THE INSURANCE MARKET

Insurance technology is a means chosen for funding of losses, incurred by individuals and companies as a result of various adverse conditions. The character of risks reimbursed through the mechanism of insurance, way of action of this mechanism depend upon the needs and wishes of a given society. The need in funds for indemnification for damages also differs. In one society a risk is taken by the state, in another - by private companies. However, the risks of large damages which cannot be covered by private structures must by always ensured by the government through taxation or by other means. Examples of risks covered by the government include risk related to the use of nuclear power or risk of unemployment. Systems of organization of insurance also differ across various countries.

Thus, this type of financial-economic activity is extremely important for provision of endless economic life of a society. In addition, it helps individuals to deal with consequences of adverse events. Insurance companies are a kind of regulators of society's attitude to risks.

Prior to 1998, the State Insurance held a monopoly position on the insurance market in Ukraine. The very name of this organization suggests that its activity was regulated by the state. Revenues from insurance premiums were budgeted as well as funds for indemnification of damages. But as early as 1988, first insurance cooperatives came into being. And in 1990 first insurance companies appeared. In 1990-1993, inflation rate was very high. The share of personal insurance exceeded the shares of all other kinds of insurance. Combined life insurance was put into practice, that is, one and the same policy covered life assurance, accident insurance, and inflation insurance. Many companies actually switched over to trust and banking activities, paying large interest on personal deposits on a monthly basis. Inflation caused a shrinkage of the volume of property insurance. The development of the "shadow" market hindered the development of insurance of cargo, against financial risks, third party liability insurance, etc. These tendencies lasted until mid-1995, when the level of inflation decreased significantly. This resulted in a dramatic decline in the growth rate of insurance services on account of decreased share of personal insurance. In 1995, many insurance companies became bankrupts and were liquidated. Out of 798 insurance companies registered in Ukraine, 280 licenses were revoked in 1994-1996. Due to raise and development of normal market relations, liability insurance and property insurance began to develop at a higher rate after mid-1995. The share of CIP in insurance of cargo gradually increased relative to the FOB share. The market for motor vehicle passenger insurance began to develop. Medical insurance and long-term life insurance take a more regular charter.

In 1996, the development of the insurance market was accompanied by further demonopolization, establishment of new organizations engaged in this activity as well as new types of insurance aimed at protection of economic interests of business entities and social protections of the public.

At the same time, it should be noted that, because of objective and subjective reasons, insurance companies have not become true guarantors of these interests as of yet. Out of 518 insurance companies active in 1996, 150 license were revoked because of non-filing reports and other transgressions of law. Yet, there are some promising trends in Ukraine's insurance market. Thus, insurance organizations began to pay cover and premiums more appropriately. The personnel of these organizations became gained some practical experience. Conditions and rules of insurance became closer to European standards. Due to adoption of the Law of Ukraine On Insurance, insurance organizations with significant authorized capital were established. Cooperation with foreign counterparts is now of more equitable character.

In 1997, the breakdown of insurers into those dealing with life insurance and those engaged in other kinds of insurance resulted in a marked shrinkage of the life insurance market. It is highly probable that the share of property insurance in the market's structure will increase to some extent and the share of liability insurance will decrease. The share of obligatory insurance is likely to increase rapidly, first and foremost, on account of mandatory insurance of civil amenability of owners of transport vehicles as well as aircraft insurance.

The main tasks of this market in 1997 included: re-registration of insurers, significant rise of their solvency due to increased authorized funds, provision of formation of reserves, which must be in compliance with liabilities undertaken. It is also very important to attract foreign investment, put into practice specialized accounting for operations dealing with insurance activity, large-scale involvement of insurer's funds in the development of the national economy. The measures mentioned above were initiated as early as 1996, and some positive results have been achieved. As compared to previous years, the rate of fulfillment of commitments undertaken by insurers increased significantly. Currently defaults are exclusions, whereas in 1993-1994 defaults were typical. A trend towards stabilization of the growth rate of insurance services have surfaced. The share of foreign capital invested in insurance business began to grow.

These beneficial trends continued to develop in 1997. The key role in this is to be played by the state.

A preliminary analysis provides grounds to assume that nearly 300 insurance companies were still active on the market in late 1997. Macroeconomic analysis suggests that the growth rate of this type of financial-economic activity will be still in Ukraine until 2000. It is natural because insurance is intrinsic to market economy. As suggested by world experience, it is very helpful in attacking challenges of social development. Without insurance, entrepreneurs cannot be sure that they would not loss in contingency their capitals invested in economic activity. Insurance allows to save financial resources of business entities and accumulate significant funds for further investing in the economy.

