Delegation of Ukrainian insurers learn from North American practices (09/06/98)

Delegation of Ukrainian insurers learn from North American practices

by Andrij Kudla Wynnyckyj
Toronto Press Bureau

TORONTO - "When will the Ukrainian National Association begin selling life insurance in Ukraine? Does the UNA feel it has an obligation to do so, given that its very name suggests it does have such an obligation?"

These bold questions, both an invitation and a challenge, were posed by Oleksander Sazhko, president of Ukraine's Dynasty Insurance Corporation at a five-hour meeting with a group of senior executives from Ukraine's insurance industry at the UNA's Toronto office on July 30.

Their host, the UNA's director of insurance operations, Bob Cook, welcomed the challenge, but responded that the agencies from Ukraine had considerable work cut out for them to help the UNA satisfy North American regulators that such a venture would be an acceptable risk.

"The UNA is not saying no, it's saying that the [New Jersey State] regulators are likely to say no," Mr. Cook added. "[Regulators] are receptive to any opportunities to expand, but if we do anything to erode reserves, or if we take on an unreasonable risky situation, then they get nervous."

Mr. Cook encouraged the group to contact the UNA's home office in Parsippany, N.J., with a formal, written proposal that could be studied by the fraternal's executive. He pointed out that any decision on the matter would be made out of the home office and would likely involve consultation with a UNA convention.

The visiting group

Five senior officials of three insurance companies based in Kyiv and Mariupil, as well as two bankers from the Ukrainian capital, were in Toronto on a self-directed, self-financed business program and seminar titled "Modern Insurance Technology of North America" to explore possibilities for cooperation and to study the legal and market environments in which Canadian companies operate.

The Ukrainian delegation hired the Toronto-based consulting firm Aldorf International to set up contacts and shepherd their seven-day (July 25-August 1) agenda. In May, Aldorf International got in touch with Toronto UNA broker Steve Mazur, who also assisted in arranging the group's activities.

At the July 30 meeting at the UNA Toronto offices, Volodymyr Stadnyk, an Aldorf marketing director who is fluently tri-lingual in Ukrainian, Russian and English, accompanied Svitlana Kurmelova and Yevhen Vakulenko, department heads of the Alcona Insurance Company of Kyiv; Mr. Sazhko and Vasyl Shestakov, president and general director respectively of the Dynasty Insurance Corporation of Mariupil; and Olexander Pustov, department director of the Kyiv-based Narodna Insurance Company.

Earlier in the tour, the team met with Stanley Griffin, president of the Insurance Bureau of Canada, and Alan Morson, president of the Canadian Life and Health Insurance Compensation Corporation.

Svitlana Pylypchuk, chairman of the board, and Viktor Trush, economist with the Kyiv-based Zevs bank, also traveled with the group, but did not attend the UNA-hosted meeting.

Alcona officials brought along a 24-page booklet outlining the company's focus on medical, property, transport and financial risk insurance, and listing the locations of its six branches (Dnipropetrovsk, Energodar, Khmelnytskyi, Kuznetsovsk, Mariupol and Yuzhnoukrainsk). The professional booklet was essentially bilingual in Russian and English, with the slogan "Strakhuimosia, bo my toho varti" (Let us insure ourselves, because we're worth it), providing the sole instance of the use of Ukraine's official language. Nevertheless, Ms. Kurmelova, 34, and Mr. Vakulenko, 46, were quite fluent and expressive in Ukrainian during the meeting.

The others did not bring promotional material, but Mr. Pustov, at 59 the oldest member of the group, offered that his firm dealt with the insuring of rocket systems and satellites.

Ukraine's insurance environment

Messrs. Vakulenko and Pustov provided a thumbnail sketch of Ukraine's insurance environment. Mr. Pustov said Ukraine is essentially a closed market for insurers, with only companies based in Ukraine allowed to directly provide insurance to individuals and companies. Foreign firms are due to arrive in 2003, when legislation is scheduled to be liberalized in this area. The Narodna Co. official said about 70 large English and German firms have a presence in Ukraine, as re-insurers.

He added that "the rate of change from a socialistic to a market system is difficult to gauge, but we all have confidence that it will proceed towards a market system."

"Two factors are working to limit the market," Mr. Vakulenko explained, "first, the concept 'hroshi strakhuiut sami sebe' (money insures itself, i.e. wealth protects against accidents and other eventualities); and second, the impoverishment of the general population."

The Alcona official said that at the moment only 5 percent of the population can afford insurance, but 5 percent of 52 million is still a substantial market.

