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Insurers and reinsurers in the Commonwealth of Independent States (CIS) are struggling to remain profitable in the face of significant geopolitical instability and regulatory changes, according to a report by A.M. Best.

The rating agency noted that, whilst the overall economy for the CIS improved in 2018 compared to prior years, challenges remain for the insurance sector, with more than a third of companies receiving long-term issuer credit ratings of ‘bb+’ or below.

A.M. Best rates a number of companies based in Kazakhstan, Russia and Azerbaijan, and monitors insurance and economic trends in other CIS countries, which include Armenia, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

The insurance markets in CIS countries are generally small with very low penetration rates, such as in Russia, where gross written premium as a percentage of gross domestic product was only 1.4% in 2017.

Re/insurers also tend to be subject to heightened political and regulatory risk due to the government and legislative influence on product design, pricing, distribution and ownership of companies in these marketplaces.

“AM Best notes that insurers in the region are contending with an evolving regulatory environment, limited investment options and currency fluctuations,” said Valeria Ermakova, Senior Financial Analyst at A.M. Best.

“As local regulators make progress toward risk-oriented supervision, companies are faced with additional costs and operational hurdles adjusting to the new regimes,” she continued. “This process can be especially difficult, given that the enterprise risk management (ERM) practices in the region are still emerging.”

A.M. Best expects heightened mergers and acquisitions (M&A) activity to continue in the CIS insurance sector as companies look to achieve economies of scale through consolidation in an attempt to reduce their operating expenses and improve profitability.

At the same time, increased regulatory oversight has resulted in some companies voluntarily exiting the market, leading to higher industry concentration – especially amongst the largest players.

Analysts predict that smaller insurance players operating in the CIS are likely to face challenges in sustaining their technical margins and capital strength, while larger participants are more likely to withstand volatile market conditions and increased regulatory scrutiny.

“The typically high costs of sourcing insurance business in the CIS, combined with relatively high claims inflation, put pressure on technical results,” said Yvette Essen, Director of Research at A.M. Best.

“A number of companies have sought to achieve economies of scale through acquisitions in an attempt to reduce their operating expenses and improve profitability,” she added.

“At the same time, increased regulatory oversight has resulted in some companies voluntarily exiting the market, leading to higher industry concentration – especially amongst the largest players.”

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