Russia’s insurance market will continue to see strong growth, aided by retail business development, regional diversification and new compulsory insurance lines, according to a report released by Fitch Ratings.

Further tightening of regulations will “dramatically reduce” the number of insurers and improve the financial strength of the market overall, the report finds.

“Consolidation among large players and local market knowledge are likely to support the medium-term domination of domestic companies in non-life business,” said Anastasia Voronkova, an analyst in Moscow on Fitch’s insurance team.

“However, we expect more foreign entrants to become influential, both by establishing start-ups and by buying shares in existing companies - thus providing additional capital for the market.”

The Russian insurance sector grew 4% in 2005, to € 14.3 billion in gross premiums written, compared to € 13.7 billion in 2004, Fitch reported. The low growth rate is due to the decline in tax-avoidance schemes using insurance, which dominated the market in 2004.

Market commentators estimate the real growth of the insurance sector – not including the tax-avoidance schemes - to be 27% for 2005, Fitch noted. Growth has been mainly driven by corporate property, corporate accident and health, and retail motor insurance, Fitch said.

The rapidly developing insurance market has generated a growing demand for capital, for which the major insurers are expected to go to the public market to raise funds, Fitch said.

Medium-sized to large players that are not ready to become public are more likely to look for portfolio or strategic investors. Fitch sees initial public offerings representing a tough challenge for insurance players that are new to the public market.

Fitch noted that the Russian market is likely to see large mergers among the top 10 insurers in the short term.

For example, Rosgosstrakh, the market leader with a strong retail position, and Kapital, an insurer with a large proportion of corporate property business, recently announced a strategic partnership. “Currently, consolidation seems to be the best way for players to preserve a national presence in the market,” according to the report.

Following discussions with the United States, Russia agreed last week to the terms for joining the World Trade Organization. Those terms include allowing the presence of branches of U.S. insurers in the Russian market.

Fitch said the earlier inability to do this may partly explain U.S. insurers’ previous lack of interest in Russia. In Fitch’s view, the Russian government will “take steps to establish fair and equal requirements for U.S. branches, foreign subsidiaries and domestic companies.”

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