some changes were seen among the Top-10 companies: Allianz, which decreased its retail portfolio, dropped to 11th place in terms of gross written premiums, and was replaced in the Top-10 by Renaissance Strakhovanie.

10 10 Russian insurance market survey Gross written premiums per line of business, RUB billion Average annual growth rate +9% +4% +4% Forecast Other VMI Life Insurance Property Insurance Casco % +28% +11% +3% % +20% -7% -14% % +10% 0% -3% +7% % CMTPL % Source: Central Bank of Russia, KPMG analysis

11 Russian insurance market survey 11 CMTPL Casco As insurers predicted at the beginning of last year, the main driver of the insurance market in 2015 was CMTPL. Due to tariff increases, CMTPL gross written premiums grew by 45%. In 2016 insurers expect a continuation of insurance premium growth in this line of business, by 7%, potentially due to the following factors: Residual effects from the tariff increases in An expected decrease in fake CMTPL policies A possible decrease in the number of uninsured vehicles (according to RAMI, in 2014 only 76% 3 of vehicles were insured). Casco was mostly affected by the economic climate in Russia. In 2015 Sales of new vehicles fell by a record 36% 4 during 2015 year. Despite insurers increasing tariffs by 17% 5 on average, 2015 was the first year in the past six years when Casco gross written premiums demonstrated negative dynamics (-14%). However, at the beginning of 2015 insurers expected that the Casco market would only shrink by 1% 6. An additional factor behind the decrease in demand for Casco products was an increase in CMTPL liability limits, which led to a reduction in risks of loss for policy holders, and particularly for careful drivers, Denis Samsonov, Senior Manager, Audit Services in the Financial Sector. Respondents expect a further reduction in gross written premiums in 2016, and believe that the Casco market will shrink by 3%. Due to high tariffs and the economic crisis, Casco has become less accessible for a wide group of consumers. Insurers are doing their utmost to retain their Casco positions, by optimising underwriting and introducing deductibles, and through plans to halt tariff increases. The Casco market is closely linked to the macroeconomic environment (through the sales of motor vehicles). Thus, no noticeable growth is expected in the next couple of years, Maxim Pristalov, Manager, Audit Services in the Financial Sector. 3 RAMI Annual report, European Business Association press-release: aebrus.ru/ upload/iblock/4ba/rus_car-sales-in-december-2015.pdf. 5 KPMG analysis based on Central Bank of Russia data. 6 Ongoing change: The Russian insurance market survey: KPMG research, 2015.

12 12 Russian insurance market survey Property insurance Property insurance premiums declined by 7% in 2015, while for 2016 insurers expect to maintain the current market volume. In conditions of an economic crisis the insurance market is undergoing structural changes: a reduction in duties on corporate business and an increase in the volume of retail insurance. Premium charges for legal entities dropped by 12% 7 last year, which was potentially due to a decrease in companies insurance expenses. At the same time, property insurance premiums from individuals rose by 14% 8 in The increase in property gross written premiums received from individuals may have been down to the active distribution of packaged products through banks, Natalia Tomilova, Senior Manager, Actuarial Services. Insurers forecasts for maintaining the current volume of premium income from property insurance indicate that in 2016 the nature of the business will most likely change: an increase in retail sales will eliminate a decline in the corporate segment. Although this segment is popular all over the world, the typical Russian customer is not yet ready to insure his property voluntarily: there is no understanding or trust. The market has development prospects, however, it is necessary to improve it through investing in marketing and increasing customer confidence, Julia Temkina, Partner, CIS Head of Insurance Services. 7 For the purposes of the analysis we included marine, aircraft, rail transport, cargo and crop insurance premiums in corporate property insurance. 8 For the purposes of the analysis we used premiums for other property insurance, except for marine, aircraft, rail transport, cargo and crop, as the total volume of retail property insurance.