"Understandably there is fierce competition among companies," Mr. Vakulenko continued, "Now there are about 250 companies, in 1992 there were 800." Mr. Pustov added that the national government has stepped in to regulate the market by raising the levels of capital reserves necessary to operate an agency.

Ms. Kurmelova said that compared to the billion-dollar giants of Europe, North America and Asia, Ukrainian companies have a very small capital base and can't afford to provide some of the services necessary. As an example Ukrainian firms are unable to cover workers at atomic energy stations (AES) in their country and thus are looking to get capital backing from foreign companies.

The Alcona official noted that funding from the European Bank for Reconstruction and Development, which would finance various AES projects, is currently being held up in part because workers can't get disability and additional medical insurance.

In answer to a question from Mr. Cook, Mr. Shestakov, 27, explained that in Ukraine, companies certify agents as their representatives who sell their products, but there is no government body which provides licensing.

Mr. Sazhko, 29, said "We sell insurance in the same way, we follow your [North American] procedures. It's the same approach, a personalized focus on customers, mostly through individual agents."

Mr. Cook expressed interest in the remuneration offered agents, and the Dynasty president said that an agent of theirs can earn anywhere from $5,000 to $30,000 (U.S.) in annual bonuses. "We used to give expensive gifts, rare consumer items, but now these things are more generally available, so it's better to deal in cash."

Mr. Sazhko also explained the Ukrainian system, whereby agents are tied to companies. "They have to sign agreements that they will not sell insurance nor work for another insurance company for five years. We pay them well, so they owe us that loyalty." Mr. Cook averred that such a policy would be considered much too restrictive in North America.

The pitch

After this exchange of information, the Dynasty Insurance Corporation's young turk made his bold pitch to the UNA, to assist in establishing a pioneering life insurance operation in his country.

Mr. Vakulenko added encouragement, pointing out that "the credibility of any company based in Canada and the U.S. is very high, and the credibility of Ukrainian diaspora companies is even higher. "The opportunities are great as a result," he wrote.

The Alcona executive also said that in terms of insurance, Canadian companies are late entrants into the Ukrainian market and thus are already at a disadvantage, but the inherent advantage of being a Ukrainian firm based abroad is more than enough to compensate.

Mr. Vakulenko said that regulations in Ukraine are similar to those in Canada, that the presence of advisers from Canada has had a thorough influence on the insurance system in Ukraine.

Mr. Cook responded with a request for a formal proposal submitted to UNA decision makers and cautioned about the need to satisfy North American regulators. "The regulatory bodies see the need to protect existing policy holders as paramount," the UNA official said.

The UNA's director of insurance operations also showed that he is by no means ill-informed about conditions in the eastern European country. "Most companies going into Ukraine are those in product liability, auto insurance, and such, in other words, those with less risk and those with more easily examined variables," he said, explaining his perception of the difficulty of establishing a life insurance presence there.

Mr. Cook added: "When statistics kept in Ukraine become more trustworthy and more complete; when they are more readily divulged and when the effect of factors such as environmental pollution and the apparent inadequacies of the health system are better known, then you'll see a greater movement into Ukraine."

In response to the group's queries, Mr. Cook provided a sketch of the UNA's assets, operations and background, and screened the Slavko Novytsky video about the fraternal, "Helm of Destiny."

Post-hoc thoughts

A few weeks following the meeting with Ukraine's insurers, Mr. Cook told The Weekly that the similarities between the Ukrainian and North American systems make it probable that in the long term Ukraine's insurance system will be a viable one.

He was primarily encouraged by the fact that Ukrainian companies were able to compensate their agents at a commensurate level, offering far higher pay than the national average.

"In those terms, they're no different than companies in North America," Mr. Cook said in an interview on August 17. "They've obviously recognized that there aren't many people who are good and successful at insurance sales and that companies are glad to pay them because they are so rare."

But Mr. Cook saw several impediments to direct links between the UNA and a Ukraine-based company in the near future. "I saw little indication of their capitalization (where the company gathers and invests capital to run their operation), and not a very strong willingness to divulge what's behind the promise they're selling."

"I'd assume that even Europe's companies are wary of cooperation with companies reluctant to be absolutely frank about their capitalization," he added.

Mr. Cook said North American regulatory bodies would likely demand that a fair number of personnel be brought into the country, and that a substantial amount of assets be amassed to back the venture. "I don't think they understood the concept of an insurer having to receive approval from a regulator, it seemed not to click," he said.

"There's a lot of opportunity, but also a lot of risk," Mr. Cook concluded. "At this stage, things are very preliminary. We would need considerably more talks, more research before the UNA would be comfortable [about going into Ukraine]."

"I encouraged them to present something in writing to Home Office, but warned them that this is a very long process," Mr. Cook said.

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