Identifier
Created
Classification
Origin
07YEREVAN1471
2007-12-27 06:31:00
UNCLASSIFIED
Embassy Yerevan
Cable title:  

ARMENIA'S GROWING INSURANCE SECTOR

Tags:  ECON EFIN AM 
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VZCZCXRO9916
RR RUEHLN RUEHVK RUEHYG
DE RUEHYE #1471/01 3610631
ZNR UUUUU ZZH
R 270631Z DEC 07
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 6797
INFO RUCNCIS/CIS COLLECTIVE
RUEHNO/USMISSION USNATO 0486
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC
UNCLAS SECTION 01 OF 03 YEREVAN 001471 

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SIPDIS

E.O.12958: N/A
TAGS: ECON EFIN AM
SUBJECT: ARMENIA'S GROWING INSURANCE SECTOR


YEREVAN 00001471 001.2 OF 003


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SUMMARY
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UNCLAS SECTION 01 OF 03 YEREVAN 001471

SIPDIS

SIPDIS

E.O.12958: N/A
TAGS: ECON EFIN AM
SUBJECT: ARMENIA'S GROWING INSURANCE SECTOR


YEREVAN 00001471 001.2 OF 003


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SUMMARY
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1. Despite the rapid growth of Armenia's banking sector and GDP over
the past several years, other financial services, including
insurance, have developed more slowly. Insurance remains a small
part of the financial sector and plays a minor role in financial
intermediation. Encouragingly, the transfer of insurance
supervisory authority to the Central Bank of Armenia (CBA),adoption
of new insurance legislation, and rising incomes may ultimately lead
to a more rapid development of this sector. End Summary.

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SMALL MARKET SIZE
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2. The Armenian insurance market is quite small, even for a country
of its size. Annual revenue from insurance premiums currently
equals about AMD 5.124 billion (USD 14.12 million),with AMD 3.078
billion (USD 8.48 million) -- or 60% of premium income --
transferred to reinsurance firms. Due to the use of
non-proportional reinsurance, 95% of the insurance risk is
reinsured. This constitutes "fronting," a practice generally
discouraged by insurance regulators by the imposition of minimum
retention requirements. This also has the effect of making
insurance companies brokers rather than insurers. Insurance
penetration -- insurance premiums as a percentage of GDP -- is
currently 0.22 percent of GDP, compared to 9.2 percent in
industrialized countries, 2.7 percent in Central and Eastern Europe
and 0.5 percent in neighboring Georgia. Despite the small market
size, limited demand and limited range of products offered, insurers
in Armenia are profitable due to low loss ratios (claims). Their
total assets currently amount to 8.15 billon drams (USD 22.45
million),with total equity capital of 5.526 billion drams (USD
15.22 million). (COMMENT: All figures in this report are based on
year-end 2006, which is the last year for which there is complete
data. Figures are based on the exchange rate on December 31, 2006
(AMD 363 = USD 1). The statements in USD would now be approximately
20% higher, due to the appreciation of AMD against the USD.)


3. As of November 2007, there were nine insurance companies and six
brokerages operating in Armenia, down from 26 and 9, respectively,
since the beginning of 2006. This consolidation has occurred

primarily due to stricter controls imposed by the CBA, in particular
minimum capital requirements, that have forced smaller firms from
the industry. In the last three years the minimum capital
requirement has tripled to AMD 350 million (approximately USD 1
million) and on January 1, 2008 will increase to AMD 500 million
(approximately USD 1.5 million). This change should result in a
further consolidation of the market, leaving a small group of
well-capitalized insurance providers.


4. There are no restrictions against foreign investment in Armenia's
insurance sector, and the CBA Chairman has repeatedly emphasized his
willingness to attract leading multinational insurance groups to
Armenia. At present there are three foreign-owned firms in the
market: Cascade Insurance, owned by US based Kafesjian Family
Foundation; London-Yerevan Insurance, a full subsidiary of UK-based
Golden Gate Investment and Management company; and INGO Armenia,
majority shareholder Russian Ingostrakh. According to CBA officials,
companies from Germany, Ukraine and Russia have expressed interest
in establishing subsidiaries in Armenia. Speaking at a recent
business forum in Brussels, Armenian President Robert Kocharian
expressed hope that German and French insurance companies will start
operating in the Armenian market by the end of the year. According
to media reports, HSBC-Armenia Bank has also declared its intention
to establish an insurance company in the country. Armenian officials
have also approached U.S. Embassy officials in the past to request
help in attracting American insurance firms into the Armenian
market.


5. After two unsuccessful incarnations, a newly formed trade group,
The Association of Insurers, began to play a modest role in the
sector after its formation this year. Although the Association
cooperated with the CBA in drafting the new regulations for the
sector, it lacks both financial and human resources to be fully
effective.

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LIMITED PRODUCTS OFFERED
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6. The number of insurance products available in the Armenian market
is very limited. The main types of policies available are vehicle
(collision and non-mandatory third-party liability),property, cargo
transportation, as well as travelers' accident insurance. With the
development of the mortgage and consumer loan markets, the volume of
property insurance has increased considerably, as most banks require
property insurance in order to provide loans.


