On 29 July 2018, the Russian President signed an amendment* for the Law on the Organisation of Insurance Business in the Russian Federation (“Law”). The Law increases the minimum amount of charter capital for insurance organisations among other changes and requirements, the most notable of which are outlined below. The Law comes into force on 1 January 2019 except for the new requirements on charter capital.
Increasing the minimum amount of charter capital of insurers
The most highly discussed change brought on by the Law is an increase in the basic size of the charter capital of an insurance organisation from RUB 120m (EUR 1.6 m) to RUB 300m (EUR 4.1 m). Taking into account the coefficients applicable to life insurance, the minimum charter capital of an insurance organisation will now be RUB 450m (EUR 6.2m) and RUB 600m (EUR 8.2m) for reinsurance. The minimum amount of authorised capital for compulsory medical insurance is RUB 120m (EUR 1.6m).
The new requirements will be applicable from 30 July 2019. Insurance organisations created before this date will also have to bring their capital into compliance with the new requirements. Capital increases can be made gradually: for each type of insurer, the Law establishes the thresholds to be reached by 1 January 2020 and 1 January 2021. By 1 January 2022, charter capital must reach the size set in the Law
New data to be added to the Register of Subjects for Insurance
The Law expands the list of information that is included in the Unified State Register of Insurance Subjects. In particular, insurers will now be obliged to disclose information about the insurance rules they have adopted.
Legal capacity of insurers
Until now, the legal capacity of insurance companies was unclear. The Law resolves this by expressly stating that an insurance organisation has no right to carry out entrepreneurial activities unrelated to insurance activities. Exceptions include an organisation’s core investment activities in relation to its own funds (capital), insurance reserves and transactions with property, including property received by the insurer as a result of abandonment.
Regulation on the assessment of insurance risks and their management
The Law stipulates that insurance organisations must approve a regulation on the assessment of insurance risks and their management. (In the early versions of the Law, the term “underwriting policy” was proposed, but was rejected in the final version). For organisations that carry out compulsory health insurance, this policy will not be required.
The Law establishes requirements for the contents of this document, such as the aims of the assessment of insurance risks, its forms and methods, risk management means, the classification of objects and risks subject to insurance, provisions on the inspection of insurance objects and provisions on the diversification of insurance risks.
The list of grounds for an insurer transferring an insurance portfolio is open ended
According to the Law, the list of grounds for transferring an insurance portfolio is non exhaustive. (Earlier, the grounds not directly stipulated in Paragraph 3 of Article 26.1 of the Law were to be contained in federal legislation). Given the inevitable “redistribution” of the insurance market after the rise of requirements for the minimum charter capital, these changes will be welcomed, as they provide insurance organisations with more options and the opportunity to form and transfer an insurance portfolio at their own discretion without having to abandon insurance activities as a whole.
Business plan for insurance organisations
One of the novelties of the Law is the need for insurance organisations to adopt a business plan. The final version of the Law does not spell out the plan’s concept, but only establishes that the requirements for this document will be set in a regulatory act of the Central Bank of Russia. It should be noted that the previous drafts of the bill defined “business plan” as a document containing the insurance organisation’s development strategy, the results expected from its activities and milestones in implementing the business plan.
The business plan should be submitted by the applicant along with other documents needed to obtain a licence. Insurance organisations established before the Law comes into force will also be required to provide a business plan by 1 January 2020.
Interestingly, under the Law, the business plan must be approved by a general meeting of shareholders (participants), which, in accordance with the corporate legislation, does not fall within the usual competence of this body.
Update of the list of documents by subsidiaries of foreign investors to obtain a licence
Subsidiaries of foreign investors (or subsidiaries with more than 49% foreign participation in their charter capital) will be required to provide the following additional documents to obtain a licence:
- a decision of the foreign investor to set up an insurance subsidiary in Russia;
- an extract from the register of legal entities with respect to the foreign investor;
- written consent of the regulatory body of the foreign investor’s country of establishment for its participation in the charter capital of the Russian insurance organisation. The absence of the need to obtain such consent is confirmed by the conclusion of the regulatory body or a legal opinion issued by a person authorised to render legal services in the territory of the relevant foreign state. (Previously only a simple notification to the Central Bank of Russia that the consent of a foreign regulatory body is not needed was required from the applicant);
- a copy of the foreign investor’s license issued in the country of its establishment; and
- the foreign investor’s accounting (financial) reports for the last five years confirming that the investor carries out insurance activities in accordance with the laws of the country of its establishment, along with a copy of the audit report for the last reporting period.
As of 1 January 2018, only 11.29%* of Russian insurance organisations have foreign investors that own a stake in their charter capital. Unfortunately, these changes do not appear to be aimed at attracting foreign investment and helping foreign investors take a stake in the charter capital of Russian insurance organisations.
It is expected that an increase in the minimum size of the charter capital of insurers will likely reduce their number and support the efforts of the regulator to “cleanse” the insurance market. On the other hand, such measures can also lead to a restriction of competition and tariff growth. In addition, the minimal size of charter capital does not guarantee that insurers will fulfil their obligations.
It is hoped that the new requirements for the existence and content of an underwriting policy and a business plan, while aimed at strengthening prudential control and ensuring the financial reliability and sustainability of insurers, will not become an excuse for issuing warnings or other regulatory sanctions for non-compliance, which seems likely given complex economic conditions.
* In Russian