Nikolai Galushin, Ingosstrakh Insurance Company - ОСАО «Ингосстрах»

Release Date: 2011-09-21

Nikolai Galushin, deputy general director of Ingosstrakh Insurance Company: let the market put everything in its place

Nikolai Galushin has been interviewed by Russianavia.net for a special report on the Russian helicopter industry to discuss the current situation on the aviation segment of the insurance market, the prospects represented by growing production of rotorcraft in Russia and the necessary changes - such as the attitude to operation and insurance of helicopters - that the operators and owners need to make before insurance becomes an efficient tool for aviation business.

Mr. Galushin, Ingosstrakh saw the very dawn of the insurance market in the Russian air transport industry. Moreover, Ingosstrakh is the first Russian company that issued insurance certificate to an aircraft manufacturer. How did the activity of Ingosstrakh affect the development of aviation risks insurance in Russia?

The history of insuring aviation risks in Russia is indeed long and complicated. The manufacturers have come a long way to get closer to the insurance industry, and I must admit that it were the foreign customers who have contributed most here: when ordering aircraft, they required liability insurance for its maintenance. Insurance revealed unsecured losses, leading to the need to thoroughly analyze the offer, the insurance products, the choice of partners. This is how full-fledged market with clients, insurers, experts and legal advisors appeared.

As a matter of fact, insurance market is traditionally understood as insurance of airline risks but it is also insurance of airports, liability of manufacturers – aircraft manufacturers and repair companies – and private aviation that still needs a system of regulation.

How do you assess the possibilities that open for Ingosstrakh as insurer with a revival in the civil helicopter segment in Russia?

We are quite careful regarding the helicopter market because helicopters are a very specific kind of aircraft that require a very thorough approach to maintenance. Any accident means loss of the machine and death of the people, and every time it’s a tragedy, that is why Ingosstrakh as insurer is not interested in working with one-off projects – for us it’s important to understand the consequences of aircraft operation, the necessary compliance with safety requirements and quality of maintenance, the objectives pursued by every potential insurant. We need this to understand the intentions of companies and to be confident in the high profile of our clients. Besides, the fact that an extensive helicopter fleet is serviced outside Russia in challenging landscapes is also important for us. Any investment company works when one party understands why insurance is made and the other party analyzes the risks and is ready to provide its financial capacity to protect the risks.

What is also important is that while the major part of airplanes is bought via leasing contracts, quality of insurance of privately owned helicopter fleet is determined by owners or operators who, in Russia, pay closer attention to insurance of the aircraft as such, and tend to ignore liability insurance – responsibility towards passengers, cargo, property and people and objects on the ground - that is regulated by the Air Code only. In parallel, legislation is changing: the State Duma has just approved first reading of the law “On liability of the carriers” that covers all kinds of transport. In terms of the Constitution of Russia, a private owner of aircraft cannot be forced to insure his or her transport, so we need to control the compliance with aircraft operation regulations. Specifically, what we need to control is not the fact of making an insurance contract but the fact of doing regular maintenance and letting qualified pilots operate the aircraft. For an insurer, it is difficult to control this but the client understands that ignoring the rules entails problems when the accident occurs – which might even end up in the insurance company’s refusal to pay the compensation.

Liberalization of the Air Code in the end of 2010 is expected to encourage more active operation of helicopters in Russia. Does this represent any potential for your company as an insurer?

For us, the signal of future growth of insurance market related to the changes in the Air Code is rather the fact that the limits of liability insurance for passengers will increase to US$68K. This has actually triggered development of insurance in aviation.

Russian Helicopters plan to increase helicopter production to 300 units per year by 2012. What prospects does this represent for the Russian insurance companies?

The prospects look really good. In terms of insuring helicopters as such, it’s very important to make sure how the programs aimed at increasing helicopter production and renewal of the fleet will promote further possibilities for their insurance. First of all, it is hard to forecast the countries where Russian helicopters will be operated. If they will be operated in Russia, there is a chance that they will be insured in Russian companies – and that will contribute to the growth of aviation insurance market. Otherwise, the program of increasing production will not affect the Russian aviation insurance in any way. On the other hand, active acquisition of foreign helicopters will.

