Russia’s budding auto-insurance companies are trying hard to attract customers – even tolerating fraud to do so.

Throughout most of Europe, liability insurance for car owners became compulsory back in the 1920s-1940s, but in Russia it is only now making its debut. And Russian consumers and industry are still debating the issue and fine points of the rules to get compulsory liability insurance.

The Russian Duma passed a law last year that will make it compulsory as of Jan. 1, 2004, for all cars in Russia to be insured. In the interim, Russian insurance companies have to take steps to implement the new program, and car owners have to purchase civil liability insurance.

Irina Zhachkina, deputy general director of the GUTA-Strakhovaniye insurance company, said there was an increasing interest in automobile insurance throughout 2002, which analysts linked to rising standards of living.

"The approval of the new law will serve as a sort of catalyst to kick-start the development of mass insurance in Russia," Zhachkina said. "It’s through this law that most people will come to understand just what insurance is and will take out their first insurance policies."

No one knows exactly how many cars in Russia are insured. Various estimates put the number of insured cars in Moscow at 5-12 percent. According to insurance companies, most of their clients are men aged 30-50 and with a monthly income over $500.

There are more than 1,000 companies on the Russian insurance market today, and most of them offer car insurance, but around 50 percent of policies are run through roughly 30 large insurance companies in Moscow and the central region. Insurance occupies a relatively modest place in the Russian economy, accounting for only 3 percent of GDP, but rapid growth rates over recent years give hope that this share could soon increase soon and rise to the 10 percent level typical of developed countries.

The new law is just around the corner, but the insurance rules, types of contract, policy and sticker to be put on the windscreen of insured cars have all still to be finalized. The same goes for forms for reporting traffic accidents and incidents or containing information about the policyholder.

Insurers now say that introduction of compulsory third-party motorist-liability (TPL) insurance may be delayed beyond the statutory start-up date of July 1, 2003. Part of the problem, they say, is that the government’s insurance agency has been unable to complete preparations, including the fixing of tariffs. Another reason is that there is lobbying against the start-up by parliamentary deputies and some smaller domestic insurers.

Igor Zhuk, general director of the Soglasiye insurance group, told The Russia Journal that there are five different draft laws in circulation to modify introduction of TPL in July. Some of them propose postponement by six to 12 months, and others propose changing the system of tariff fixing.

Preparing the traffic police for the new law is a serious problem, insurers concede, though not for the scheduled start-up time. "If the police do not prepare themselves for the increased number of accidents that will require involvement of the traffic police," an industry source warns, "the law may be sabotaged. There are already long lines for the so-called ‘groups of consideration,’ which study traffic accidents. These are likely to become much longer when third-party liability for car owners will be obligatory and the rulings of the ‘groups of consideration’ become necessary for getting compensation from insurance companies."

A look through the statistics shows that, although car insurance is accounting for an ever-larger share of large insurance companies’ business, it remains a low-profit business, even for the large insurers.

"The real problem with car insurance is that it is one of the most expensive types of insurance," said Ilya Olenin, the director of the car insurance department at the Alfa Strakhovaniye insurance company. "The view is that an insurance company can’t stay too long in this business, because it would kill it."

Three years ago, car-insurance premiums in Russia started falling. Car insurance became increasingly popular among insurers, and new players emerged on the market. In a bid to attract clients, insurers offered dumping prices, covering their losses with other types of insurance.

"Of course, you can lower the rates to a minimum, but then you have to ask yourself at whose expense we’re being so kind?" said Igor Zhuk, chairman of the presidium of the Russian Union of Car Insurers. "This program has to be profitable for insurers."

Today, insurers are concentrating on attracting new clients while retaining the existing client base through improving service, rapid compensation of losses and various discounts, rather than through lowering premiums.

At the moment, insurers compensate the losses of their clients from their own pockets, but this should change for the better once the new law on compulsory insurance takes force, and the insurers of the innocent party will be able to get the insurers of the person who caused the accident to foot the bill.

Up to 70 percent of insurance fraud cases involve auto insurance, and so insurers urgently need to develop effective preventative measures.

One of the main differences between car insurance on the Russian and Western markets is that in other countries, insurers take a far more serious look at the insurance and credit histories of the clients. A Russian client could take out a policy in one company, commit fraud and then turn up at another company, where he would be welcomed with open arms and even given discounts as a new client. In the West, however, means of dealing with insurance fraud have long been in place.

"Here, we have policy holders who run to the insurance company for money for every little scratch," said GUTA-Strakhovaniye’s Zhachkina. "But in other countries, every little scratch would make the client’s next insurance policy more expensive, and rates are linked tightly to a person’s insurance history. At the moment, there’s an intense battle going on for clients, and that’s why we’re forced to close our eyes to various problems such as this for now."

Since the insurance business is all about risks, it is a sector that is particularly exposed to fraud. Western insurers have devised a whole range of measures to reduce the risk of such things happening: Fraud cases are highly publicized and insurers work closely with law-enforcement agencies and help set up specialized agencies and data bases. Finally, compensation is organized in such a way as to replace a loss rather than seeming like a reward for an insurance incident, and this is done deliberately so as to give policy holders less incentive to, say, declare a fictitious car theft.

According to Alfa Strakhovaniye’s Olenin, Russia urgently needs insurance investigators, because car insurance is such fertile ground for fraud. Up to 30 percent of "serious" car accidents and thefts take place at a different time and place than indicated by the "victims."

Practice shows that simply making fraud cases known and exposing them to public condemnation has reduced insurance fraud by 20 percent in the West. In Russia, the fight against fraud is only just beginning.

"One policy holder has already come to us twice seeking compensation for the theft of the wing mirrors off his $100,000 Mercedes," said Vera Loginova, executive director of the Stolichnoye Strakhovoye Obshchestvo insurance company. "Each of these mirrors costs $1,500. We began to suspect that this client was just an ordinary cheater, because the mirrors were stolen within three months of each other, and the first theft came practically the day after the contract was signed."

Loginova said that, as the company had no proof the client was cheating, it paid the money in full, and, if necessary, will continue to pay until the contract expires, but it will not extend the contract with the client.

Up to 70 percent of insurance fraud cases involve auto insurance, and so insurers urgently need to develop effective preventive measures such as a common database with information on fraud cases that could serve as the foundation for a collective-security scheme for insurance companies.

The Russian Union of Car Insurers plans to set up just such a database for the exchange of information on car-insurance fraud, but this requires help not just from insurers, but also from the state, which has to provide a solid legal framework for these activities. At the moment, some ministries and agencies have regulations on procedures for exchanging this kind of information. The Interior Ministry’s Chief Information Center, for example, can provide certain information to banks and other legal entities on a contract basis.

If the compulsory car insurance scheme is introduced successfully, it will do a lot to help make insurance common practice in Russia. After all, there are now some 20 million cars in the country, and their owners make up the wealthier and more active part of the population.