Geographically, Ukraine is located in the center of Europe. There are good reasons to anticipate enhancement of both internal and transit traffic, tourism, construction and exploitation of joined communications. In connection with this, we need to take care of the development of civilized form of covering transport, environmental, and other risks, whose adverse effect may extend beyond the borders of Ukraine.

It should be remembered that a leg in the level of insurance behind the world standards hinders active attraction of foreign investment in Ukraine's economy that are of large importance for us.

In Ukraine, legislative framework for the development of the insurance market began to be created in 1992. The decree On Insurance adopted in May 1993 was based on the regulatory framework of the former State Insurance. It should be mentioned that this regulatory framework had a number of drawbacks. The most important drawback was the lack of the very notion and mechanism of "earned" premiums, poorly defined legislative framework for "technical" and "mathematical" reserves and restriction of the amount of reserves in the structure of a tariff rate, insufficient substantiation of the system of assessment of insurers' solvency, live insurance and risk insurance mixed together, low requirements to registration of insurance companies, a lack of particular standards of accounting and reporting.

These drawbacks induced insurance supervision bodies established in late 1993 to improve the legislative framework. First of all, the Law of Ukraine On Insurance was developed. This Law was approved by the Parliament on 7 March 1996. The Law enacted a number of provisions of prime importance, in particular:

• established a minimum amount of the authorized fund of an insurance company in the amount of 100,000 ECU. For insurance companies with foreign participation this parameter was established in the amount of 500,000 ECU (previously, a minimum authorized fund amount was 5,000 ECU);
• established a margin of solvency -- 25%-30% of the amount of premiums and payments paid during the accounting period;
• demarcated licensing of live insurance and risk insurance;
• introduced the notions of "technical" and "mathematical" reserves and requirements of compliance between these reserves and commitments undertaken by the company;
• established arrangement of "gained" premium based on the method of "one fourth" of premiums received;
• empowered supervision bodies to implement sanitation, liquidation or reorganization of insurance companies;
• established higher registration requirements;
• increased the share of possible participation of foreign insurers to 50%; etc.

The new law provided opportunities to improve reliability of Ukraine's insurance market in 1996 and enhance control over its development. In addition of the above-mentioned Law On Insurance, a number of regulatory acts were enacted in 1996 that impacted the insurance market significantly. What do these documents provide for? Following is brief description of some of them.

The Resolution On Normalization of Procedure for State Obligatory Insurance of Property Owned by Individuals and the Cabinet of Ministers' Resolution # 206 of 22 March 1995 established that the Resolution of the Cabinet of Ministers of the Ukrainian S.S.R. # 568 of 13 November 1981 On State Obligatory Insurance of Property Owned by Individuals became null and void since the enactment of the Law of Ukraine On Insurance. In other words, state obligatory insurance of property owned by individuals became deliberate after the enactment of the Law of Ukraine On Insurance.

The process of privatization resulted in significantly increased volume of private and collectively-owned property as well as transactions with this property. To provide real insurance protection each owner should pay significant amounts to insurer's. Terms of obligatory insurance of individuals' property were disadvantageous for insurers, especially when dealing with low-income layers of the population. The world experience suggests that insurance of individual property should be free-will in essence. An individual should have an opportunity to chose terms offered by various companies, negotiate special terms to be provided for in the contract.

The Cabinet of Ministers' Resolution # 1122 of 17 September 1996 approved the limits for rates of voluntary insurance of individual property against breakage and breakdown of buildings as a result of natural calamities, against death of animals, and natural hazards.

The main provisions of the Parliament's Resolution On Procedure for Enactment of the Law of Ukraine 'On Insurance' envisage as follows:

• provisions of Article 38.2 (which states that "insurers holding life insurance license cannot implement other kinds of insurance") as regards insurers who were granted the life insurance license prior to the enactment of this Law shall come into force as from 1 January 1997;
• it is established that insurers who set up their business prior to the enactment of this Law shall no later than 1 January 1997 form their authorized funds in accordance with requirements of Articles 2 (the share of cash contributions shall be no less than 60% of the authorized fund) and Article 29 (a minimum authorized fund shall be no less than 100,000 ECU);
• insurers with participation of foreign entities and individuals, who had set up their business prior to the enactment of this Law, were granted an extension to 31 March 1998 of the time-limit for payment of a minimum 500,000 ECU amount of authorized fund (as per Article 29) subject to the increase in the paid authorized fund to 100,000 ECU as of 31 March 1997.

