VZCZCXRO9916
RR RUEHLN RUEHVK RUEHYG
DE RUEHYE #1471/01 3610631
ZNR UUUUU ZZH
R 270631Z DEC 07
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 6797
INFO RUCNCIS/CIS COLLECTIVE
RUEHNO/USMISSION USNATO 0486
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

UNCLAS SECTION 01 OF 03 YEREVAN 001471 
 
SIPDIS 
 
SIPDIS 
 
E.O.12958: N/A 
TAGS: ECON EFIN AM
SUBJECT: ARMENIA'S GROWING INSURANCE SECTOR 
 
 
YEREVAN 00001471  001.2 OF 003 
 
 
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SUMMARY 
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¶1. Despite the rapid growth of Armenia's banking sector and GDP over 
the past several years, other financial services, including 
insurance, have developed more slowly.  Insurance remains a small 
part of the financial sector and plays a minor role in financial 
intermediation.  Encouragingly, the transfer of insurance 
supervisory authority to the Central Bank of Armenia (CBA), adoption 
of new insurance legislation, and rising incomes may ultimately lead 
to a more rapid development of this sector.  End Summary. 
 
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SMALL MARKET SIZE 
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¶2. The Armenian insurance market is quite small, even for a country 
of its size.  Annual revenue from insurance premiums currently 
equals about AMD 5.124 billion (USD 14.12 million), with AMD 3.078 
billion (USD 8.48 million) -- or 60% of premium income -- 
transferred to reinsurance firms.  Due to the use of 
non-proportional reinsurance, 95% of the insurance risk is 
reinsured.  This constitutes "fronting," a practice generally 
discouraged by insurance regulators by the imposition of minimum 
retention requirements.  This also has the effect of making 
insurance companies brokers rather than insurers.  Insurance 
penetration -- insurance premiums as a percentage of GDP -- is 
currently 0.22 percent of GDP, compared to 9.2 percent in 
industrialized countries, 2.7 percent in Central and Eastern Europe 
and 0.5 percent in neighboring Georgia.  Despite the small market 
size, limited demand and limited range of products offered, insurers 
in Armenia are profitable due to low loss ratios (claims).  Their 
total assets currently amount to 8.15 billon drams (USD 22.45 
million), with total equity capital of 5.526 billion drams (USD 
15.22 million). (COMMENT: All figures in this report are based on 
year-end 2006, which is the last year for which there is complete 
data.  Figures are based on the exchange rate on December 31, 2006 
(AMD 363 = USD 1).  The statements in USD would now be approximately 
20% higher, due to the appreciation of AMD against the USD.) 
 
¶3. As of November 2007, there were nine insurance companies and six 
brokerages operating in Armenia, down from 26 and 9, respectively, 
since the beginning of 2006.  This consolidation has occurred 
primarily due to stricter controls imposed by the CBA, in particular 
minimum capital requirements, that have forced smaller firms from 
the industry.  In the last three years the minimum capital 
requirement has tripled to AMD 350 million (approximately USD 1 
million) and on January 1, 2008 will increase to AMD 500 million 
(approximately USD 1.5 million).   This change should result in a 
further consolidation of the market, leaving a small group of 
well-capitalized insurance providers. 
 
¶4. There are no restrictions against foreign investment in Armenia's 
insurance sector, and the CBA Chairman has repeatedly emphasized his 
willingness to attract leading multinational insurance groups to 
Armenia.  At present there are three foreign-owned firms in the 
market: Cascade Insurance, owned by US based Kafesjian Family 
Foundation; London-Yerevan Insurance, a full subsidiary of UK-based 
Golden Gate Investment and Management company; and INGO Armenia, 
majority shareholder Russian Ingostrakh. According to CBA officials, 
companies from Germany, Ukraine and Russia have expressed interest 
in establishing subsidiaries in Armenia.  Speaking at a recent 
business forum in Brussels, Armenian President Robert Kocharian 
expressed hope that German and French insurance companies will start 
operating in the Armenian market by the end of the year.  According 
to media reports, HSBC-Armenia Bank has also declared its intention 
to establish an insurance company in the country. Armenian officials 
have also approached U.S. Embassy officials in the past to request 
help in attracting American insurance firms into the Armenian 
market. 
 
¶5. After two unsuccessful incarnations, a newly formed trade group, 
The Association of Insurers, began to play a modest role in the 
sector after its formation this year.  Although the Association 
cooperated with the CBA in drafting the new regulations for the 
sector, it lacks both financial and human resources to be fully 
effective. 
 
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LIMITED PRODUCTS OFFERED 
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¶6. The number of insurance products available in the Armenian market 
is very limited.  The main types of policies available are vehicle 
(collision and non-mandatory third-party liability), property, cargo 
transportation, as well as travelers' accident insurance.  With the 
development of the mortgage and consumer loan markets, the volume of 
property insurance has increased considerably, as most banks require 
property insurance in order to provide loans. 
 
¶7.  The market for conventional life insurance is virtually 
 
YEREVAN 00001471  002.2 OF 003 
 
 
non-existent.  In the past it generated only USD 90,000 in premiums, 
less than one percent of the total.  Under the new Law on Insurance, 
which took effect October 1, 2007, firms are prohibited from 
offering both life and non-life insurance.  While this constraint 
can be accommodated by establishing another subsidiary, the high 
capitalization requirements relative to the potential premiums to be 
generated prevent life insurance from being a cost-effective market 
segment at present.  Generally, the lack of investment opportunities 
-- particularly long-term opportunities -- in Armenia makes 
development of the life insurance market difficult, if not 
impossible. 
 
