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DANCES WITH BEARS
Insurers managing
the WTO risk
By John Helmer
MOSCOW - Prime Minister Mikhail Kasyanov
recently summoned Russia's chief insurance regulator
Konstanin Pylov, and told him to mind his mouth.
The subject of the prime minister's concern was
the World Trade Organization's (WTO) demand that Russia
dismantle its restrictions on foreign insurance
companies in the Russian market.
The regulator,
who is officially head of the Department of Insurance
Supervision at the Ministry of Finance, understands that
if Kasyanov says jump, he should cry, How high? On the
one hand, Pylov is a junior bureaucrat several ranks
below the prime minister. An attempt to get
parliamentary approval to raise his rank and make him
more independent was blocked by the government last
year.
On the other hand, Pylov's agency is
dependent on extracting license fees from the companies
it supervises, and it is also responsible for government
policy in a sector that has the potential for managing a
vast share of the nation's capital, just as the
insurance industry normally does in other parts of the
world. License fees may be Pylov's affair, Kasyanov has
intimated. The nation's capital, Kasyanov has let him
know, is not Pylov's business.
As Pylov explains
over the dining table to Alexander Belyarov, general
director of the All-Russia Insurance Association, the
industry lobby, the prime minister has put him in a
bind. The government and the insurers both expect him to
jump, and he concedes he has no alternative. But how to
manage the leap in different directions? And how to
encourage prudent management of capital without allowing
reinsurance and other scams that are common everywhere
in the world, not only in Russia? Russia's insurance
companies have told Pylov that they are ready to accept
demands from the WTO for the dismantling of limits on
foreign entry into the Russian market. But they also
insist on a quid pro quo. They have told Pylov and other
government officials that deregulation should be phased
in over time; and over the same interval, the government
should continue to allow the lucrative pseudo-life
insurance business. They accept the need for regulation
over re-insurance operations, but they don't want to see
a state reinsurance agency set up for that purpose. That
will only centralize the scamming, they say, not
eliminate it.
Russia's negotiations with the WTO
are taking place in Geneva, and are likely to lead to an
accession agreement within 12 to 18 months. Little
discussion of the terms the WTO has set for Russia's
accession has so far taken place in public or in the
Russian media, and the Russian parliament has not yet
considered the issues at all. For some time already, the
government has been signaling that it is ready to make
concessions to the WTO on insurance, in exchange for a
relaxation of WTO demands in other sectors.
In
response, Russian insurers have told the government that
they will agree to dropping their demand to preserve
existing barriers to foreign entry. But this concession
has a price. This is the condition that the writing of
short-term life insurance policies, which currently
amount to more than three-quarters of the industry's
premium revenues, is not eliminated, as the government
would like. These life insurance policies are usually
for just three to six months, and are in effect tax-free
salary enhancement schemes. Without them, few Russian
insurance companies could survive.
At a
conference of Russian insurers in January, Andrei
Slepnyov, director of the Russian Association for
Insurance of Liability of Owners of Automobiles, was one
of several local insurance leaders who advocated the
phased approach - phasing out the pseudo-life business,
and phasing in foreign entry. "There is no real life
insurance market in Russia at present," Slepnyov said.
"Real life insurance amounts to one or several percent
of its potential size now. Before opening this market
for foreigners, we first have to allow national
insurance companies to establish certain positions on
this market, and then let the foreigner companies in."
Russian insurers believe the government has yet
to decide on the stages for dismantling the limits on
foreign entry currently in force. But they are worried
by the pressure tactics of the European Commission. The
European bureaucracy is pressing the WTO, and the
Kremlin in turn, not to accept a phased approach.
Instead, it is insisting that Russia agree to dismantle
all restrictions, including foreign capital and
shareholding limits, and the exclusion from the life
sector, at once.
No one in government is ready
to acknowledge what most insurance experts understand
about the European Commission's demand. If implemented,
they say the Russian insurance market will become wide
open as a conduit for the diversion of domestic
insurance capital abroad. Controlling that is something
the European Commission demand has so failed to address,
even though the controls on reinsurance scamming are
quite strict in the European Union; even tougher in the
United States.
Russian sources say that major
foreign companies such as the American International
Group (AIG), as well as Allianz, which have already
established large stakes in Russian companies, are not
lobbying their governments to back the European
Commission's demands. The reason is that for the time
being at least, they benefit from their privileged
status, and are in no hurry to see foreign rivals
establish themselves in Russia to compete. To them, the
phased approach means protection for years to come.
According to Yevgeny Kurgin, general director of
People's Insurance Company of Russia (ROSNO), "We have
no other option than moving towards the WTO. I think
that our approach should be that we shouldn't have too
high fences." Allianz acquired 49 percent of ROSNO in
June 2001, and is seeking the liberalization of current
capital restrictions to acquire a majority stake in the
company.
Boris Turkin, first deputy general
director of ROSNO, has said that temporary protection is
necessary, but restrictions on foreign participation in
the Russian industry can be evaded. "To reach the same
level of capitalization as the leading foreign companies
is a dream that will never come true for Russian
companies," he concedes. "None of the Russian joint
stock companies is able to resist acquisition by foreign
companies if it happens, directly or through
intermediaries." Turkin is calling for the Russian
government to "use the protection mechanisms designed
for developing countries which are members of the WTO".
Vasily Kovalyov, a senior official of the
Ministry of Tax Collection, has recognized the danger of
WTO-approved scamming, and challenged the terms the
European Commission has been insisting on. He warns
that, in the rush to join the WTO to benefit domestic
exporters, "the insurance market should not become
merely the small coin in this game. I think Russia
should start to gradually transfer from restricted
access to the insurance market towards open access,
while at the same time introducing restrictions on
re-insurance abroad."
(©2002 Asia Times Online
Co Ltd. All rights reserved. Please contactcontent@atimes.com for
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