Moody’s warns of new risks for CIS insurers

To compete against international reinsurers’ better prices, and increase profitability, insurers in countries part of the Commonwealth of Independent States (CIS), will likely grow their reinsurance business, but this would also bring new risks, according to Moody’s analysts, Report informs.

Since international reinsurance offers better risk-adjusted prices than the CIS region’s primary insurance markets, Moody’s expects they will likely increase their exposure further over the next year or so.

“Limited opportunities for profitable growth in the CIS region’s primary insurance markets are a further incentive. Insurance penetration in the CIS region excluding Russia and Belarus is low, with total annual premiums of over $4 billion, while poor data quality hampers adequate pricing and risk management. Legal and regulatory frameworks are also relatively underdeveloped.”

According to the report, these new reinsurance activities will support CIS profitability and enhance their diversification.

International reinsurance prices rose significantly in 2022-2023 and will remain substantially higher than in domestic CIS markets, providing local players with a powerful incentive to diversify into reinsurance.

According to the agency’s report, CIS insurers, led by companies in Uzbekistan and Kazakhstan, are significantly expanding their presence in international reinsurance markets, capitalizing on the global reinsurers’ partial withdrawal from some markets in response to mounting catastrophe claims.

They have also benefited from the exit of Russian reinsurers since the start of the Ukraine conflict. Russian players previously generated annual reinsurance premiums of $400 million.

In 2023, international premiums increased by around 40% in Uzbekistan and Kazakhstan and analysts believe this will continue to grow faster than primary insurance premiums in the next 12-18 months.

“We anticipate an improvement in insurers’ geographic and business diversification and a positive impact on their profitability, provided they manage their international expansion prudently and avoid major catastrophe claims,” said Moody’s.

As CIS insurers grow their reinsurance footprint, they will also be exposed to new and unfamiliar risks, including more frequent and severe natural catastrophes, climate change-related losses, geopolitical risks and foreign exchange fluctuations, analysts warn.

According to analysts, this increased exposure will test their risk management expertise. Moody’s said: “We view the rapid growth in their international reinsurance footprint as a major challenge to their risk profiles which will likely expose them to more large single losses and more catastrophe-related claims than their domestic business.

“This could offset the benefit of greater business diversification that increased reinsurance exposure brings. Growth in long-tail lines of business such as casualty reinsurance is particularly challenging, as casualty risks sometimes do not materialize until years after the business is written. Companies with better risk management will be better able to understand, manage and mitigate these risks, ensuring their financial stability.”

Moody’s also noted that rapid growth in reinsurance business volumes will also put pressure on CIS insurers’ regulatory capital adequacy. This would then come under pressure as they take on more risk, because local financial markets are underdeveloped.

Analysts added that CIS insurers’ relatively low transparency also limits their access to international investors. As a result, they will likely remain largely dependent on existing shareholders’ ability to inject capital, the agency concluded.

By the end of last year, Azerbaijani insurance companies guaranteed protection against risks in the amount of 500 billion manats or more than $294.117 billion, which is five times the volume of the country’s annual GDP. For example, in Türkiye, the amount of insurance guarantees against risks is equal to 20 times GDP.