13 Russian insurance market survey 13 Life insurance In 2016 respondents expect the most significant increase to be in the life insurance segment according to their forecasts the increase will be 10%. Insurers expectations for double-digit growth in the life insurance market indicate growth potential, even in crisis conditions. In line with the KPMG forecast made in , life insurance entered the Top-4 lines of business, with 20% growth in The development of this type of insurance is clearly determined by the main players. With the development of this type of business, and against a background of a general economic crisis accompanied by a decline in lending volumes, growth rates are shrinking and the structure of life insurance is changing: credit products are giving way to endowment and investment products. Furthermore, the continuation of this trend is expected due to the Central Bank of Russia resolution 10 allowing to refuse constrained types of insurance policies. This will most likely lead to a further decline in credit life insurance. 9 Rewarding risk: The Russian insurance market in 2013, KPMG survey, The Central Bank of Russia resolution On the Minimum (Standard) Requirements Related to the Conditions and Execution of Certain Types of Voluntary Insurance came into effect on 1 June Источник: анализ КПМГ.

14 14 Russian insurance market survey Factors affecting the non-life insurance market in % 6% According to respondents the main negative factors influencing the development of the non-life and life insurance markets will be decreased purchasing power and reduced bank lending, as in the previous year. 41% Purchasing power 53% 47% Bank lending 47% The expectations of respondents in relation to bank lending is still negative, despite bank lending showing positive dynamics at the beginning of At the same time, the development of technologies such as insurance policy sales via mobile applications and online could have a positive influence on the non-life insurance market. Respondents optimistically assess the potential impact of the investment attractiveness of insurance products, as well as the potential to develop new life insurance 12% 23% 6% 6% 12% New technologies 24% RUB exchange-rate volatility 65% 53% 6% 6% 18% 59% Economic sanctions 35% Legislative reforms of insurance market 76% Negative influence Positive influence Source: KPMG analysis.

15 Russian insurance market survey 15 products in In addition, some survey participants highlight that in the event of an increase in tax deductions, the life insurance market will display a high rate of growth. Also, one of the most important market drivers will be the behaviour of the largest player, Sberbank Life Insurance, which has a more than one third (34%) market share. In upcoming years other large banks are likely to successfully apply life insurance technologies. Independent market participants should be ready to deal with new strong competitors, Daria Kernatsenskaya, Associate Director, Deal Advisory. Factors affecting life insurance market in % 13% 6% Purchasing power 56% 19% 13% 6% 6% Bank lending 56% 13% 6% 38% Investment attractiveness of insurance products 31% Activity of major players 50% 63% 19% 6% New products 25% 50% Legislative 50% changes 50% Negative influence Positive influence Source: KPMG analysis.

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17 Russian insurance market survey 17 Economic environment Gross written premium dynamics in real terms, , and illustrative forecast up to ,6% Forecast 14,5% 15,9% 13,0% 0,9% 8,8% 8,8% 6,1% 13,4% 14,2% 6,0% 6,5% 6,9% 4,9% 6,4% 11,4% 12,9% 1,0% 1,9% 6,0% 0,9% -6,1% -0,6% -2,2% -9,3% -1,8% -16,3% Top-10 Market total Inflation 11 Note: Insurance market and Top-10 company growth rates are shown, excluding inflation 11 Source: Central Bank of Russia, KPMG analysis. Respondents expectations concerning further market development are not too optimistic. Survey respondents expect that the insurance market crisis will only bottom out by 2017, while a recovery in growth rates will take a further three years. 82% of respondents are planning to increase their portfolios in the near term. Companies remain optimistic, despite the expected unfavourable internal and external factors. Based on international experience, meaningful changes to penetration rates for insurance come predominantly from fundamental regulatory developments. In the absence of such developments, penetration levels are likely to remain relatively stable or move very slowly. Thus investors should not be too focused on the low penetration level of insurance in Russia argument at least not yet for the non-life segment. The life segment, however, may have greater chances for a breakthrough, Robert Vartevanian, Partner, Deal Advisory. 11 Economist Intelligence Unit forecast.

18 18 Russian insurance market survey Preferred measures to expand insurance portfolios in the near term Increasing client retention levels New product development Increasing product penetration levels per client (up-sell)* Tariffs optimisation Developing new sales channels 93% 75% 79% 58% 79% 64% 50% 64% 42% Optimising cross-sell programmes Optimising the terms of deductibles 43% 33% 29% 25% Participation in M&A 7% 0% * This option was offered for the first time in the 2016 survey. Source: KPMG analysis.