Thus, said provisions actually forced re-distribution of the shares of insurers' interests. Due to this, some insurers were brought to leave one sector of these services. At the same time, new legal entities may appear in this market. The first of the above provisions resulted in a decreased income base of a company, the second one will necessitate companies to look for resources to form authorized funds of two insurance companies at once. Those companies that failed to increase their authorized funds to 100,000 ECU had several option not to leave the insurance market. They had an option of merging with large companies, be their subsidiaries. A small-sized insurer could be turned to an insurance broker. Finally, there was an option for insurers to establish mutual insurance funds.

Equally important for the insurance market was the adoption by the Cabinet of Ministers of Ukraine a the resolution entitled On Procedure for and Terms of Obligatory Insurance of Civil Amenability of Transport Vehicle Owners (#1175 of 28 September 1996). According to experts, this resolution will result in an increased to 25%-30% share of non-state obligatory insurance in the general structure of the market, while in 1995 this share was 16.4%. Insurance policies that will soon be as necessary to each driver as transport vehicle and driver's license will help to re-establish the confidence to insurance as a whole.

A marked event was also the adoption of the Statute of the Motor Insurance Bureau of Ukraine. It is to fulfill two important functions. First, settlement of disputes with other countries. Second, fulfillment of third party liabilities in the internal market. Insurance of civil amenability was imposed as obligatory and is aimed at protection of accident victims. Transport vehicles are a source endangering life and health of citizens and their property. The above-mentions resolution establishes a system of social protection of accident victims by way of a mechanism of obligatory insurance of civil amenability of transport vehicle owners.

It socially important that a victims of an accident caused by several owners of motor vehicles have an option to apply to one of the respective insurance organizations that is under obligation to indemnify damages.

The Regulation entitled On Procedure for and Terms of Obligatory Insurance of Civil Amenability of Transport Vehicle Owners approved by the above-mentioned resolution defines the mechanism for insurance indemnity in case of death of injury of the victim as well as breakdown of his/her property. The Regulation established a framework for relations between the Motor Insurance Bureau of Ukraine and subjects of insurance of transport vehicle owners' civil amenability.

This document defines the requirements to organizations engaged in this kind of financial-economic activity, procedure for entering obligatory insurance contracts and requirements to insurance policies pertaining to this kind of insurance. The Regulation sets as one of functions of the Motor Insurance Bureau of Ukraine the establishment and use of centralized reserve funds that ensure financial stability of the system of obligatory insurance of transport vehicle owners' civil amenability as a whole. The imposition of such obligatory insurance provides the needed prerequisites for Ukraine to join the International Motor Insurance System "Green Card" and will prevent the outflow of hard currency abroad under international transportation of freights by motor transport.

After Ukraine's joining the "Green Card" system, the Motor Insurance Bureau of Ukraine will pay those damages that our drivers may cause to foreign citizens on their territory. The situation is even more complicated by the fact that settlement of claims must be carried out pursuant to legislation of the country, where the insured accident happened, irrespective of legislation of the country of insurance company that issued the policy. And while we begin to get accustomed to the minimum insurance sum (that is paid for damage caused to life and health of third individuals as a result of accident under obligatory insurance of the civil amenability of owners transportation vehicles, which amounts to 2,000 hryvnia -- a which the victim may receive in 1997), established by the above-mentioned resolution, in England, France, or Belgium the amount of claim, if it concerns personal injuries, is not limited. It will be Motor Insurance Bureau of Ukraine that will settle claims of other countries, convert and remit abroad foreign currency in the form of insurance contributions. If it fails to carry out these tasks, then the state would need to do it. Therefore, the Supervisory Committee has been established under the Motor Insurance Bureau of Ukraine that consists of representatives of a number of ministries and several insurance organizations Apart from this, the fund of insurance guarantees has been created and deposited abroad. If it would be formed only in the stipulated minimum amount (400,000 ECU), the insurance market of Ukraine will undertake liability only within this sum. The rest of risk the Motor Insurance Bureau of Ukraine would have to re-insure abroad.

In home insurance, companies are active that have comparatively small capacities of undertaking risks. The need in covering risks growth at a higher pace than the authorized capitals. Such a trend observed in the insurance market seriously retards the enlargement of the scopes of rendering appropriate services and pulls down the clients' confidence in insurers. Therefore, the growth of the capacity of the domestic insurance market and integration of separate funds of insurance companies is a challenge for the Ukrainian market, that requires prompt attacking.

