Russia's Insurance Revolution

Russia may no longer be behind the Iron Curtain, but it is still a very different from the West. In the nearly two decades since the Soviet Union collapsed, Russia has opened the door to private enterprise, moving from a centrally planned economy to a more market-oriented one that has made it a key "BRIC" economy (the acronym given to the emerging powerhouses of Brazil, Russia, India and China).

When it comes to insurance and risk management, however, Russia remains an immature market far different from the West. The insurance sector is still young, risk management expertise is minimal and the insurance brokerage community is small and noncompetitive, giving buyers little help. Even though the Russian insurance market has grown 470% in the last nine years (about 36% per year), it remains small overall, with just $30 billion in premiums in 2009 compared with more than $1 trillion in the U.S. market in 2008.

Furthermore, the commercial insurance market represents only 28% ($8.4 billion) of that $30 billion, with the biggest lines of coverage being auto, medical and commercial property-a stark contrast to the United States, where third party liability and workers compensation comprise the bigger share of commercial lines. There is also no workers compensation insurance, and liability insurance is included in property, which covers loss or damage caused by named events, such as fire, lightning and hurricanes. So-called "all risk" policies are practically unknown in Russia, except where a foreign insurance buyer is concerned.

It is still rare for Russian enterprises to purchase standard fire insurance. Many companies only insure the most modern parts of their plants and equipment while others use their own captive insurance. Because there is essentially no risk of litigation in Russia, the liability insurance market, including employers' liability, is undeveloped.

Although Russian law is very explicit about the liability of a party at fault, in practice, few people understand these principles. And even fewer use the courts. This is because if they were to win their case, the financial reward would be insignificant. Few enterprises, therefore, consider purchasing voluntary liability insurance, and only a few professions are required to carry professional liability insurance. In addition, insurance against currency and counterparty risks is not allowed in Russia.

Risk management is another area where there are significant differences. Most Russian companies have very little expertise in risk management, and only larger companies can afford to retain their own staff or use consultants. Russia also does not have a well-developed, competitive insurance brokerage industry to provide buyers with independent advice. In Russia, there are only around 100 licensed insurance brokers-or one broker for every seven insurance companies. In the West, there are 10 brokers for every insurance company.

The size of commissions paid to brokers contributes to the problem. Brokers typically receive commissions of up to 30% from insurers, so it is in their interest to work for the insurer, rather than the buyer. This leads many companies looking to work directly with insurers. But this still leaves the novice insurance buyer without an effective representative to assist them in getting the type and amount of insurance reflective of their exposures.

One alternative is for buyers to retain risk management consultants from accountancy and professional services firms, such as the Big Four. These firms work for a flat fee and represent the buyer's interests, helping them identify the insurance they may need and obtain favorable terms and rates.

The last thing companies should be prepared for is the difference in business culture. Western companies often worry about Russia's reputation for corruption. Indeed, it exists.

While these differences will pose a challenge for Western companies, Russia has emerged onto the world stage as a large, developing economy with promise for future growth and influence. While the insurance market in Russia is still immature, it is growing very quickly and is well positioned compared to its BRIC counterparts. And those companies and risk managers who are also well positioned will have the best opportunities for success.