An insurance company shall ascertain its financial sustainability and solvency being a participant of the financial market. The safeguards to ensure financial sustainability and solvency of an insurance company under para. 1 art. 25 of the Law of the Russian Federation No. 4015-1 of November 27, 1992 “On the organization of insurance business in the Russian Federation” are economically feasible insurance rates; formed insurance reserves; insurance reserves in the amount that is sufficient to fulfill insurance liabilities; equity (capital); reinsurance.
Adoption of Regulation No 710 is connected with the general trend towards stricter requirements to financial sustainability of insurance companies. The amount of the minimum authorized capital of newly established insurance companies was increased up to 300 million rubles starting from January 01, 2019 (those insurance companies that were already established are to increase their authorized capital up to 300 million rubles until January 01, 2022 under para. 4 art. 2 of the Federal Law of the Russian Federation No.251-FZ of July 29, 2018).
Regulation No 710 specifies:
- methodology for calculating equity (capital) of an insurance company;
- procedure for investing equity (capital) and insurance reserves, the list of assets that can be invested, requirements to such assets, including requirements to asset structure;
- methodology for calculating asset value of an insurance company;
- methodology for calculating value of liabilities of an insurance company;
- methodology for calculating equity (capital) in relation to undertaken liabilities ratio.
An insurer’s equity (capital) is defined as a difference between all its assets and liabilities (para. 1.1). In contrast to current regulation that contains requirements to the amount of insurance reserves and equity (capital) of the insurer, Regulation No. 710 takes into account all the insurer’s assets when equity (capital) of the latter is calculated, however, a part of such assets (see below) is deemed equal to zero.
The insurers are entitled to invest their equity in property (including cash and certificated securities) and property rights (including non-cash funds, uncertificated securities, digital rights, rights to claim) (para. 2.1).
Regulation No 710 stipulates that when issuers invest in securities, the issuers of the latter shall be incorporated in accordance with Russian legislation or legislation of the Eurasian Economic Union or Organization for Economic Cooperation members and other foreign countries whereas property in which an insurer invests is to be located in the Russian Federation (para. 2.2).
Regulation No 710 provides for the proportion of certain assets in the total value of insurer’s assets (for example, the proportion of derivative financial instruments shall not exceed 40% under para. 2.4.3).
Determination of assets and liabilities value
Regulation No 710 contains significant rules on determining asset value. The value of 24 financial instruments, including:
- share in LLC;
- shares and units of foreign investment funds;
- units of interval investment funds;
- units of closed-end investment fund;
-
promissory notes;
certain rights to claim, inter alia, to a depositary, under repo agreement, insurance agents’ and brokers’ obligations, obligations to transfer the insurance premium, pay arrears,
deferred tax assets;
cash in the register and movable property;
intangible assets
is deemed equal to zero (para. 3.1).
With regard to other assets, Regulation No 710 provides for different rules on determining their value. The value of immovable property is based on the report on market value of an item of property (para. 3.6). The value of bonds, the payments on which are set in the form of formulas with variables, is determined as the minimum amount possible for such bond (para. 3.7).
Therewith, the value of assets which have no method to determine their value in Regulation No 710, is determined based on a fair value under IFRS 13 “Fair value measurement” [1] and insurer’s internal document stipulating methodology for determining asset value based on IFRS (para. 3.11).
Under para. 2 of IFRS 13 “Fair value measurement” the object of value measurement is to estimate the price, at which an ordinary transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions.
The value of liabilities of an insurance company is calculated on the basis of accounting data of the insurance company at the calculation date. However, Regulation No 710 stipulates certain characteristics of liabilities recording. The value [2] of insurer’s liability under lease contract is defined in the amount exceeding the sum of the mentioned obligation of the insurance company over the asset value of the insurance company in the form of right of use under the lease contract (para. 4.2). The liabilities of an insurance company also include the amount of insurance reserves formed by the insurance company, deferred tax reserves calculated under a formula provided in para. 4.4 of Regulation No 710.
Regulation No 710 contains methodology (formula) for the ratio of equity (capital) and assumed liabilities. The minimal acceptable ratio is 1 whereas the threshold is 1,05.
Liability for non-compliance with sustainability and solvency requirement.