7. The market for conventional life insurance is virtually

YEREVAN 00001471 002.2 OF 003


non-existent. In the past it generated only USD 90,000 in premiums,
less than one percent of the total. Under the new Law on Insurance,
which took effect October 1, 2007, firms are prohibited from
offering both life and non-life insurance. While this constraint
can be accommodated by establishing another subsidiary, the high
capitalization requirements relative to the potential premiums to be
generated prevent life insurance from being a cost-effective market
segment at present. Generally, the lack of investment opportunities
-- particularly long-term opportunities -- in Armenia makes
development of the life insurance market difficult, if not
impossible.

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EMBASSY CAUGHT IN THE SQUEEZE OF TRANSITION
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8. The Embassy has inadvertently found itself a victim of the
changes in the domestic insurance industry. As a result of the new
law, Cascade Insurance, which had provided both health and life
insurance for the Embassy's LES employees, was forced to discontinue
providing life insurance (rather than discontinue the more lucrative
health insurance),effective December 1, 2007. As a result, the
Embassy is currently in the unenviable position of having to
self-insure, while it seeks another insurance provider that can
provide the same level of service and protection it previously
enjoyed.

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WHAT'S THIS "INSURANCE?"
--------------


9. One of the factors behind the small insurance market is the
absence of a so-called "insurance culture" in this society.
Insurance is a relatively new, private market concept not employed
in the Soviet era, and not well understood in Armenia. With little
experience with these products, public skepticism is high regarding
whether insurers will pay claims. Insurance is also something of a
middle-class concept, and many who struggle to meet current expenses
do not feel they can afford the "luxury" of spending money to
protect themselves against potential future calamities. Others
simply do not see the need to spend today to protect themselves
tomorrow. According to one firm, many clients who sign up for auto
insurance as a requirement for receiving a car loan cancel their
policies as soon as their loan is paid off, even if they will
receive a very small refund.

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AREAS FOR GROWTH
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10. Aviation is the largest insurance category, comprising nearly
half of total industry revenues; in effect, Russian-owned INGO
Armenia, the company that holds the contract to insure Armavia (the
privately-owned national airline),is the country's largest insurer.



11. Nevertheless, the strongest growth is currently occurring in the
health insurance market, as large employers -- both foreign and
local -- are beginning to provide health coverage as an employment
benefit. With the implementation of pension reform in Armenia,
which will allow the introduction of private pension schemes, the
life insurance market may receive a further boost. Another major
growth area is expected to come with third-party liability motor
insurance, which is expected to become mandatory at the beginning of

2009.

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CENTRAL BANK IMPROVES SUPERVISION
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12. In a move that most insurance companies consider a positive
change, on January 1, 2006, the highly-regarded CBA assumed the role
of unified regulator and supervisor of Armenia's entire financial
sector, including the insurance sector, thus becoming the sole
authority to license and supervise insurance and reinsurance
activities. Though insurance supervisory authority previously
belonged to the Insurance Inspectorate of the Ministry of Finance
and Economy, the primary motivation for a single supervisory
authority was to oversee general risks across the financial market.
The CBA may be in a better position to supervise and regulate the
insurance sector, as it has broader experience in financial sector
regulation and greater institutional capacity. The CBA will also
play an important role in the near future by enforcing the new Law
on Insurance, enacted earlier this year, by issuing implementing
regulations, as well as by building capacity for effective
supervision of the sector.

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NEW LAW AND REGULATIONS
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YEREVAN 00001471 003.2 OF 003



13. Insurance companies in Armenia are regulated by the Law on
Insurance and relevant CBA regulations. This new legislation was
adopted in April 2007, and the CBA board member overseeing the
sector told us it is in full compliance with European standards and
directives. The previous law, adopted in 2004, had many
shortcomings, including vague definitions of different insurance
types, as well as no straightforward licensing and reporting
requirements. Among other things, it also lacked mechanisms to
regulate operation of the branches of foreign insurance companies in
Armenia.


14. The new Law on Insurance has brought forth a number of
innovations. First, it provides clear definitions of insurance and
reinsurance activities consistent with European directives. The law
specifies and clarifies procedures for issuing licenses, with
separate approaches to different insurance types. It also separates
life and non-life insurance activities, not allowing the same
company to provide both life and non-life insurance services.


15. To further enhance the market, the CBA is currently working to
establish a database for car accidents, which will later be extended
to other categories as well. The CBA is also the licensing
authority for actuaries under the insurance law, and plans are
underway to provide basic actuarial training from March to December
2008, with more advanced training and the development of an
actuarial association in Armenia to follow.


16. While the changes in the regulatory environment enforced by the
CBA will most likely lead to the establishment of a stable,
efficient, transparent and trustworthy market, and are generally
positively perceived by local insurance companies, they also have
their downsides. The rapid introduction and enforcement of the new
requirements has created serious pressure on most companies in the
market. In addition to the higher capital requirements, new
financial reporting forms introduced by the CBA and more frequent
reporting requirements are imposing a major administrative burden
that smaller companies will be less likely to meet.

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COMMENT
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17. Increasing wealth should spur the development of Armenia's
insurance market, as people come to appreciate the need to protect
themselves against possible future calamities, and as the GOAM
compels insurance coverage in matters of public interest. We are
hopeful that recent legislative and regulatory changes will create a
more transparent business environment that is welcoming to foreign
investors. The consolidation of the sector, to the extent that it
weeds out less reliable firms, is a positive development.

PENNINGTON