19 Russian insurance market survey 19 Preferred measures to reduce loss ratios and cut costs in the near term More detailed underwriting Reduction in other operating expenses Changing the portfolio structure in favour of profitable products/regions Acquisition costs cutting Personnel costs cutting 80% 75% 73% 100% 60% 33% 53% 42% 27% 67% Source: KPMG analysis. Like last year, the most popular way to increase the sales volume is by raising client retention levels and developing new insurance products. In addition, according to the majority of respondents, increasing the penetration level per client will be an effective measure. In the context of the current economic conditions, almost 90% of respondents plan to take measures orientated towards reducing loss ratios and decreasing of costs. In general we can observe insurers shifting their focus from directly cutting personnel expenses and other operating expenses to improving portfolio quality. This could stem from exhausting the options for cutting expenses further. Nevertheless this trend, accompanied by continued consolidation, is leading to the market beginning to stabilise. There are a range of positive changes taking place in the market, such as an increase in CMTPL tariffs and healthy interaction between companies and the Central Bank of Russia. The crisis has resulted in the Central Bank of Russia monitoring the market more thoroughly and reducing the number of dishonest players. Furthermore, insurers have begun to consider more advanced optimisation measures in addition to standard cost cutting methods, not only to grow their business but also to increase profitability, Julia Temkina, CIS Head of Insurance Services. Companies cannot indefinitely cut costs, so they have to find other ways of staying profitable, such as through the development of deductibles, Maxim Pristalov, Manager, Audit Services in the Financial Sector. The classic approach to business optimisation has run its course, however there is potential for optimising costs in the area of technology solutions, such as mobile insurance, telematics and selfdriving cars. Improvement of business models should be performed at the expense of external sources, rather than obvious standard decisions, Alexey Nazarov, CIS Head of Strategic and Operational Consulting

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21 Russian insurance market survey 21 Legislative changes Recent legislative changes influence and difficulties of implementation Smooth implementation Court decisions in favour of the insured Online sales option for CMTPL policies Negative impact Positive impact Compulsory actuarial appraisals Self-regulatory organisations on financial markets Difficult implementation Source: KPMG analysis. According to the management of insurance companies, the most significant negative influence on the insurance market remains court practice. On the one hand, current legislation does not eradicate the possibility of insurance fraud and leads to additional losses for insurers. On the other hand, such legislative initiatives as compulsory actuarial appraisals and the introduction of self-regulatory organisations on financial markets have been welcomed and, according to respondents, have not required significant implementation costs. In recent times the Central Bank of Russia has become more involved in the affairs of insurers, and this has been beneficial to the insurance market. Constructive work on the part of the Central Bank of Russia will have favourable results, Maxim Pristalov, Manager, Audit Services in the Financial Sector

22 22 Russian insurance market survey Forthcoming legislative changes influence and difficulties of implementation Smooth implementation Negative impact Positive impact In coming years making the switch to a new industry standard and a new chart of accounts will present the biggest challenges for insurers Difficult implementation Increase in the minimum level of authorised capital Adoption of new insurance industry accounting standard Amending requirements for the solvency margin level, in line with the new industry standard Changes in the methodology of the insurance reserve calculation, in line with the new industry standard Compulsory online sales of CMTPL policies Permitting online sales of life insurance policies Establishing a government reinsurance company Insurance companies switching to a new chart of accounts Source: KPMG analysis. Respondents believe that the requirement for compulsory online sales of CMTPL insurance policies will have a significant negative impact on business, but overall they take a neutral view towards the option for online sales. This attitude may stem from the concerns over more complicated methods for monitoring fraudsters. The majority of insurers negatively view the establishment of a government reinsurance company; however, the opinions of respondents concerning the influence of economic sanctions on the availability of reinsurance cover are divided. Some players believe that the issue of reinsurance on the Russian market requires further development. The market is cautiously viewing the plan to establish a government reinsurance company, as there is some ambiguity as well as a lack of information about how it will operate. How it will work in practice is not clear. If things are transparent, then insurers may revise their attitude, Julia Temkina, CIS Head of Insurance Services According to the heads of insurance companies, an increase in the minimum level of authorised capital will help stabilise the market and will not require significant expenditure to implement.