Talking about the development of insurance market, an interesting activity in the light of Russian Helicopters’ program of increasing rotorcraft production is insurance of test flight programs with new rotorcraft. Such risks need to be insured: the Russian aviation statistics abides in accidents with aircraft during test flights that led to their irreparable loss. It is also important to understand that insurance of the facilities where helicopters are manufactured is even more important than insurance of the rotorcraft.

What factors hinder the development of aviation insurance market in Russia?

Honestly, it’s first and foremost the mentality – changing the owner’s attitude to aircraft. Let’s say that a helicopter insured for US$66.6K made a hard landing. Undamaged fuel tanks and avionics worth much more than US$66.6K were found at the place of incident. Why was the helicopter insured for this amount of money?

When I say mentality, I also mean the attitude to insurance in principle. In Russia, insurance is treated as an item of expenditure, and when it comes to saving money, people try to economize on two things: human resources and insurance. For instance, if a helicopter is insured for US$7 mln, this amount remains constant in your insurance contract. In case of damage or loss of your helicopter, you do not have to look for another US$7 mln to buy a new helicopter. Like this, we can see insurance as a tool of leveraging the possible fluctuations of unsecured expenses that take aviation risks out of your system: if something happens to your helicopter, money return.

What, in your view, needs to be done to “westernize” the mentality of the clients – both for private and big operators?

It is very hard to do something specific because insurers cannot force the insurants to use insurance. Let the market put everything in its place. By all means, the helicopter industry will be even more consolidated – there will be less players who will compete for better quality, better safety and better service. Fight for the client will change the insurance. Large operators with developed service centers will choose strong partners in insurance, and occasional players will be squeezed out.

Basically, it boils down to finding the balance between insurance that is critical for the business and insurance that can be postponed till better times. This requires analysis of risks inside the company. The approach to protecting your asset reflects your will to be in the business. For any business, the insurance contract is the starting point, not the destination. The only problem is that in aviation, we’re talking about insuring equipment that transports thousands of people.

Do large operators who buy a lot of foreign helicopters and have certified training centers exercise a more mature mentality?

We only work with the operators who accept our rigid conditions concerning the risks, the cost of equipment, the people’s lives. Our client should be able to show the necessary quality of maintenance and qualification of pilots – we must see that he tries to minimize risks and invests in people and maintenance.

Has the insurance market in Russia reached its maturity?

There are about 600 companies on the Russian insurance market. The top 100 account for more than 90% of the insurance premiums. The top 10 account for over 40%. As you see, there is no monopolism on this market in Russia. At the same time, regulation on the insurance market is also quite complicated. New requirements to share capital of insurance companies, tougher than those of European countries, are entering in force in 2012. From this moment, the minimum capital of an insurance company licensed for insurance and re-insurance is to be at least US$15.7 mln. To compare, licensed insurance companies in Europe are required to have a 3 mln Euro share capital – which is 5-fold less. Recently, there was an anecdote in our practice: a company from the Far East of Russia was choosing an insurance partner between Ingosstrakh and a local insurer and eventually chose the local company although we had a rep office in that region. In a week’s time, this local company sent us a letter offering to buy them because they were not compliant with the new regulation requirements. Question is: what motivated the insurant to choose a company that might have not survived the border of 2011/2012?

What potential does Ingosstrakh as insurer see in the segment of private aviation?

Russia is so big that we have more possibilities to operate air transport than any other country. Our approach is based on the future of aviation as a means of transport: there will always be remote regions in Russia that are only accessible with air transport. This concerns both regular flights and shift works involving helicopters and small aircraft. This is precisely the segment where we want to be. Moreover, the choice of partner, alongside political and administrative factors, is especially important in Russia. In private aviation, we work with Aerosouz, one of the largest Russian players in private aviation and a rotorcraft operator who has organized one of the first high class private helicopter clubs in Russia.

Given successful development of competitive insurance market and positive changes in the mentality of the insurants, what prospects are opening for Ingosstrakh?

Good prospects are there, not only for private but also for large operators, for cargo transport for the UN and other organizations, for military and transport aviation and production of helicopters. Also, something very specific that is not yet given enough attention is liability of the manufacturers. This is just a tiny segment of the general market. To sum it up, we know what we have to achieve and we have the reserves for growth and development.

Company:	Ingosstrakh Insurance Company - ОСАО «Ингосстрах»
Position:	deputy general director
Country:	Russian Federation