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Ministries and governmental bodies, as RBC Daily has learned, have been broadly discussing amendments to the law on insurance business in Russia which would boost the minimum share capital of insurance companies sixfold, to RUB 180m (approx. USD 6.24m). Half of over 740 Russian insurance companies are currently lacking that requirement.

Just recently, head of the Federal Insurance Supervision Service Alexander Koval suggested that the share capital of insurance companies be raised to RUB 90m (approx. USD 3.12m), while that figure has now been doubled. Furthermore, the companies cannot enlarge their capital through borrowings or pledged property. At this point, the minimum capital requirement stands at RUB 30m (approx. USD 1.04m) for composite insurance companies, RUB 60m (approx. USD 2.08m) for life insurance companies, and RUB 120m (approx. USD 4.16m) for reinsurance companies. According to the latest data from the Federal Insurance Supervision Service, the aggregate capital in the industry reaches some RUB 153.8bn (approx. USD 5.33bn).

The new amendments will also entitle insurance companies to take subordinated loans which do not exceed one fourth of their equity into account when calculating the debt to equity ratio. To meet the requirement, the loan must be issued for at least five years, and the maximum interest rate cannot be above the Central Bank’s discount rate multiplied by a factor of 1.1. Should these amendments be adopted, insurance companies will not be able to substantially increase their share capital through contributions from top managers or objectionable investors, as the changes prohibit any acquisition or trust management of over 5 percent in an insurance company if such a buyer or trustee is its head, deputy head, or even a founder or chief accountant of a different company that was declared bankrupt through the fault of its shareholders or leadership. If such a transaction does in fact occur, the parties are under an obligation to dispose of their share within three months.

“In theory, capital enlargement could be completed in two steps,” Ingosstrakh General Director Alexander Grigoryev stated, adding, “It would be more reasonable to impose the requirement starting January 1, 2011, however. A year is ample time to enlarge share capital. All the more so, considering that RUB 180m (approx. USD 6.24m) is no big deal for any serious investor.”

For financial organizations drawing long-term contributions from their clients, the proposed share capital enlargement appears to be reasonable, General Director of AlfaStrakhovanie Vladimir Skvortsov explained. Yet, according to him, most regional companies will not survive the change. “Banks were given more time to gradually build up their capital,” Skvortsov added. “It would be advisable to raise the requirement for insurance companies to RUB 100m (approx. USD 3.47m) beginning in 2011, and then mark it up on an as-needed basis.”

Analytical department of RIA RosBusinessConsulting