WTO update: A bill authorising the activities of branches of foreign insurers in Russia is now under discussion

Russia
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On 16 December 2011, Russia signed the Protocol Amending the Marrakesh Agreement Establishing the WTO (ratified by Federal Law No. 126-FZ of 21 July 2012). The Protocol sets out a number of measures that Russia must implement, including the obligation to allow branches of foreign legal entities from WTO countries to provide insurance services in Russia before August 2021 (on which we previously reported).

A bill* (“Bill”), which would allow foreign insurers to work in Russia through Russian branches, is being discussed. (Currently, the operations of foreign insurers are organised through Russian subsidiaries). Although it is too early to know the Bill’s final version, the outline of the approaches for the regulation of branches of foreign insurers appears clear.

Accreditation instead of licensing

The Bill provides that branches of foreign insurers will have to undergo accreditation rather than licensing in Russia. The decision on accreditation will be made by the Bank of Russia (as the insurance supervisory authority). The possibility of requiring obligatory participation in a Russian self-regulatory organisation of insurers is also being discussed.

At the same time, the rule on limiting the percentage of foreign capital in the charter capital of Russian insurers will remain. (If the 50% quota is exceeded, the foreign insurer’s application to create a branch will be rejected.) According to the Bank of Russia*, as of 1 January 2018, the share of foreign capital in the charter capital of insurers was 11.29%.

Accreditation will allow a foreign insurer to offer, through its Russian branch, voluntary life insurance and personal insurance, voluntary property insurance, reinsurance and, for mutual insurance companies, mutual insurance. A branch will be able to offer compulsory insurance only in cases expressly provided for by the relevant federal laws. Currently, the Bill provides for this possibility only with regard to compulsory third party liability motor insurance.

Information about the branch of a foreign insurer will be entered into the State Register of Accredited Branches and Representative Offices of Foreign Legal Entities, and into the State Register of Insurance Subjects, once the foreign insurer has placed its security deposit (please see below).

Requirements for foreign insurers opening a Russian branch

According to the current version of the Bill, in order to operate through a Russian branch, a foreign insurer must:

  • Be authorised to carry out insurance activities in its country of registration and have experience in the types of insurance that it intends to carry out in Russia:
    • at least eight years for life insurance;
    • at least five years for insurance other than life insurance and for reinsurance.
  • Have experience in carrying out insurance activities through foreign branches in other countries at least five years for the types of insurance that the insurer intends to carry out in Russia.
  • Have assets not lower than 3.6bn units of special drawing rights (as at the date of the publication of this Alert, about RUB327bn – approx. EUR 4.37bn) in accordance with the financial statements for the year preceding the submission of the application for accreditation.
  • Have its registration address and principal place of business in the same country.
  • Ensure the financial stability of its branch and the fulfilment of the obligations of the branch (please see below).

Ensuring the financial stability and creditworthiness of a branch of a foreign insurer

The current version of the Bill provides for three means to ensure the financial stability and fulfilment for the obligations of a branch of a foreign insurer: insurance reserves, a mandatory reserve (a security deposit) and reinsurance.

Insurance reserves

According to the Bill, a branch has the right to form insurance reserves in accordance with the requirements of the country of registration of the foreign insurer who established it. Funds received by the branch from its activities in Russia can be invested in accordance with Russian regulations (when the legislation of the foreign insurer does not prohibit the placement of funds abroad).

Mandatory reserve (security deposit)

The amount of the security deposit must meet the requirements for the minimum charter capital of Russian insurers. The current version of the Bill provides that the foreign insurer must pay a security deposit into a special account opened with the Bank of Russia. The possibility of paying a security deposit on accounts opened with commercial banks approved by the Bank of Russia is also being discussed. The security deposit must be paid for the period that the branch will be active in Russia. If accreditation is terminated, the balance of the security deposit is returned to the foreign insurer.

For the branch to effect current operations, the foreign insurer must open a rouble settlement account with a Russian bank. If the branch’s funds on the settlement account and the account for keeping the obligatory reserve (security deposit) are insufficient, the foreign insurer is obliged to transfer the shortfall to fulfil the obligations of the branch to the settlement account of the branch.

Reinsurance

The Bill gives reinsurance as one of the guarantees for ensuring the financial stability and creditworthiness of a branch of a foreign insurer. At the same time, it is not planned that the requirements on the compulsory reinsurance with the Russian National Reinsurance Company will apply to branches of foreign insurers (the Bill excludes the application of articles 13.2 and 13.3 of the Law on the Organisation of Insurance to foreign insurers and their Russian branches). The explanatory note in the Bill states that, since a branch is not an independent legal entity, but acts on behalf of a foreign insurer, the foreign insurer must take the decision on the need to reinsure its obligations for insurance payments in accordance with its national legislation. According to the Bill, the Bank of Russia, as insurance supervisory authority, has the right to enquire with a foreign regulator on whether the foreign insurer is complying with its national legislation on financial stability and creditworthiness.

Supervision of a Russian branch of a foreign insurer

The Bank of Russia will supervise the branches of foreign insurers and will also be entitled to send enquiries to the appropriate foreign regulators. Each branch will be obliged to submit to the insurance supervisory body reports on the branch’s performance indicators and semi-annual financial statements of the foreign insurer, annual reports with an auditor’s report, an internal auditor’s report with a section on the branch’s activities, annual statistical reports on the branch’s activities (in the form to be established by the Bank of Russia). Branches will be subject to Russian anti-money laundering requirements.

If a branch ceases to operate (due to the revocation or suspension of the licence of the foreign insurer), it will be obliged to transfer its insurance portfolio to Russian insurers or the Russian branch of another foreign insurer.

Conclusion

Russia is obliged to admit branches of foreign insurers into its market as part of the framework of its accession to the WTO. This obligation must be fulfilled in one form or another before 22 August 2021. Talks over the relevant Bill are on-going, and CMS will continue to follow developments.

If you have any questions on the matters referred to in this eAlert, please do not hesitate to contact CMS Russia experts Leonid Zubarev and Darya Lukoyanova or your regular contact at CMS Russia.

* In Russian