WTO accession process

Russia submitted its services offer to the WTO negotiating group in early 2001 but received a “cool reception from key WTO members”[1].  

With regards to the Insurance sector, Russian chief negotiator M. Medvedkov while commenting this submission at a press conference said, “Foreign insurers will also be prohibited from providing services linked with compulsory insurance and insurance connected with state procurement.”[2]  

On September 25, 2001 , the Minister of Economic Development and Trade of Russia announced that informational stage of Russia ’s accession to the WTO has been completed.[3] He stated that most trade in goods negotiations have been completed and one of the main contentious issues remains: services trade.  

One of the services negotiation rounds took place in Geneva in early October 2001.[4] Later that month, a member of the Russian negotiating team announced that the financial services sector of Russia is the most prepared for WTO accession. Yet, the insurance sector’s limitations provoke the most protests from foreign counterparts.[5]  

Foreign counterparts actively support Russia ’s accession process. WTO Director General Mike Moore expressed his support through promising his personal supervision of the accession process.[6]  

On September 24, 2001 , Prime Ministers of Finland, Denmark and Estonia , who were participating in the Third Annual Baltic Forum expressed their support for Russia ’s speedy accession to the WTO.[7]  

Chris Patten, EU’s Foreign Affairs Commissioner, and Pascal Lamy, EU’s Trade Commissioner, visited Russia in early December of 2001. The EU leaders are eager to engage in further economic dialogue. They support the idea of gradual engagement of Russia , according to which the WTO accession is an urgent and short-term task[8]. However, beyond the WTO accession, the EU is ready to consider widening economic ties into various fields of cooperation, including energy production (not currently on the WTO agenda.) The EU considers Russia ’s WTO accession as a stepping-stone for achieving greater economic integration with its eastern neighbor.  

The new American Presidential Administration is prepared to help Russia become a member of the WTO and stresses economic cooperation with Russia as a key to improving relations with the U.S. [9] The United States has progressed more in the negotiations with Russia than any other member of the WTO. It is ready to consider Russia to be a country with market economy[10] and to is ready to support a consideration of a working party report as early as December of 2001.[11]  

Although US trade representative Robert Zoellick stated that it was erroneous to seek a geopolitical reason for speeding up Russia WTO accession[12], some political observers see the linkage between Russia ’s support of anti-terrorist operations in Afghanistan and consideration of its WTO application[13] by the western counterparts.
   

WTO popularization conferences experience

Throughout 2001, the government of Russia conducted a series of informational WTO accession business conferences in different regions of Russia . The intent of these conferences was to familiarize the business community with what the WTO accession will mean to Russian business as well as to generate new input from the regional business community as to what should be the priorities for Russian WTO accession negotiations. The general outcome of these conferences was that the business community supports the WTO accession. The business community’s support is reflected in the statements by the RUIE and other business lobbying entities.
  

Current Insurance Policies

The official government position on insurance is recorded in the laws about insurance and related legislative acts. However, analysis of these obsolete acts is more relevant for the legal analysis section rather than for the current section. This section will focus on the recent developments, which have not yet been enacted into legislation.

The Government of the Russian Federation proposes the following as the major economic policy in the insurance sector[14]: 

• Creation of national insurance system that would be able to perform the following socio-economic functions: protection from potential risks necessary for effective functioning of market economy and for stimulating entrepreneurial activities;

• Accumulation of long-term investment resources within Russia .

Among the main objectives for the insurance sector the government names the following:

• Creation of the adequate legal framework for the insurance sector;

• Creation of the effective mechanism of state regulation and supervision, what is very important during the period of formation of national insurance system;

•  Development of mechanisms for transforming consumer savings into long-term investments by utilizing mechanisms of life insurance;

• Step by step integration of the national system into an international insurance system.

The Government program proposes a number of practical steps for achieving these goals: establishing systems of mandatory insurance (like automobile owners liability; a law that will expand the insurance market by $1 billion, is under consideration by the State Duma[15]) and mandatory state insurance, which amends tax laws to exempt insurance payments from immediate taxation etc. These policies deal mostly with the domestic aspect of the Russian insurance sector.  

The Russian government is developing new legislation to eliminate the use of life insurance for schemes to avoid payroll taxes.[16] Currently budgets at all levels suffer from shortage in collection of taxes due to the fact that enterprises abuse life insurance schemes to avoid taxation. Experts estimate that only 25% of life-insurance premiums collected actually represent true life insurance business, while the rest is used to reduce the tax burden. The tax “savings” amount to 25-35% of the life insurance premiums paid. 
   