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25 Russian insurance market survey 25 Loss ratios and expenses In 2016 the CMTPL loss ratio could reach a five-year peak. Last year more than half of respondents expected that the CMTPL loss ratio could reach, but not exceed, 80%. In 2016, respondents unanimously believe that the loss ratio for compulsory motor insurance will be greater than 80%. This increase in the CMTPL loss ratio stems from an increase in the cost of spare parts and works, calculated using the CMTPL manual Unified Methodology For Calculating Repair Costs. In addition, changes to direct claim settlements, such as the full elimination of surcharges from the calculation of average reimbursements, have a negative influence on the financial results of insurers. According to the management of insurance companies, the main reasons for the high loss ratio for compulsory motor insurance are fraud (89% of respondents cited this factor) and excessively low tariffs (cited by 44% of respondents). Respondents believe that a tariff increase of 17% would help make this business segment profitable. When income levels fall, the number of people inclined towards engaging in fraud grows. Moreover, a ban on the regional segmentation of sales is leading to insurers becoming more pessimistic about fraud levels. Alexey Nazarov Partner, CIS Head of Strategic and Operational Consulting 2016 JSC KPMG. All rights reserved.

26 26 Russian insurance market survey Average expected loss ratio 12 dynamics, CMTPL 79% 80% >80% Casco 82% 84% 79% VMI 80% 85% 83% Property Insurance 56% <70% 50% Expected loss ratio in 2014* Expected loss ratio in 2015** Expected loss ratio in 2016 * New reality: the Russian insurance market survey, KPMG survey, 2014 ** Ongoing change: the Russian insurance market survey, KPMG survey, 2015 Source: KPMG analysis. In 2016 the Casco loss ratio will return to the pre-crisis level. According to respondents, in 2016 the profitability of Casco will increase, and the average expected loss ratio will return to the 2012 level to stand at 79%. Expecting a growth in the loss ratio of voluntary motor insurance at the beginning of 2015, insurers decided to take such measures as raising tariffs and increasing the availability of motor insurance policies provided for deductibles. The active promotion of such policies allows insurers to retain current clients and has a positive influence on the expected loss ratio. It also serves as a kind of cure for an issue that has blighted Russian motor insurance very high volumes of small claims. 12 Loss ratio is the quotient of incurred expenses to the premium earned for the relevant period.

27 Russian insurance market survey 27 Dynamics of average and expected administrative and acquisition cost ratios, Administrative costs ratio 16.1% 15.1% 2014* 2015* 18.5% 2016** Acquisition costs ratio 18.7% 2014* * Calculated on the basis of published information, stated in IFRS financial statements of non-life insurers from Top-10. ** Respondents expectation. Source: KPMG analysis. 17.6% 14.8% 2015* 2016** 9.7% 23.0% CMTPL 17.5% 8.4% Casco VMI Property Insurance In 2016 insurers expect growth in the administrative expenses ratio. Despite the measures taken by insurers to reduce administrative expenses being generally efficient, the forecasts of insurance company executives regarding the level of administrative expenses in 2016 are very negative. Respondents expect that the administrative expenses ratio will rise from 15% to 19% on average, in line with inflation, which exceeds market growth.

28 28 Russian insurance market survey Measures taken by insurers to cut administrative costs in 2015 and effectiveness of the these measures Reduction in rent costs Optimisation of organisational structure Implementing new models Share services Salary indexation decrease or cancelation Reduction in headcount 60% 53% 53% 47% 40% 13% Insufficiently effective Effective Shares of respondents who took the referred measure in 2015 are shown in numbers. Source: KPMG analysis. The most popular measure to reduce administrative costs was a decrease in rent expenses, despite almost half of respondents believing that this was not sufficiently effective. Last year 73% of respondents planned to reduce employee wage indexation, however, only 40% of players implemented this measure. Moreover, half of these respondents considered this measure to be not sufficiently effective. The two remaining key measures cited by respondents last year to reduce administrative costs were successfully implemented by 53% of players. In 2016 insurance company executives plan to focus on reducing overheads, as well as expenses related to standardising and automating business processes. Reducing personnel and rent expenses are no longer a priority for the majority of insurers. This is probably due to the fact that opportunities to make further cost cutting in these areas have been exhausted.

