Liability insurance in Russia: a Hotel California for insurance companies

Can you imagine a company which actively tries to minimise number of clients buying its product or service? Before I read this article today, I thought such company cannot exist in this world. However, every passing day is a learning opportunity and apparently if you’re in an insurance business and you work in Russia you have to keep it as small as possible when it comes to compulsory third-party liability insurance (a.k.a. “OSAGO”).

Russia is a country of contrasts. In particular this means that there are many people who have nothing and some people who have everything. In such a country any mandatory services or products can only be free of charge or heavily subsidized by the government. You cannot mandate poor thug on 15 years old car to buy an auto insurance policy for twice as much as his car could be sold for. And this is not only a problem of poor thug. A poor school teacher, a poor doctor a poor fireman.. A few years ago when compulsory auto insurance was mandated by Russian law the government has conducted a series of discussions with major insurance companies about how do they make auto insurance affordable. Of course, when you discuss something with a government, this often looks like this (you’re not on the left):

Basically, the government has stuck its gun in a mouth of insurance industry and pushed them hard to sell these insurance policies for zero profit. As they said to us, ‘this is going to be a social part of their business’. By that time they legislated how much such insurance should cost and how much money companies have to pay should any auto-related damage happen. And these parameters were somewhat at break-even levels so insurance companies swallow this shit without complaining too much. The industry started to grow rapidly.

So… why Russian insurance companies are not happy to sell you this insurance today? Something happened between the launch of this insurance program and today when every insurance company makes losses selling these policies. What always happen when prices are regulated by the government? Over time they become either too high and people can’t afford it or too low so society starts experiencing severe deficit of this product because no one is happy to sell it at a loss.

This is exactly what has happened in Russia. The government was very reluctant raising policy premium maximums and always tried to fix any problems with these policies by mandating more and more compliance on a part of insurance companies. What are the results? Insurance companies who initially agreed to work for no profit started making losses. What is a natural response by businessmen when they start making losses selling something? Well, sell something else and stop selling products that led to a loss. However, not only insurance premiums were mandated by the government, but the government also mandated insurance companies to sell these products to everyone willing to buy even if company doesn’t want to be in an auto-insurance business. At the same time the supreme court ruled that insurance companies should not push any other products with these compulsory policies as it violates ‘consumer rights’. The next step was the following: offices of insurance companies started claiming they have no forms to fill when you show up to buy insurance. Can you imagine any business stopping operations just because they have no forms? No, if the business is to sell more of these policies. But currently it is the other way around: if you want less of a loss, you would be better not selling them. If a company fails not to sell you a policy they either not pay or underpay you for any damage. The majority of population in Russia have experienced our court system just because they are not getting paid by the insurance company. Hiring a lawyer and filing a lawsuit is an almost mandatory step to get any money from insurance company in Russia.

What government plans to do now? Well, some proposals suggest a jail time for those who refuse to sell these compulsory policies 🙂 Can you imagine that?

Let’s imagine a coffee shop industry that is mandated to sell a standard cup of cappuccino for $1 and if you are coffee shop and refuse to sell cappuccino — you’re criminal. In some fancy places people only go there for a cup of cappuccino to discuss their business. To survive, these coffee shops start a new product ‘$1-cappuchino from government’ that is very hard to get. You have to stay in a humiliating long line, the coffee is tasteless and served by shitty barista who doesn’t even speak your language. At the same time if you want the right cappuccino, you’ll be charged $5 and served by the best barista and waiter featured with best syrup and some artistic drawing on a milk foam.

The thing is… you can’t force people to work well if they just don’t want to. They will go extra hundred mile not to work at all or make you feel humiliated by the actual work they do just because they don’t want you to show up and make your order next time. It would be interesting to see how far insurance companies and government are ready to go to keep up this status quo.

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