Exclusion of health insurance

The Ministry of Finance in its effort to streamline the regulation of insurance has ceased regulation of 300 health insurance companies that did not insure any other types of risks by mandatory health insurance. The Ministry believes that the health insurance business is not strictly insurance business and therefore does not require direct licensing and regulation by the Ministry[17]. The official policy on medico-social insurance is to be stipulated in the new law on medico-social insurance. The Ministry of Economic Development and Trade is drafting that law.  

The last two domestic policy issues related to the development of the insurance sector are:

• Taxation policy in terms of the ability for enterprises to write off insurance expenses as tax deductible; and
• Policy towards mandatory insurance.

These topics will be more fully considered in the Legal section.  

Legal Framework  

Russia is a federal state; therefore, it delegates authorities and competence between federal government and regional governments. Unlike in the U.S. insurance sector in Russia like other financial services sectors is regulated only by the federal legislation and controlled by the federal supervisory bodies. Federal laws and presidential decrees are binding throughout the territory of Russia . The federal government has exclusive competence over specific areas, such as foreign investment in the financial, monetary and credit sectors. The Ministry of Finance through its department of Insurance Supervision regulates the activities of all insurance companies.  

Russian domestic legislation with regard to insurance consist of the following:

a. The Law “On Organization of Insurance”;

b.Civil Code (selected articles) The Civil Code of Russian Federation regulates several important aspects relevant to the insurance sector.

c. Tax Code (selected articles); and,

d.Finance Ministry by-laws.  

In 1992, the State Duma adopted the original Law of the Russian Federation on Insurance. It was amended in 1999 to include the aforementioned prohibition on the sale of mandatory insurance by majority foreign owned companies.  

Legislative history shows that due to enormous lobbying pressure that Russian companies were able to exert on the State Duma, the Duma was forced to pass the discriminatory law. Yeltsin’s government either considered preservation of competition rules in the sector as unimportant or was unable or unwilling to overcome the lobbying pressure.  

Main protectionist norms of the law, as outlined in the Issue section, are stipulated in the 1992 (as amended in 1997 and 1999) Federal Law “On the Organization of Insurance”. Stipulations of the regulations issued by the Ministry of Finance are just fulfilling the meaning of the Federal Law.  

Article 6 (Insurers) of the Law “On the Organization of Insurance” stipulates that foreign owned insurers cannot sell life and mandatory insurance, as well as insurance for governmental needs.

It is important to understand the political layout that existed on the moment of adopting the last version of the Law. In 1999, president Yeltsin’s administration submitted a draft text on insurance law to the State Duma. The original text was heavily influenced by the ongoing Russia ’s negotiations for the WTO accession. It was a rather liberal text allowing for greater foreign participation in the insurance sector.  

However, lobbying pressures from domestic insurance companies were sufficient to overcome the President’s veto and institute a protectionist regime on trade in insurance.  

The new law did not affect rights of existing foreign insurance companies. Their life insurance and other licenses were grand-fathered. Such grandfathering took place only after numerous American lobbying groups for financial services undertook an effort to lobby the executive and legislative branches of the Russian government.  
   

Consequences of possible Russia ’s WTO accession and its possible obligations under GATS

In compliance with GATS requirements, Article 15 of the Russian constitution stipulates that all legislation, regulations and administrative practices must be published; and can only enter into force when published. The fact that applicable legal texts co-exist with its frequent amendments often leads to ambiguity and make interpretation difficult, especially for foreign businesses.  

The Russian political culture has historically lacked effective lobbying mechanisms. Only recently have large, medium and small enterprises, as well as industrial groups, started to form legislative consulting bodies to more fully participate in the legislative process.[18]  

To comply with provisions of Article VI of the GATS, Russia will have to reconsider the economic rationale underlying the current regulation in the insurance sector and define more clearly the functions of its regulating agencies. The new legislation should limit the bureaucratic discretion. Russian authorities admit that the implementation of GATS commitments offers a good opportunity to implement a solid legal structure, which is compatible with international practices. Nevertheless, Russian authorities would like to preserve a certain degree of flexibility to be able to adapt legal structures necessary for rapid development of the services sector.  

With regard to Article V (Economic Integration) of the GATS, Russia and its negotiation partners must examine the following. Russia will have to clarify status of agreements concluded with the partners of the Commonwealth of Independent States (CIS) and assess their consequences for the application of MFN treatment. The Treaty on the Creation of the Economic Union concluded in September 1993 by CIS countries covers trade in goods and services and also concerns commercial presence. Furthermore, Russia has concluded more than 700 agreements with individual members of the CIS. Some of these agreements may be relevant to trade in services and imply preferential treatment in terms of one or more modes of supply. Due to the large number of agreements it is difficult to compile an exhaustive list of preferences granted by Russia . Due to the economic weakness of the CIS members it is unlikely that Russia will have to negotiate the degree of flexibility to grant them preferential treatment in the insurance sector.  
   