29 Russian insurance market survey 29 Preferred methods for reducing administrative expenses Reducing overheads* Standardising processes and functions* Automating business processes* Shared services Reducing rent costs Salary indexation decrease or cancelation Reduction in headcount Optimisation of organisational structure** Implementing new operating models** 85% 77% 77% 54% 27% 46% 64% 31% 73% 15% 27% 64% 45% *This option was first presented in 2016 questionnaire. ** This option was not presented in 2016 questionnaire Source: KPMG analysis.

30 30 Russian insurance market survey Measures taken by insurers to cut acquisition costs in 2015 and the effectiveness of these measures Increasing the share of renewed contracts Optimising relations with intermediaries and partners Developing online/ mobile sales Developing crossselling Extension of direct sales Optimising the regional portfolio structure 80% 80% 73% 60% 40% 40% Ineffective Insufficiently effective Effective Shares of respondents who took the referred measure in 2015 are shown in numbers. Source: KPMG analysis. According to the expectations of respondents, in 2016 the acquisition expenses ratio will be lower than in previous years, in contrast to administrative expenses. Most costly for insurers will be selling property insurance policies (23% of premium), whereas for VMI and CMTPL the acquisition costs ratio will be less than 10%. The difference in the level of acquisition costs for different lines of business accords with respondents expectations regarding loss ratios. Thus, attracting more profitable property insurance policies is more expensive than selling policies with high loss ratios. The main measures to decrease acquisition costs remain, like last year, improving relations with partners, online sales, and renewing contracts. Almost a quarter of respondents do not plan a further downsizing in acquisition costs, which suggests that the measures taken in 2015 have had a positive effect. A reduction in the CMTPL acquisition costs ratio demonstrates the low attractiveness of the segment for insurers: whereas before the crisis the average motor insurance commission was 20%, now it stands at 10%, due to bad regions having 0% commission levels. Given current court practice, CMTPL commissions can only decrease in the future, Daria Kernatsenskaya, Associate Director, Deal Advisory. Online sales of motor insurance policies can significantly reduce the acquisition costs of a company; however, in such case insurers should consider anti-fraud measures (for example, motor vehicle inspections), Natalia Tomilova, Senior Manager, Actuarial Services.

31 Russian insurance market survey 31 Preferred methods for reducing acquisition costs Optimising relations with intermediaries and partners 85% 75% Increasing the share of renewed contracts Developing online/mobile sales Developing cross-selling 69% 58% 54% 75% 46% 33% Extension of direct sales 23% 8% Optimising the regional portfolio structure 15% 8% Source: KPMG analysis.

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33 Russian insurance market survey 33 Motor insurance In 2016 respondents plan to continue optimisation of underwriting and to combat fraud, despite the latter proving to be the least effective measure last year. Continuing growth in the CMTPL loss ratio, which, according to respondents, stems from insurance fraud and insufficient tariffs, is forcing insurers to take active measures to reduce the Casco loss ratio. In 2015 the heads of insurance companies optimised agreements with partners fairly successfully, as well as the terms of insurance products; in addition, they increased tariffs and expanded deductibles. According to respondents, raising Casco tariffs has exhausted the potential to reduce the loss ratio, hence an insurance price increase is not expected in A growth in Casco tariffs was reasonable, however, it was an emergency measure to decrease the loss ratio. That said, the insurance market is very keen to optimise tariffs. Julia Temkina, CIS Head of Insurance Services JSC KPMG. All rights reserved.

