The insurance market in Ukraine is quite modest as the Insurance Penetration Ratio is at the level of 1.3%, while the average rate in Europe is 5%. Still, for two previous years the Ukrainian insurance market has been characterised by a stable 20% growth per year.
The current regulation of the insurance market is far from perfect and leaves Ukrainian insurance market behind comparing to other European countries. To address this issue, on September 12, 2019, Verkhovna Rada of Ukraine (the national Parliament) has adopted the so-called “Split Law”, which prescribes the liquidation of the National Commission for Regulation of Financial Services Market and division of its competences between two bodies: the National Bank of Ukraine (the “NBU”) and the National Securities and Stock Market Commission. Among others, the competence to regulate the insurance market has been transferred to the NBU.
To this end, the NBU in late April has published the White Paper presenting to the public its view on the problems of the insurance market and plans to tackle them. In this article, we are going to review this White Paper and briefly describe how the NBU is planning to transform the insurance market to meet the best international practices.
The NBU declares that it will approximate the respective EU law under the EU-Ukraine Association Agreement and will respect the principles of the International Association of Insurance Supervisors. The NBU establishes a risk-oriented method as a core of its regulation and supervision policy, based on the principles of proportionality, forward-looking, early warning, professional judgement and legal certainty. Thus, all the following NBU’s proposals shall be viewed through the lens of these principles. We have prepared 7 main points in how the NBU plans to rebuild the insurance market.
- Licensing procedure
Currently the licensing procedure is rather overwhelming. Insurance companies are obliged to receive a license for each type of insurance (e.g. civil aviation insurance, civil liability insurance of vehicle owners, medical insurance, insurance of financial risks etc.). As a result of it, big insurance companies need to obtain more than 30 licenses for their insurance activities.
The NBU plans to reduce the number of licenses by combining them by classes of insurance (e.g. “life” and “non-life”), contrary to the current type-based licensing. These changes, if implemented, will simplify the entering to the insurance market.
- Capital requirements and assets evaluation
Sound functioning of the insurance market and protection of customers from illicit activities run through the White Paper as red threads. The capital requirements, assets evaluation and adequacy of reserves assessment aim to ensure the fulfilment of these aspects.
The NBU plans to establish the following capital requirements:
- UAH 32 million (approximately EUR 1 million) for insurers in the sphere of “non-life” insurance;
- UAH 48 million (approximately EUR 1,7 million) for insurers in the sphere of “life” insurance, liability risks, credit and surety insurance.
The insurers will also be obliged to conform to Minimum Capital Requirements and Solvency Capital Requirements, which aim to ensure that the insurance company will be able to fulfil its contractual obligations in 12-months perspective.
The NBU also declares the policy to increase the requirements towards companies’ assets and their liquidity. The evaluation of the reserves of insurance companies will also be under NBU’s scrutiny as it plans to establish requirements towards such evaluation.
- Business plans
As a condition to obtain a license, the NBU also plans to evaluate business plans on the grounds of their implementation capabilities. The business-plan should contain the information about licensee’s ability to comply with solvency and liquidity requirements demonstrating the nature of risks of contractual obligations which the company is going to undertake. This requirement is aimed to create a stable and sound insurance market, characterised by smaller insolvency risks and protection of customers from unfair practice.
- Mandatory insurances
The NBU plans to significantly shorten the list of mandatory insurances as almost half of these insurances have no practical use and are outdated. It is expected that the state regulation of insurance prices will also be lifted. Hence, the insurance market will be moving from the unnecessary state regulations to self-regulation in cases when the self-regulation of the market is sufficient to ensure its smooth functioning.
- Transparent ownership structure and good governance
The NBU aims to establish criteria for a transparent ownership structure. Insurance companies will have to disclose the information about their owners who may exercise significant influence on the company and establish liability of such owners for the company’s wrongdoings. These requirements aim to make the insurance market fairer and more transparent as the companies with non-transparent ownership structures will be removed from the market.
The NBU plans to rewrite the requirements towards corporate governance and systems of internal control to improve the functioning of companies and facilitate the implementation of business plans. Insurance companies will have to adopt internal policies, procedures which would correspond to the challenges of these companies and their sizes.
- Requirements towards management
Moreover, the NBU plans to sharpen the requirements concerning the management of the insurance company. These requirements include, inter alia, necessary education, experience, impeccable business reputation and the absence of the conflict of interests. The NBU wants to control the fulfilment of these requirements and, thus, will analyse candidates, decide on their suitability and approve or reject respective appointments.
The collective suitability of management and control bodies will also be under NBU’s spotlight. The aggregate knowledge of the members of the respective body will be analysed in the light of their abilities to cope with entrusted tasks. Bigger insurance companies will face higher requirements towards their management.
- Prudential supervision
Finally, the NBU will conduct a supervisory review in the spheres of corporate governance and internal control systems, risk management systems, investment policy, capital adequacy and liquidity. Based on the results of this assessment, the intensity of supervision and communication with the insurance company will be determined.
To conclude, NBU’s plans on reforming the insurance market are rather ambitious. The companies that are currently present on the market will have a transitioning period to meet new regulatory requirements. As of now, we do not know how many plans from the aforementioned list will be implemented and during which period of time. Still, given the successful example of the banking reform, we believe that the NBU can make the insurance market a better place.