After the global financial crisis of 2008, regulators around the world concluded that the solvency of a financial institution cannot be assessed by formal ratios alone. One has to look at what risks a company takes on and whether they are covered by capital. In Europe, this approach was embodied in the Solvency II directive for insurers and the Basel III standards for banks. Russia has followed its own path towards risk-based regulation.

The principle: risk must be covered by capital

An insurer takes on other people’s risks. To meet its obligations even in a bad year, it needs:

  • sufficient insurance reserves for obligations already assumed;
  • own funds (capital) to cover possible deviations — large losses, falling asset values, pricing errors;
  • reliable reinsurance protection that removes peak risks from the balance sheet.

Risk management is the system that links these elements: it identifies risks, measures them, caps them with limits and monitors them.

How it works in Russia

The Law “On the Organisation of Insurance Business in the Russian Federation” requires insurers to set up a risk management system and internal control. Detailed requirements were established by the Bank of Russia: a company must have an approved risk management policy, a responsible unit or officer, procedures for identifying and assessing risks, and regular reporting to the board of directors.

An important step towards risk-based supervision is Bank of Russia Regulation No. 710-P “On Requirements for the Financial Stability and Solvency of Insurers”. It linked capital requirements to the company’s risks — insurance, market and credit — and set requirements for the quality and investment of assets. The riskier an insurer’s portfolio and investments, the more capital it needs.

The role of reinsurance

Under the risk-based approach, reinsurance becomes a capital management tool: by passing on part of the risk, the insurer reduces the burden on its own funds. But what matters is not only how much risk is ceded, but also to whom. A reinsurer is assessed qualitatively: financial stability, rating, jurisdiction, real ability to pay. An unreliable reinsurer does not remove insurance risk — it adds credit risk.

After 2022, when access to Western reinsurance shrank, this issue became particularly acute for the Russian market. Read more in “Russia’s Reinsurance Market”.

Why uniform mandatory requirements are needed

Minimum risk management standards must be mandatory and the same for all participants, and the rules of the game must be uniform, known, verifiable and achievable. Without this, undercapitalised companies can dump prices: sell policies below an economically justified level and shift risk onto clients. The market as a whole becomes less stable.

For a reinsurer, working with a ceding company that has no clear view of the risks it has assumed is also a problem: it is unclear what exactly is being reinsured and at what price. Moreover, such a cedent itself poses a credit risk for the reinsurer — for example, the risk of non-payment of the reinsurance premium.

What happens in case of violations

If an insurer fails to comply with requirements for capital, reserves or the risk management system, the Bank of Russia applies supervisory measures: it issues orders, demands a solvency recovery plan, may restrict or suspend the licence and, in extreme cases, revoke it. Weak risk management is therefore not only an internal problem for the company but also a direct risk for its clients.

Who benefits from sound risk management

  • Policyholders — their risks are accepted by a company that knows what it is doing and is able to pay.
  • Insurers — they understand their portfolio better, price more accurately and work more efficiently.
  • Reinsurers — they get transparent partners.
  • Shareholders and investors — they get a predictable business.
  • The state — it gets a stable financial market and a higher level of consumer protection.

What this means for the client

A client does not need to understand capital calculations, but it helps to look at external signs: a valid licence, a rating from an accredited agency, no supervisory measures. How to do this is explained in “How to Choose a Reliable Insurance Company”. Businesses should build their own insurance programme for large risks: Polis Re specialists will help you find cover in the “Business Insurance” and “Reinsurance” sections.