34 34 Russian insurance market survey In 2015 the insurance market responded to the economic environment and the level of fraud by significantly increasing tariffs and expanding deductibles. Current Casco consumers are likely to be less sensitive to policy pricing and remain loyal, even if economic conditions develop unfavourably. In the near term, if inflation forecasts prove to be correct then insurance market participants do not foresee an increase in Casco tariffs; in the medium term a reduction is possible, which would compensate for the sharp increase that has occurred. Measures taken by insurers to reduce motor insurance claim costs in 2015 and the effectiveness of these measures Expansion of underwriting analysis and respective optimisation of the terms of insurance products Expansion of deductibles Optimising the terms of contracts with partners Tariff increases 100% 100% 100% 100% Improving the procedure for settling insurance claims in the court Decreasing fraud levels Increasing subrogation collections Optimising the regional portfolio structure Exchanging claims data with other insurers 89% 89% 67% 67% 56% Ineffective Insufficiently effective Effective Shares of respondents who took the referred measure in 2015 are shown in numbers. Source: KPMG analysis.

35 Russian insurance market survey 35 Preferred methods for reducing motor insurance claims costs Expansion of underwriting analysis and 53% respective optimisation of the terms of insurance products 75% Anti- fraud measures Optimising the terms of contracts with partners Improving the procedure for settling insurance claims in court Expansion of deductibles Increase subrogation collections Optimising the regional portfolio structure Exchange claims data with other insurers Implementation of telematics* 53% 58% 47% 75% 47% 33% 40% 25% 27% 33% 13% 17% 13% 25% 13% Tariffs increases 0% 25% Source: KPMG analysis. *This option was first presented in 2016 questionnaire.

36 36 Russian insurance market survey CMTPL tariff corridor Soglasie Rosgosstrakh SOGAZ 12% 46% 77% 120% VSK Tariff, RUB VTB Strakhovanie 33% Renaissance Strakhovanie 47% 59% AlfaStrakhovanie RESO-Garantia 92% 100% Ingosstrakh The graph relates to the average customer: male, aged 30, driving experience: 7 years, car: Hyundai Solaris, horsepower < Х% 100% 50% 0 50% 100% 150% Change in CMTPL portfolio in 2015 Size of the circle indicates the CMTPL market share of insurance company in 2015; the number within refers to the change in company s CMTPL insurance premium income in 2015 Source: information from the websites of insurance companies or provided by the phone, KPMG analysis. Respondents assume that if the tariff corridor is abolished, the compulsory motor insurance tariff will rise by 17%. Despite this, a number of large insurers do not set their prices at the upper bound of the corridor. The cost of the insurance policy appears to be not a key demand factor in CMTPL polices, since some companies from the Top-10 demonstrated premium income growth in 2015 irrespective of their tariffs location in the corridor.

37 Russian insurance market survey 37 Influence of changes in the motor insurance market 25% Receiving information on road accidents through GLONASS 13% 13% Change in reimbursement calculations for direct claims settlement 25% 22% Launch of an insurance record bureau 44% 75% 33% 50% 11% 11% 11% Adoption of CMTPL manual for repair costs calculation 78% 11% 44% Revision of CMTPL tariffs and limits 33% Negative influence Positive influence Source: KPMG analysis. The procedure for adopting the CMTPL manual Unified Methodology For Calculating Repair Costs in general garnered positive feedback, although the heads of some insurance companies expressed strong disapproval. Almost 80% of respondents plan to develop motor insurance, both in the short and long term, despite the difficulties prevailing on the Russian market. The stabilisation of the Casco market is possible, depending on new additional services and how technology develops, Julia Temkina, CIS Head of Insurance services. In recent years the Russian motor insurance market has been influenced by various innovations, both legislative and technological. In 2015, the insurance record bureau garnered the most positive feedback: 56% of respondents cited this initiative as being good, and no negative feedback was received.

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39 Russian insurance market survey 39 Life insurance Respondents intentions related to the development of life insurance in % 11% 13% 25% Credit life insurance 45% Term life insurance Endowment life insurance Combined investment products and life insurance 33% 89% 87% 75% Increase in sales Retention of sales at the current level Decrease in sales Source: KPMG analysis. The structural changes that began in the Russian life insurance market in recent years will continue in the near term: changes in the market environment are forcing companies to replace credit life insurance with more classic types: endowment and investment. According to Expert RA, credit life product premiums comprised 44% of total life insurance market premiums in the first half of 2014, while in the first half of 2015 the figure fell to 31%. Moreover, players actively continue to develop a comparatively new type of business, investment life insurance, which is the equivalent of «unit linked» foreign products adapted to Russian legislation. According to Expert RA, the share of such products rose from 25% in the first half of 2014 to 35% for the first half of 2015 in terms of premiums. The classic western model of life insurance does not work in our market: the economy is not stable, so it s difficult to predict what will be going on with insurance policies in 20 years. Life insurance in Russia takes its own form an interesting financial instrument that serves an alternative to making a bank deposit. Moreover, tax and other non-financial benefits allow endowment and investment life insurance products to occupy its market share, Julia Temkina, CIS Head of Insurance Services.