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EMBASSY CAUGHT IN THE SQUEEZE OF TRANSITION 
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¶8.  The Embassy has inadvertently found itself a victim of the 
changes in the domestic insurance industry.  As a result of the new 
law, Cascade Insurance, which had provided both health and life 
insurance for the Embassy's LES employees, was forced to discontinue 
providing life insurance (rather than discontinue the more lucrative 
health insurance), effective December 1, 2007.  As a result, the 
Embassy is currently in the unenviable position of having to 
self-insure, while it seeks another insurance provider that can 
provide the same level of service and protection it previously 
enjoyed. 
 
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WHAT'S THIS "INSURANCE?" 
------------------------ 
 
¶9. One of the factors behind the small insurance market is the 
absence of a so-called "insurance culture" in this society. 
Insurance is a relatively new, private market concept not employed 
in the Soviet era, and not well understood in Armenia.  With little 
experience with these products, public skepticism is high regarding 
whether insurers will pay claims.  Insurance is also something of a 
middle-class concept, and many who struggle to meet current expenses 
do not feel they can afford the "luxury" of spending money to 
protect themselves against potential future calamities.  Others 
simply do not see the need to spend today to protect themselves 
tomorrow.  According to one firm, many clients who sign up for auto 
insurance as a requirement for receiving a car loan cancel their 
policies as soon as their loan is paid off, even if they will 
receive a very small refund. 
 
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AREAS FOR GROWTH 
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¶10. Aviation is the largest insurance category, comprising nearly 
half of total industry revenues; in effect, Russian-owned INGO 
Armenia, the company that holds the contract to insure Armavia (the 
privately-owned national airline), is the country's largest insurer. 
 
 
¶11. Nevertheless, the strongest growth is currently occurring in the 
health insurance market, as large employers -- both foreign and 
local -- are beginning to provide health coverage as an employment 
benefit.  With the implementation of pension reform in Armenia, 
which will allow the introduction of private pension schemes, the 
life insurance market may receive a further boost.  Another major 
growth area is expected to come with third-party liability motor 
insurance, which is expected to become mandatory at the beginning of 
¶2009. 
 
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CENTRAL BANK IMPROVES SUPERVISION 
--------------------------------- 
 
¶12. In a move that most insurance companies consider a positive 
change, on January 1, 2006, the highly-regarded CBA assumed the role 
of unified regulator and supervisor of Armenia's entire financial 
sector, including the insurance sector, thus becoming the sole 
authority to license and supervise insurance and reinsurance 
activities.    Though insurance supervisory authority previously 
belonged to the Insurance Inspectorate of the Ministry of Finance 
and Economy, the primary motivation for a single supervisory 
authority was to oversee general risks across the financial market. 
The CBA may be in a better position to supervise and regulate the 
insurance sector, as it has broader experience in financial sector 
regulation and greater institutional capacity.  The CBA will also 
play an important role in the near future by enforcing the new Law 
on Insurance, enacted earlier this year, by issuing implementing 
regulations, as well as by building capacity for effective 
supervision of the sector. 
 
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NEW LAW AND REGULATIONS 
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YEREVAN 00001471  003.2 OF 003 
 
 
¶13. Insurance companies in Armenia are regulated by the Law on 
Insurance and relevant CBA regulations.  This new legislation was 
adopted in April 2007, and the CBA board member overseeing the 
sector told us it is in full compliance with European standards and 
directives.  The previous law, adopted in 2004, had many 
shortcomings, including vague definitions of different insurance 
types, as well as no straightforward licensing and reporting 
requirements.  Among other things, it also lacked mechanisms to 
regulate operation of the branches of foreign insurance companies in 
Armenia. 
 
¶14. The new Law on Insurance has brought forth a number of 
innovations.  First, it provides clear definitions of insurance and 
reinsurance activities consistent with European directives.  The law 
specifies and clarifies procedures for issuing licenses, with 
separate approaches to different insurance types.  It also separates 
life and non-life insurance activities, not allowing the same 
company to provide both life and non-life insurance services. 
 
¶15. To further enhance the market, the CBA is currently working to 
establish a database for car accidents, which will later be extended 
to other categories as well.  The CBA is also the licensing 
authority for actuaries under the insurance law, and plans are 
underway to provide basic actuarial training from March to December 
2008, with more advanced training and the development of an 
actuarial association in Armenia to follow. 
 
¶16. While the changes in the regulatory environment enforced by the 
CBA will most likely lead to the establishment of a stable, 
efficient, transparent and trustworthy market, and are generally 
positively perceived by local insurance companies, they also have 
their downsides.  The rapid introduction and enforcement of the new 
requirements has created serious pressure on most companies in the 
market.  In addition to the higher capital requirements, new 
financial reporting forms introduced by the CBA and more frequent 
reporting requirements are imposing a major administrative burden 
that smaller companies will be less likely to meet. 
 
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COMMENT 
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¶17. Increasing wealth should spur the development of Armenia's 
insurance market, as people come to appreciate the need to protect 
themselves against possible future calamities, and as the GOAM 
compels insurance coverage in matters of public interest.  We are 
hopeful that recent legislative and regulatory changes will create a 
more transparent business environment that is welcoming to foreign 
investors.  The consolidation of the sector, to the extent that it 
weeds out less reliable firms, is a positive development. 
 
PENNINGTON