New tax regulations

As of January 1, 2002 property insurance expenses are fully tax deductible. From the standpoint of insurance the sector it is the main accomplishment of the drafters of the new Chapter 25, Part II, of the Russian Tax Code. New legislation allows writing off mandatory and voluntary insurance payments as tax-deductible expenses. Almost all insurance expenses are excluded from income taxation.  

Personal insurance payments have been excluded from taxation but with a few exceptions. These limitations were introduced to counter the misuse of personal insurance as a scheme for tax evasion. According to the new law, long-term life insurance premiums paid by the employers cannot exceed 12% of total payroll.  

However progressive this new regulation might be, domestic insurers still criticize it. The main reason for criticism is the inconsistency of dates in tax accrual for different types of insurance contracts.[19] Resolution of this problem is possible in conjunction with a comprehensive accounting reform, which is another hot topic of political debate in Russia.  

Currently, there is no single unified mandatory insurance law that would set the guidelines for provision of mandatory insurance.  
   

Auditors liability insurance

In September of 2001, the new federal Law on Audit entered into force.[20] The Law on Audit obliges auditors that conduct mandatory audits to insure their possible liability for breach of contract. However, the law does not stipulate the minimum limits or conditions of such insurance. As much as 60% of Russian auditors insure their liability to clients. Six companies have liability coverage exceeding $1 million.[21] Experts estimate that total market for this sector will amount to $1-1.5 million annually.[22]  
   

Automobile-owners liability insurance

The Specialized Committee of the State Duma has recommended that the Duma pass the law on mandatory car-owners liability insurance. The law was adopted in the first hearing in April of 2001.  

Insurance companies will have to acquire a mandatory insurance license to operate in this new market, but the government will exclusively set the rates. The rates set by the Government should not exceed $10-20 for coverage of 400,000 rubles ($13,000)[23].  

The main issue of debate is the status of the Guarantee Fund. The Fund’s purpose is to make payments when it is impossible to determine fault in the accident or in case of bankruptcy of the insurer. Insurance companies will be required to remit 5% of collected premiums to the Fund. Legislators are still discussing the principle scheme of the Fund and will not resolve the issue until mid 2002.[24]  
 

Economic Analysis  

What economic rationale is to be overcome in the coming discussion?

Opponents of the opening of insurance markets to foreign participation state the following as the major reason for supporting their cause:

Foreign insurers collecting huge premiums (in the developed countries up to 10% of GDP), will transfer the collected premiums, that otherwise would be invested in the domestic economy, abroad. Insurers do it through a number of channels: reinsurance, investments of premiums in foreign capital markets, and repatriation of profits.  

This argument is unviable since Russian companies contribute to the outflow of capital in through exactly same mechanisms, except maybe for the repatriation of profits, which domestic companies retain in Russia or distribute to domestic shareholders.  

Currently, the Russian economy is grossly underinsured. The proportion of insurance in the overall economy is very small. There are three measures of insurance penetration:

• Percentage of premiums collected in the GDP. In 2000, Russia collected insurance premiums that equaled 171 billion rubles[25]. Russian GDP in 2000 amounted almost to 7 trillion rubles. According to these figures insurance penetration of Russian economy is 2.44%.  
   
• Ratio of Insurance companies capital to the overall capital in the country. Since insurance companies face limitations on the minimum size of capital and face strict licensing and reporting requirements, total capital of insurance companies is easily determinable and amounts to $1 billion. Overall capital invested in Russia is not easily determinable. Conservative estimates suggest $50 billion figure.[26] These figures still produce the same level of insurance penetration of the Russian economy – 2%.

• Consumer insurance spending in Russia is very low: “in 1997 Russian citizens paid $43 per capita in insurance premiums. The 1998 crisis reduced premiums to $29. In comparison, in Estonia , the current estimated insurance per capita spent is $60; Turkey $200; Slovenia $350. In Western Europe , the range is between $1,000 and $2,500; in the United States , $3,000; and in Japan , more than $4,000.”[27]  

Insurance penetration ratios are very small for Russia when compared to the transition economies of Eastern Europe . Eastern European countries commit an average of 5% of their GDP’s toward insurance premiums. When compared to OECD countries the difference in insurance penetration ratio is even greater. On average that ratio is between 8 and 10%.  

