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Western (re)insurance markets now losing 10% to new Russian NRC

No case of non-payment of reinsurance indemnity due to sanctions clauses has been reported since the end of 2014. Nevertheless, Russia’s central bank is now attempting to counter these effects with the creation of the NRC.

Moscow: The new Russian National Reinsurance Company has increased pressure on Western markets already challenged by the international sanctions regime, a leading lawyer said today.

From 1 January 2017, the NRC began collecting 10% of outward premiums and Leonid Zubarev, Senior Partner at CMS Russia, says that international reinsurance markets providing coverage in the Russian Federation now face losing a sizable chunk of a dwindling pot of business.

“From January 1 2017, 10% of outward reinsurance premiums will have to be ceded directly to the NRC, introducing a potentially unwelcome income squeeze and some tricky claims handling protocols to boot. “ says Leonid.

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Moscow: The NRC’s claims co-operation clauses could introduce unwanted red tape*

“At the recent CMS Know Your Risk Seminar in London, international reinsurers as expected, had many questions about the implications the NRC’s creation may have for their businesses.

“Ironically, no single case of non-payment of reinsurance indemnity due to sanctions clauses has been reported since the end of 2014 (i.e. after the first renewal of the existing international reinsurance policies since the introduction of the restrictions that included these sanctions clauses).

“Nevertheless, the Central Bank of Russia is the sole owner of the NRC and is now attempting to counter the effects of sanctions. The 10% ceding rule was passed by the state Duma despite an expert report of the Presidential Council for the Codification and Improvement of Civil Law which was strongly against this idea for “conceptual reasons”. The Council said it was contrary to the basic principles of civil law – freedom of contract and equality – and creates unjustified advantages for the NRC.“

Meanwhile, the legislation behind the NRC has introduced for the first time the concept of ‘follow the fortunes’, adds Leonid.

“While this condition is widely used in international and domestic reinsurance practice, it usually requires the reinsured to fulfil all of its obligations under the reinsurance policy as a condition precedent. Those ceding tot he NRC will have to comply with its own terms and conditions.

“This could lead to different consequences for reinsureds and reinsurers. Reinsureds with complex (primarily international) reinsurance programmes may have to bring the terms and conditions of such programmes in line with the NRC’s internal policies on risk assessment and risk management. In particular, these conditions include the scope of the cover, leader and claims control clauses, proof of loss, indemnity payment provisions and so on. Reinsurers would lose 10% of their business and everybody would have to partner with a state company, potentially with a lot of red tape and objectives that are far from adequately safeguarding their business interests.

“Generally, the biggest worry is that the law on the NRC is very scarce and generic. The law does not distinguish between treaties and facultative reinsurance policies and requires Russian cedents to offer 10% of any reinsurance to the NRC after 1 January 2017. If one looks at the website of the NRC http://www.rnrc.ru you will see that the answer to the question ‘what kind of treaties will have to be offered to the NRC’ is: ‘Any’.  On the other hand, according to the NRC’s underwriting policy available on the website, its priority markets include corporate and industrial property except for warehousing risks, engineering risks with warranty periods less than 3 years, cargo except cash, securities and jewelry, ship building, general liability, airplane hull and liability. These risks will be accepted almost without exclusions.”

To be fair, adds Leonid, it is still early days and the business practice of the NRC remains to evolve.

“One should hope that the management of the NRC that comprises well-known industry specialists and experienced insurance professionals will be able to turn the NRC into a proper market player despite political considerations and ambiguous legislation.”

*Picture Credit: Creative Commons – licence:

 

 

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