With many Russian banks now looking to make long-term plans, insurance companies are making their move.

Russians do not trust their banks. And for good reason. Only a small percentage of banks operating in Russia insure their business, and depositors have no guarantee against the risks these banks run.

Insurance companies in Russia know they can’t get by without banks, but banks haven’t yet fully realized the benefits of working with insurance companies — up to now, at least.

Experts say that Russian banks are beginning to show more interest in the products that insurers have designed for the sector. This includes insurance for banks’ property, for employees and for loan and leasing operations. Russian banks have also been more actively getting insurers involved in joint programs, and insurance is now beginning to show up in banks’ risk management.

Russia’s biggest bank, state-owned Sberbank, set the trend when it took a policy that would safeguard the bank’s assets, partners and depositors.

According to a study by PricewaterhouseCoopers, 42.5 percent of banks worldwide have fallen victim to various kinds of economic crimes over the past two years, for total losses of more than 3.6 billion euros. According to the FBI, swindling alone causes losses of $160 million-$200 million a year to banks in the United States.

In Russia, according to official data, the number of crimes linked to the banking and financial system in 2002 was 75,000 – an increase of 37 percent from 2001. Insurers in Russia are now offering some policies to manage these risks.

Foremost among these is the Bankers’ Blanket Bond (BBB), a comprehensive criminal-risk insurance policy that is used by more than 90 percent of banks in the world, although few in Russia take advantage of the protection. And even fewer insurers here have real experience of working with this complex type of coverage.

Only two Russian insurers have real experience with the BBB – Ingosstrakh and Alfa-Strakhovaniye. Ingosstrakh insures banks throughout Russia and the other former Soviet republics, and, for reinsurance, uses Strakhovoi Dom VSK, which was selected as an authorized company for insuring Sberbank’s property interests in 2003-05.

As well as providing BBB coverage to its sister Alfa Bank, Alfa Strakhovaniye added depository company IBG NIKoil to its BBB portfolio at the end of last year. This deal, which saw the insurance cover placed with Lloyds with the help of AFM Insurance Consultants and Brokers, was the biggest of its type so far in Russia, experts said.

Vadim Sukhikh of Ingosstrakh’s Financial Institutions Department said that interest in these kinds of products is growing in Russia. "This is linked above all to the considerable increase in losses in this area," he said. "It’s also linked to the development of internal risk-management systems for banks and their gradual transition to international standards."

He added that banks across the sector are getting insurance, "from those that are among the Top 10 here, to mid-level banks. Interest in insurance products is coming from both Moscow banks and regional banks."

Russian insurance companies are actively promoting coverage for banks’ assets, stressing to the institutions the need for protection in view of their specific services and activities. The risks, Sukhikh said, include the possible loss, destruction or damage of assets and losses arising from forgery or fraudulent activities by bank employees when carrying out official duties.

Natalya Shishkina, general director of the Stolichnoye Strakhovoye Obshchestvo (SSO) insurance company, said insurance also covers banks’ real-estate assets, equipment, furniture, vehicles and other items. "Insurance of cash held in the bank or under transportation, insurance of assets held as collateral by the bank, various types of financial-risk insurance and insurance of bank employees are also all part of this concept," she added.

Kirill Brovkovich, deputy general director at Strakhovoi Dom VSK, agreed. "Insuring banks’ assets means insuring against all risks that could cause asset losses. In the West, there are standard comprehensive products that give banks comprehensive protection, the BBB policy, for example," he said.

"Western companies also offer this product on the Russian market," Brovkovich added. "The problem with promoting these classic comprehensive insurance programs is that Russian banks are not yet ready to fully open up to independent risk assessors, the so-called ‘surveyors.’"

1. Antivirus 24%
2. Flow-coding complexes 24%
3. Firewalls 24%
4. E-mail monitoring and archiving systems 6%
5. Secure web servers 24%
6. Authenticity-verification systems 65%
7. Virtual private networks (VPN) 18%

Danger of breach of banking security systems from the outside (results of a poll conducted by the Russian Banks Association)

1. Negligible 16%
2. Considerable 8%
3. Higher than from the inside 26%
4. High 50%

Experts agree, nonetheless, that banks have begun to show more interest in getting insurance protection.

Irina Ryzhakova, head of the assets and liability insurance department at GUTA-Strakhovaniye, said she is seeing an increasing number of banks signing up to take coverage. "As a rule, Russian banks have two or three insurance partners," she said. "Except in cases where banks and insurance companies are part of the same financial group, they don’t participate in each other’s capital. Otherwise, they prefer to work within their own holdings, so that financial flows don’t go outside."

Most interested in risk insurance are the Top 100 Russian banks that work extensively with counteragents abroad. One sign of the growth of an insurance culture in Russia is that, in order to ensure the highest levels of protection for clients, companies often turn to reinsurance on Western markets, in particular with the Lloyds Syndicate in London, recognized worldwide as a leader in the field. For the original insurer, this is a way to ensure greater security and stability and help avoid catastrophic losses by shifting a large part of the risk to the reinsurance firm.

In addition, distributing the risks throughout the international insurance market considerably reduces the influence of the economic situation on a particular country, which is seen as especially important in the Russian context.

Sberbank example

The choice of insurer often depends on the bank’s internal policy, though more and more banks are following the example of Sberbank and the Russian Central Bank and are using tenders to choose insurers.

"Banks follow a two-sided interest in their work with insurance companies," said Ingosstrakh’s Sukhikh. "On one hand, they’re interested in the insurance products the company is offering, and on the other hand, they want to earn money on the insurer by placing its money in their bank and putting it into various financial instruments. Obviously, this kind of overall assessment of the potential partner often calls for a tender to be held."

Deputy Executive Director of the property-insurance department of the Promyshlenno-Strakhovaya insurance company Mikhail Golomazov said that banks generally prefer to work with large insurance companies that can take on a lot of responsibility. "At the same time, all kinds of banks are signing more contracts to insure assets held by the banks as collateral for loans they’ve made," he said.

One type of insurance policy that has been slow to catch on in Russia is the D&O Liability policy, mainly because of the vagueness of Russian law.

Statistics show that no matter what measures to make money-transporting vehicles safer and employees more professional, problems often arise from within as a result of conflict between employees and employers as well as mismanagement or crime by owners. Most attacks on money-transporting vehicles involved current or former employees working with them, experts say.

Therein lies the catch for banks’ liability for the actions of bank employees. There are no precedents yet for Russian bank managers (or owners) having to pay compensation for the losses they have caused, and the law is vague in this area, so many banks still don’t see the need for D&O Liability coverage.

But that is just a sign that the banking-insurance market is only beginning to develop in Russia. That means there is much potential for growth in the country and good prospects for the future for insurance companies operating here, according to most experts.