Aviation Likely to Help Shape Lloyd’s View of Russia

As Lloyd's plans to open a representative office in Russia in mid-2011, it is likely to pay close attention to the country's aviation market.

As a vast nation whose territory extends across nine time zones, Russia is heavily dependent on aviation. And the country's airline industry, which has grown rapidly since the collapse of communism, is itself heavily reliant on the international reinsurance market.

This international element is a by-product of the absence of reinsurers in Russia, according to Paul Smith, a partner in JLT Re in London. Russian aviation insurers retain only small amounts of risk, he said.

"Aviation insurers all buy comprehensive reinsurance programs in the international marketplace via London brokers, and they tend to use local representatives," Smith said. "One or two do tend to come to London direct."

Russia will not be entirely new to Lloyd's. "Lloyd's of course have worked with Russian risk for centuries through brokers," said Vasilina Bindley, broker Willis Group'sLondon-based executive director for marine.

During the Soviet era, London brokers and underwriters dealt with Rosgosstrakh and Ingosstrakh, the state-controlled insurance companies, Bindley said. The London market has also served the large number of underwriters that have been set up in Russia since the early 1990s.

Bindley, herself a Russian, is secretary of the Russia Club, an informal organization of Lloyd's market participants with an interest in Russia and, to some extent, Eastern Europe. The group's monthly meetings at a London wine bar have become an attraction for visitors from Russia.

Ian Krise, a partner in JLT Aerospace in London, said he believes that Lloyd's decision to open its representative office "adds credence" to Russia's highly competitive insurance market.

"The Russian market, I think it is fair to say, is now mature in that it's been around for nearly 20 years," said Krise, who also noted the growth of the country's aviation industry. He said there may be as many as 100 airlines in Russia.

The insurance companies that were launched in Russia after the fall of communism began with small amounts of capital, Krise said. Gradually the banks got involved. The banks "have got proper capacity behind them to make them serious [insurance] players," he said.

The London market has long responded to the tendency of Russian aviation insurers to charge low premiums by charging higher reinsurance premiums, Krise said. But the failure of this strategy, he added, has caused the London market to limit the coverage it gives on reinsurance, "so that everything has to come on a direct basis into London to be rated properly."

From an aviation perspective, Smith regards the opening of the Lloyd's Russian office as interesting. Lloyd's, he argued, is well placed to win business as Russian fleets adopt Western equipment. A lot of leasing companies will not accept the security of the Russian insurers. With its strong ratings, he said, Lloyd's "could access the business direct in the London market rather than via a local cedent company," he said.

Lloyd’s has a current Best’s Financial Strength Rating of A (Excellent).

(By Robert O'Connor, London editor: [email protected])