The insurance companies should take into account that the Bank of Russia is empowered to control equity (capital) of an insurance company and issue instruction to rectify violation in case it reveals any inconsistencies (para. 2.1 art. 25 of the Law of the Russian Federation No. 4015-1 of November 27, 1992 “On the organization of insurance business in the Russian Federation”). If the company fails to follow the instruction issued under para. 4 art. 32.5-1. of the Law of the Russian Federation No. 4015-1 of November 27, 1992 “On the organization of insurance business in the Russian Federation” the Central Bank is entitled to:
- establish restrictions on settlement of certain transactions by the insurance company;
- enforce a ban on settlement of certain transactions by the insurance company;
- restrict the use of the insurance license;
- suspend the insurance license.
If the ratio declines to a threshold (1,05), the insurance company is to report the financial rehabilitation plan to the Central Bank. Such plan shall include the analysis of the reasons for the non-conformity with the ratio for the period of not less than 24 months, financial condition assessment, information on the potential measures ensuring restoration of the ratio under Bank of Russia Ordinance No 3522-U of December 30, 2014. The Bank of Russia is empowered to revoke the license in case of material non-compliance with the requirements to financial sustainability and solvency. For example, the license was revoked from LLC “Insurance Company “Diamant” and temporary administration was appointed by the Bank of Russia Orders of June 28, 2018 No OD-1618; July 12, 2018 No OD-1753 due to the non-compliance with the requirements to financial sustainability and solvency.
Entry into force.
Regulation No 710 is currently in the registration phase in the Ministry of Justice of the Russian Federation and can still be amended. Regulation No 710 enters into force on July 01, 2021, with the exception of certain provisions, some of which are listed below.
The value of shares and/or units of Russian and foreign issuers shall not equal to zero if such shares and/or units are listed on the Stock Exchange in Russia or any other foreign Stock Exchange included in the list of foreign Stock Exchanges from July 01, 2023 [3]. Therefore, the insurance companies will have more opportunities to invest in the abovementioned instruments.
Until June 30, 2023 in order for the value of shares and/or units of Russian and foreign issuers not to equal to zero the shares shall be included in the first quotation list (so called blue chips), and shares and/or units of foreign issuers shall be included in quotation lists, lists of markets, segments of foreign Stock Exchanges [4].
The indicators specified in Regulation No 710 (evolution coefficient of credit spread depending on the group of credit quality, reduction in the cost of resident/non-resident property coefficient, coefficient of variation 2 (Q) and others) will increase gradually from July 07, 2022 and will achieve its highest rates on July 07, 2025.
Regulation No 710 in fact replaces several Central Bank subordinate acts and systemizes the requirements to financial sustainability and solvency of insurers. The Central Bank subordinate acts stipulating requirements to financial sustainability and solvency of insurers expire from July 07, 2021, including Bank of Russia Ordinance No. 3743-U of July 28, 2015 “On the procedure for Standard Equity to Debt Ratio Calculation by Insurers”, Bank of Russia Ordinance No. 4298-U of February 02, 2017 “On the Procedure for Investing an Insurer’s Capital and the List of Assets Eligible for Investment”, Bank of Russia Ordinance No. 4896-U of March 03, 2018 “ On the Methodology for Measuring Insurer’s Capital (Excluding Mutual Insurance Companies)”.
Therefore, insurance companies, taking into account the stagnation of the insurance market [5] in 2019 (certain reduction in insurance premiums year by year) shall be careful with the financial sustainability and solvency compliance and be well-prepared for the gradual increase in indicators and coefficients from July 01, 2022. Compliance with the new financial sustainability and solvency requirements will allow to minimize the risk of issuance of Bank of Russia Order on eliminating the violations and other consequences, including license revocation.
[1]
Approved by Annex No. 40 to Order of the Ministry of Finance No 217n of December 28, 2015
[2]
The procedure for reporting lease agreements in business accounts is provided in Regulation No 635-P of March 22, 2018
[3]
The criteria for the inclusion in the list of foreign Stock Exchanges are set out in Bank of Russia Ordinance No.5312-U of November 11, 2019
[4]
Approved by Annex 19 to Central Bank Regulation No. 534-P of February 24, 2016
[5]
Bank of Russia information and analytical materials “Review of key indicators of insurers activity over 3rd quarter 2019”
Ksenia Stepanischeva, Counsel