Insurance companies in Ukraine generate 40% of their profits through bank products, leaving many at the mercy of the banks restrictive accreditation procedures. Oleksander Dyakulych and Mykhailo Pergamenshchyk report on how an investigation by the Antimonopoly Committee of Ukraine is likely to affect the market.
As life and property insurance in Ukraine is not widely exercised, insurance companies generate 30% to 40% of their profit by maintaining bank products. Therefore, intense competition has been seen in this segment both before and after the financial crisis.
Historically, the banks and insurance companies established a general practice in which each bank made a shortlist of 15 to 20 partner insurance companies previously accredited and admitted to insuring the pledged property of the bank's loaners. And clauses stipulating the loaner's obligation to insure the pledged property with an insurance company accredited by the bank became widely used in loan agreements. Loaners had a fairly wide choice of insurance services and the insurance companies themselves enjoyed equal opportunities to provide services for the bank loans.
As a result of the financial crisis, however, most insurance companies were forced to leave the market owing their clients insurance benefits in the millions, and casting a shadow over the entire insurance business being a reliable partner. Banks cut their shortlists down to one to three insurance companies, often affiliated with the bank, which effectively lead to banks forcing services of particular insurance companies on the bank's clients, despite them often being 15% to 20% more expensive than similar services provided by other insurance companies. This restrained competition by granting certain insurance companies an advantage over their competitors. In addition, in order to be included in these shortlists, insurance companies had to agree to pay banks unreasonably high fees, which clearly constitutes an abuse of dominance on the bank's part.
Banks carried out the accreditation procedures under a veil of secrecy and used internal bank documents, which were accessible neither to the insurance companies nor to their clients. One criteria used to pick out insurance companies was the amount of deposits the insurance company was ready to place with the bank. The entrance threshold for such ‘accreditation' amounted to between UAH1m to UAH5m (£80 000 to £400 000) and sometimes higher. Some banks required a deposit of over UAH10m (£800 000).
This situation recently triggered the Antimonopoly Committee of Ukraine to commence an investigation regarding anticompetitive tying of insurance companies on the loaners by Ukraine's seven largest banks - OTP Bank, Ukrsotsbank, UkrSibbank, Raiffaisen Bank Aval, Privat Bank, Finance & Credit Bank and Alfa Bank. The AMCU also issued mandatory recommendations for the banks in the hope of making accreditation procedures more open and transparent.
The recommendations required banks to maintain a list of accredited insurance companies and accreditation requirements on their websites and in the offices of their local branches. If a client had already concluded an agreement with a non-accredited insurance company, the banks were required to evaluate the insurance company for compatibility with the disclosed accreditation requirements.
Following the commencement of the investigation, some banks issued a set of requirements for accrediting insurance companies. However, these still allow for some subjectivity in picking the desired insurance companies, leaving others out of the business.
But not all banks rushed to meet the AMCU's requirements. A quick browse of the website of one of the banks under the ongoing AMCU investigation found mention of only two partner insurance companies - Axa Ukraine and Cardif - both of which are this particular bank's affiliates. At the same time another bank's website lists at least 20 insurance companies with the entire range of available insurance services.
One of the more robust accreditation requirements is seen by Ukrsotsbank. After receiving the insurance company's financial statement for the last reporting period, the bank's department of corporate business risk assessment evaluates the insurance company's current financial standing in four stages.
First, its checks for stop-factors in the insurance company's activity - this includes any objective reasons to believe that the company fails to meet its obligation with its clients or the bank. However, this allows a degree of subjectivity in the bank's evaluation of a candidate and may serve a convenient formal ground to deny accreditation.
Second, it conducts an evaluation of asset sufficiency to cover possible insurance risks, which is carried out by a separate analysis of each asset item. Next a ratio analysis and internal rating of the insurance company, derived from calculating financial and insurance activity figures, is carried out. And finally, the bank determines a cooperation limit - based on the insurance company's internal rating, estimated financial capacity to cover insurance claims, the structure of the insurance portfolio, and also the level of external financial support, if any, from its parent company.
Shifting away from formal rules to more practical aspects, which are frequently unspoken about, the general requirements for any insurance company to be accredited is a valid license for the relevant insurance services, a minimum capital stock of €1.5m, an amount of insurance premiums received during the last 12 months not less than €5m, a valid obligatory reinsurance agreement with an international insurance company rated A and above by at least one of the leading rating agencies and at least five years of conducting business on the Ukrainian insurance market.
From the above facts is seems clear that each bank decides whether to comply with the AMCU recommendations or not at its own risk. Some banks see more benefits in ignoring the AMCU, by keeping their cooperation limited to the few favored insurance companies, despite the risk of having the AMCU impose an enormous fine for such anticompetitive conduct. Other banks decide to comply, opening the door for more insurance companies and offering a wider range of options to their clients.
Right to refusal
Nevertheless, the new accreditation procedures still allow for certain subjectivity that may be conveniently used by banks to deny accreditation to an undesired insurance company. The inability to challenge a refusal to accredit an insurance company is another factor increasing the chances of abuse of dominance by the banks.
Following the investigation the AMCU is likely to impose the maximum possible fine for anticompetitive tying on the offending banks - 10% of their annual income for the preceding year. This will make tying of particular insurance companies unprofitable for the banks and will eventually lead to the improvement of competition among insurance companies and cheaper insurance services for the end customers in the long run.
However, the feeling is that efforts to protect consumer interests and promote a pro-competitive environment would be more effective if the National Bank of Ukraine was to impose a mandatory set of guideline on all banks, developed hand-in-hand with the AMCU and members of the insurance market, aimed at unifying accreditation requirements and procedures.
Oleksander Dyakulych and Mykhailo Pergamenshchyk are associates with Arzinger
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