Speaker: Nikolay AGAFONOV Denis GORULEV Insurance Dept. Associate Professor Scientific Supervisor: STATE REGULATION OF INSURANCE MARKET IN THE EU AND RUSSIA AND «SOLVENCY II»

Own funds – basic guarantee of the insurer’s solvency €

EEC First Directive / «SOLVENCY I» where: AM – available margin RM – required margin min EC – minimal equity capital (in Europe – min own funds) Finance Ministry Order Nr. 90n EEC Directives 1973 and 2002 Norm: AM>=1,3*max(RM; min EC) RM = К Re *max(16% ins. premiums; 23% ins. payments) 23% payments 16% premiums

From «Solvency I» to «Solvency II» insufficiently takes into account the portfolio structure insufficiently takes into account the risks of the company Lacks of «Solvency I»: Working out and implementation of «Solvency II» Directive 73/239/EEC «Solvency I» «Solvency II» comes in force QIS5 – the last test of «Solvency II» «Solvency II» Directive QIS1 – the 1 st test of «Solvency II»

«SOLVENCY II»: 3 PILLARS Solvency II Quantitative Requirements Technical reserves Capital Qualtitative Requirements Risk Management Corporate Governance More rights of the supervisor Transparency Public Disclosure More reports for the supervisor

Minimum Capital Requirement (MCR) Noncompliance => License withdrawn LICENSE

Solvency Capital Requirement (SCR) Solvency with the 99,5% probability during 1 year One insolvency in 200 years Measures potential losses because of the risks

Solvency Capital Requirement (SCR) Own funds are less than SCR => The supervisor takes measures

Solvency Capital Requirement (SCR)

PILLAR 1: QUANTITATIVE REQUIREMENTS «SOLVENCY II» test of one of the largest St.-Petersburg insurers ? Insurance premiums: 2008 – 186 Mio EUR 2009 – 47 Mio EUR 1 st January 2009: Own funds = 41,5 Mio EUR MCR = 20,25 Mio EUR SCR=43,5 Mio EUR

Own funds vs. Obligations Solvency II: minimum own funds: Min equity capital is increased in 4 times: ? Largest revenue – 98 Bln. € Largest revenue – 1,5 Bln. € 2,2 Mio. € for non-life 3,2 Mio. € for life insurance and reinsurance Non-life: 0,75 Mio. € => 3 Mio € Life: 1,5 Mio. € => 6 Mio € Reinsurance: 3 Mio. € => 12 Mio €

PILLAR2: QUALITATIVE REQUIREMENTS Fraudulent bankruptcies of MTPL insurers Agent commissions 50% and more Underdeveloped insurance legislation No real penalties for fraudulent bankruptcies Inevitable bankruptcy Inevitable fraudulent bankruptcy: rest of money is stolen by management and shareholders Till 2010: no instruments of fraudulent bankruptcies prevention Creation of new MTPL insurers for fraudulents bankruptcies

PILLAR2: QUALITATIVE REQUIREMENTS Bankruptcies of MTPL insurers Agents commissions – 50% and more Own funds don’t work as a solvency guarantee Till 2010 Federal Insurance Supervision Service had very limited rights No real penalties for insurance legislation violations

PILLAR3: TRANSPARENCY Balance sheet and profit-loss report are not enough for full analysis Formally public reports of insurance companies in fact are unavailable for public The information about management and major shareholders is not published

KEY TARGET – GROWTH OF RUSSIAN INSURANCE MARKET STABILITY AND EFFICIENCY!

Thank you for your attention!