The main reasons why the insurance penetration ratio for Russia remains small is the overall poverty of the population, weak financial health of domestic enterprises and no traditions of using insurance services. [28]

Apart from direct investment, foreign insurance companies are present in the Russian market through the reinsurance. Reinsurance payments made to foreign companies withdraw capital from the country. Reinsurance capital outflows contribute to the decrease in the total capital available for investment in Russia . Total outflow of capital in the first half of 2001 exceeded $10 billion.[29] In 1999, the Russian reinsurance balance of payments had a deficit of $283 million, in 2000 it totaled $450 million.[30]  

After the September 11, 2001 terrorist attacks on the U.S. and the enormous losses acquired by the global leaders in the insurance sector, reinsurance for Russian companies will become even more expensive. Some Russian insurers estimate 10-20% increase in reinsurance rates for property insurance and cannot make estimates for reinsurance rates for air travel and other risks.[31]  

Another reason for increase in the reinsurance premiums is the new tax legislation described in the legal framework section.  

Despite inadequacies in the development of the Russian insurance market, the market itself is growing rapidly:  

Table 2. Premiums Collected  

The number of companies in the market decreases over the years. This fact reflects continuous market concentration. Over the past three years concentration of capital in the insurance market has become increasingly larger. The total number of insurance companies declined from 1408 in 1998 to 1140 in September of 2001.[32]

If in 1999 264 companies collected 90% of total premiums, in 2000 the same proportion was collected by 233 companies (21% of total number of the insurance companies).[33]  
   

Life insurance

Steady increase in the share of the life insurance premiums collected represents merely the increasing use of tax avoidance schemes. Use of life insurance for avoiding payroll taxes is described in the policy section. Currently, some leaders of the insurance market, for example Rosgosstrakh, are limiting their participation in such schemes.

It is the official policy of the ARIA to reduce the use of tax avoidance schemes. Otherwise, the regulators and the government as a whole perceive insurance companies to be sheltering a large share of clients’ payroll spending from payroll taxes.  
   

Liability insurance

A decreasing share of liability insurance while the total amount of liability insurance premiums is growing reflects the same disproportionate growth of the life insurance sector. Experience gained in the liability sector is vitally important to the development of the mandatory insurance sector, since most of the mandatory insurance stipulations cover third party liability risks.  

The statistical numbers provided by the Ministry of Finance combine health insurance, mandatory state insurance and mandatory insurance under one category: mandatory insurance. A large share of that is health insurance. In 2001 mandatory health insurance premiums amounted to 37.8 billion rubles[34]. Mandatory state insurance and mandatory insurance amount to 2.5 billion rubles, or .9% of the total market. Mandatory state insurance is paid by the federal or local budgets and is accounted for in the 2.5 billion rubles of premiums collected in 2001.  

Non – state mandatory insurance is a still very small sector of the insurance market. However, it is poised to multifold, after the adoption of automobile owners liability law (~1billion dollars).  

Figure 1. Proportion of non-health mandatory insurance

Figure 2. Proportion of non-health mandatory insurance including automobile owners liability insurance  

Gains from foreign participation can be achieved in several ways:  

• Inflow of additional capital to the insurance sector  

• Transfer of technology, experience, and education  

• Introduction of price competition  

Technological gains  

Transfer of extensive foreign experience is possible in two ways:  

Implementing new technologies and training local staff: Some foreign insurance companies have been in the market for ten years now. However, their combined share in the total insurance market is only between 5 and 7%. AIG is the leader among foreign insurers in the Russian market. It employs approximately 200 people in Moscow headquarters and has a small network of agents. Such small numbers of personnel, even trained to the high standards of providing insurance services, are not sufficient for generating enough expertise among the entire insurance community to effectively upgrade the knowledge to the new standards.  

Another way in which technological gains from foreign competition could be advantageous for the Russian market is through participation of foreign experts in developing regulatory agencies (either state or independent) and procedures. Experience shows that foreigners have been shut out or have not participated in the functions of the ARIA. Statistical surveys in some instances exclude AIG and some others from the list of market participants.  

In order for the technological transfers from the foreign insurers to become effective there is a need for foreigner participation in managing the large insurers (top ten) with extensive branch and agent networks. Such participation will facilitate the transfer of new technologies and standards to a much larger number of specialists, which in its turn will cause a spill over effect to the rest of the market. Larger insurance companies have a bigger stake in efficient regulation, as well as they have greater political clout in developing the regulations with either state or self-regulating regulatory body.  
   

Price competition.

Another advantage of the foreign competition in the insurance market is in price competition. Foreign companies have larger reserves. This enables them to set insurance rates lower than domestic companies. There are possible negative consequences for such price competition, as foreigners might have tendency to abuse financial leverage of their huge parent companies to pressure locals out of the market.  

However, price competition in the mandatory insurance sector is not as likely as in the rest of the market. The payout ratio for mandatory insurance, excluding mandatory health, is 68%. This is higher that the total payout ratio for the entire market at 62%, or the payout ratio for voluntary liability insurance at 9% and voluntary property at 15%. Mandatory insurance is not a likely sector for intense price competition.  

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