40 40 Russian insurance market survey Measures taken by insurers to cut life insurance administrative costs in 2015 and the effectiveness of these measures Introducing new operating models Reducing rent costs Optimisation of organisational structure Shared services Salary indexations decrease or cancelation Headcount reduction 50% 30% 30% 30% 50% 10% Insufficiently effective Effective Shares of respondents who took the referred measure in 2015 are shown in numbers. Source: KPMG analysis. In 2015 insurers strove to make administrative cost cutting, chiefly by cutting rent costs and introducing new organisational models, and these measures appeared to be fairly effective. In 2016 only 60% of the interviewed managers of life insurance companies plan to continue to reduce administrative costs. Life insurance market players, as well as non-life players, place priority on standardising and automating their business processes and functions, as well as on measures to reduce overheads.

41 Russian insurance market survey 41 Preferred methods for cutting life insurance administrative costs in 2016 Reducing overheads 100% Standardising processes and functions 100% Automating business processes 100% Salary indexations decrease or cancelation 50% Reducing rent costs 50% Shared services 50% Headcount reduction 17% Source: KPMG analysis.

42 42 Russian insurance market survey Measures taken by insurers to cut life insurance acquisition costs in 2015 and the effectiveness of these measures Optimising relations with intermediaries and partners Increasing the share of renewed contracts Developing online/ mobile sales Developing crossselling Structural changes to the agents network Extension of direct sales 70% 50% 40% 40% 30% 0% Insufficiently effective Effective Shares of respondents who took the referred measure in 2015 are shown in numbers. Source: KPMG analysis The most popular measure taken to reduce acquisition costs optimising relations with intermediaries and partners overall appeared to be insufficiently effective. Nevertheless, insurers plan to continue with this measure in The most effective measures taken by our respondents in 2015 to reduce acquisition costs turned out to be changing the structure of the agents network (introduced by only 30% of respondents) and increasing the number of renewed contracts (which was introduced by half of respondents). In 2016 less than half of respondents plan to continue to reduce acquisition costs, even though life insurance has traditionally accounted for a high level of these costs. A market focus on endowment and investment life insurance products could have had a positive effect on the level of acquisition costs. The preferred measures for cutting these costs have not changed since 2015.

43 Russian insurance market survey 43 Preferred methods for cutting life insurance acquisition costs in 2016 Increasing the share of renewed contract 75% Optimising relations with intermediaries and partners 75% Developing cross-selling 75% Developing online/mobile sales 50% Structural changes to the agents network 50% Optimising regional portfolio structure 25% Extension of direct sales 0% Source: KPMG analysis.

44 Contacts Julia Temkina Partner, CIS Head of Insurance Services Т: +7 (495) E: Andrey Voronin Actuarial Services Manager Т: +7 (495) E: Alexey Nazarov KPMG Global Strategy Partner Т: +7 (495) E: Alexey Kolosov Partner, CIS Head of Audit FS Т: +7 (495) E: Robert Vartevanian Deal Advisory Partner Т: +7 (495) E: Evgeniy Shevarenkov Audit FS Partner Т: +7 (495) E: Mikhail Klementiev Tax and Legal Partner Т: +7 (495) E: kpmg.ru The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG. KPMG refers JSC KPMG, KPMG Tax and Advisory LLC, companies incorporated under the Laws of the Russian Federation, and KPMG Limited, a company incorporated under The Companies (Guernsey) Law, as amended in The KPMG name and logo are registered trademarks or trademarks of KPMG International. kpmg.com/app