One way to attack this challenge is reinsurance.

The perspectives of the development of reinsurance in Ukraine are connected with the progress of insurance intermediaries (their activities is regulated by the Cabinet of Ministers' Resolution # 1523 of 18 December 1996 On Procedure for the Action of Insurance Intermediaries), by setting up associations of re-insurers, increased role of professional re-insures, conclusion of multilateral contracts of reinsurance.

The need in insurance and reinsurance protection will increase as privatization processes develop in our country. This is quite natural as objects of privatization, having lost support of the budget and controlling bodies, find themselves in risky situations. The necessity in reinsurance will grow every day through coverage by insurance of an increasingly greater number of big, specific risks. This will cause a need to solve a number of economic and legal issues .

Based on the worldwide experience, one may anticipate that the progress of reinsurance in Ukraine will have some peculiarities that are not typical for other economies. However, there are good reasons to state that reinsurance i. extremely promising kind of insurance services. Insurance-relate legislation in Ukraine develops rapidly. Formerly, in terms of state monopoly on the fulfillment of this kind of financial-economic activity, there was no need in an overall law on insurance. It was sufficient to set provision of particular types of insurance. Now, in the terms of the progress of insurance business, when lots of insures come out to compete with each other, there is a need in rational state regulation of this activity.

Higher independence of good manufacturers, formation of market infrastructure, contractual relations, keen restriction of the impact of state control on the progress of manufacture and allocation of material advantages -- all these factors determine the need in the development of new approaches to the use of financial-credit mechanism in administration of the economy. The development of market relations, where every good manufacturer act at his risk, increases importance of insurance. The issues of insurance of economic activity become especially important. Along with traditional tasks (provision of protection against natural calamities, accidents of technical and technological character, insurance more and more frequently covers financial risks, losses as a result of additional expenditures, not gained profit. New kinds of insurance appear e.g., UkrStrakhNaglyad (state supervisory body) issues licenses to property insurance of holders of privatization securities and other kinds of securities, insurance of liabilities of investment funds and other legal persons due to investors for the non-fulfillment of concluded agreements, on insurance of liabilities of investment managers.

The rise and development of the insurance market in Ukraine is uneven. Along with the rise and stabilization of some insurance companies one can observe decay, insolvency, or recall of license of others. The problems faced by insurance companies are caused by objective and subjective factors. The objective factors include: inflation (albeit controllable), economic recession; harsh competition that sometimes takes ugly forms; a comparatively high level of unemployment that provokes activation of criminal elements: utilization obsolete economically "dirty" technologies that comprise an appreciable percent of risk; imperfect legal acts, etc. The subjective factors include "capture" by insurance companies of a portion of the market that do not comply with the level of their real solvency; insufficient skillfulness of personnel; a comparatively narrow range of risks that are insures (similar insurance brief-bag); an absence of the practice of reinsurance.

The creation of the efficient insurance protection of business in the context of objectively available economic and social realities is complicated; therefore, companies have to adjust themselves to such realities, sometime distorting the nature and principles of insurance, discrediting thereby this sort of financial-The measures for sanitation of the insurance market should be based on the activity aimed at modernization and actualization of the existing legal acts. The principal executive link in the settlement of activity of insurance companies is the state supervision service, which, by way of establishing of an assured level of provision of insurance companies' solvency and putting into practice qualificatory requirements for the licensing of particular activity, must create a kind of filter that would prevent entering the insurance market by "ephemeral" and "shadow" companies. The present phase of transition to market -oriented economy requires strict observance of disciplinary procedures, that, unfortunately, are insufficiently developed as of yet and operate poorly . In order to protect consumers and increase of the level of insurance companies' competence, it is necessary to create general occupational standards both for the levels insurance (insurance - reinsurance - retrocession) and for the hierarchy of official functions (agent - broker - underwriter).

Table 5.7. The Insurance Organisations of Kyiv (from Single State Register of Insurers (ReInsurers))

IC - Insuarence Company
JSC - Joint-Stock Company
JSIC - Joint-Stock Insurance Company
IJSC - Insurance Joint-Stock Company
OJSC - Open Joint-Stock Company
CTJSC - Close Type Joint-Stock Company
OTJSC - Open Type Joint-Stock Company
CJSC - Close Joint-Stock Company