Starting on April 1st, anyone driving in Ukraine who can't prove that he has third-party liability insurance will be fined by the traffic police. The new law was passed by parliament on June 3rd, 2004, and came into force on January 1st. Third-party liability auto insurance was made compulsory in 1997, but there were no sanctions for non-compliance.
According to Halyna Herasym of the Institute for Economic Research and Policy Consulting, the introduction of compulsory third-party car insurance is not only a way to ensure that victims of careless drivers get compensation, but also a catalyst of growth for a country's entire insurance industry.
Regulation
In Ukraine, there are around 300 registered insurance companies, less than 100 of which have a license to offer mandatory car insurance, because they first must pass the criteria of the State Commission for the Regulation of Financial Services, which monitors the industry. Criteria include experience in dealing with this type of insurance, a large network of branch offices throughout the country (for customer convenience) and hefty fees (to demonstrate solvency).
But even a license from the commission doesn't give an insurance company the right to start selling third-party liability auto insurance. An insurer must also gain membership in the Motor Transport Insurance Bureau, which together with the license can cost a company up to 500,000 EUR. Unlike the commission, the bureau is not a state body. It gets financing from its members.
The number of policies a company can sell is limited by the amount of money it puts into the bureau.
The bureau has been around for over 10 years. It was set up as a condition to Ukraine's joining the Green Card, a UN based system to facilitate the movement of vehicles through over 40 mostly European member countries while ensuring protection for the victims of foreign registered vehicles. Membership demonstrates that the policies of a country's drivers meet the minimum level of legal requirements for third party liability insurance in any country for which the Green Card is valid.
Ukraine's new law completes the country's accession to the Green Card agreement, providing guarantees to accident victims' health and property. If the driver at fault isn't insured, the bureau covers the victim's losses, the Observer learned from the bureau's press service. If the bureau goes bust, the state is not obliged to bale it out - which is why full membership fees are so costly.
Risk
As for the insurance companies, they are obligated by law to insure war veterans and invalids for free. Moreover, drivers caught without a policy are subject to a fine of only Hr 17, or around three dollars. Some drivers may at first just get a hold of a bogus policy certificate to show to the traffic police when they get stopped. Insurance in general is not very widespread in Ukraine, says Halyna Herasym: "Not everyone is willing to spend their money on it."
People's deputy Viktor Vladimirovich Kapustin, first deputy head of the parliamentary committee for finance and banking activity, who took part in writing the law, agrees. Motorists don't want to get insured because they aren't used to it or don't trust it, he told the Observer. For these and other reasons, the bureau predicts that many of its member companies will be in the red for the first couple of years.
Such was the case in Russia, which started mandatory third-party auto insurance around a year ago. All but a couple of the biggest insurance companies left the market. Ukraine's biggest insurers include companies like Ingo, Etalon, Aska, Oranta and SkideWest. They are probably better prepared than their smaller competitors to handle the increase in the number of claims expected after April 1st.
"On the one hand, it's good that big companies will win, because they are well capitalized," and thus more likely to pay damages, which will be larger than their revenues at first, say Herasym. A lot of Ukraine's some 300 insurers were set up by "large business groups" just for tax breaks anyway, she adds.
Competition
Competition will be stiff, according to Kapustin, but "I don't think there is a serious risk of bankruptcies," he said. The main problem in Russia was loose laws on licensing. In Ukraine, the difficulty will be to properly train police to identify policies and write up accident reports - no small feat considering the prevalent culture of bribe taking. It will also take a while for the price of policies to stabilize, the lawmaker said.
Kapustin thinks that many insurance companies were set up to send money abroad. Aleksey Yevstratko, director of Aska insurance company, doesn't agree. Like Herasym, though, he acknowledges the tax benefits.
Yevstratko also isn't overly concerned that a few companies will monopolize the market. "Only time will tell," he says. Small companies support the new law as much as bigger ones, but they want lighter restrictions on licensing and bureau membership. Aska is hoping to get around 10% of the new market and expects a 30% increase in its turnover.
Profits will come from the regions, where the risk is lower, says Yevstratko. Having been in business for 15 years, Aska, like other large insurance companies, will rely on its knowledge of the market. For example, they won't insure taxis or shuttle buses, because the number of claims filed for these vehicles is high.
Last year, there were 45,000 auto accidents reported in Ukraine, according to the bureau. Eleven thousand of these involved insured vehicles. Since motorists will be required by law to buy insurance anyway, they will be less likely to settle damages among themselves.
In mid February, the bureau reported 12 Full Members, which qualify for the Green Card system. The number is expected to rise. "There are already too many" companies that can sell third-party liability auto insurance in Ukraine, says Yevstratko. Currently, there are around eight million cars registered cars in the country, a figure that is also rising.
Because the country's insurance market is so underdeveloped, initial growth will be dramatic. "While a person in the West is born with three policies in his name, our people don't know what insurance is," says Yevstratko. However the industry is already enjoying foreign investment from Europe, Russia and Western Europe. Last month, Poland's PZU insurance company acquired 100% of the shares in Skide-West.
Conditions
Compared to other types of insurance in Ukraine, auto insurance had been the most common but also the least profitable. Now, the average third-party liability policy will cost around Hr 600 per year, depending on the type of car, how it's to be used and the driver's experience, according to Aska
Reasons for which the insurance company or bureau can sue a driver for compensation paid include: drunk driving, no license, leaving the scene of the accident or not reporting the accident within three days. But "there are a few slippery parts in the law," says Herasym.
Kapustin says legislation will be adapted along the way, as it has been in other countries. Sectors like law-enforcement, law, actuary science, medical care and automobile repair will undergo change as well. To win a greater market share, many companies will compete by offering extra services like towing.
Overall, Ukraine's law has more advantages for the consumer than Russian legislation, according to the bureau. For example, in Russia the compensation ceiling for health and material damages is $5,700 and $4,300 respectively. In Ukraine the figures are $9,600 and $4,800. However, Russian minimum policy costs were almost twice as high as its western neighbor.
But many pitfalls still lie ahead for Ukraine's infant insurance industry. According to Kapustin, "there can really only be two kinds of problems. Some don't want to pay, and others don't want to get insured."
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