Compulsory insurance is ineffective and requires a new risk management model


The insurance market is the largest one among non-bank financial services markets.  As of August 2018, there were 291 insurance companies in the country, while the market volume in 2017 amounted to 40.5 billion UAH. During the past year, compulsory types of insurance amounted for 23% of net insurance premiums of companies with a total volume of 5.8 billion UAH. At the same time, the state has not yet developed an integrated approach, objectives and criteria to apply insurance mechanisms. The current Law of Ukraine “On Insurance” of 1996 doesn’t contain any definition of compulsory insurance (hereinafter – CI), which leads to double interpretation of possible cases of its application.    

Article 7 of the Law defines 40 CI types, in addition there are a number of mandatory requirements to provide the insurance specified by other legislative acts. As a result, the area of compulsory insurance is in fact 2.7 times broader than it is provided for by the framework law. At the same time, insurance activities are not carried out in most of its types, and the established insurance tariffs do not adequately reflect the realities.

The government, business, public and expert community representatives discussed the market issues during the Roundtable “Creating an Effective Compulsory Insurance System in Ukraine” on September 6. The event was organized by the BRDO Office with the support of EU4Business/FORBIZ as part of the Public Dialogue #PRODialogue.

Today, the insurance market operates under a number of legislative contradictions. Creating an effective system is possible only on the basis of complete inventory of this sector and further addressing the problems in a comprehensive manner,” the Head of the State Regulatory Service of Ukraine Kseniya Lyapina said when opening the event.

BRDO experts conducted a systematic analysis of the regulatory environment in the compulsory insurance sector, consisting of 377 acts, and found that it contained numerous conflicts and gaps. For example, 18 out of 40 CI types, or 45% of the total amount, do not have a legal basis: CI procedures or rules, forms of standard contracts, the size of insurance amounts and maximum insurance tariffs have not been approved. This is in particular true with respect to the sectors of health insurance, water transport insurance, liability insurance for entities engaging in tourism and space activities, etc.

At the same time, having established the requirements for compulsory insurance in 40 cases, the state provided for the responsibility for its non-implementation only in 11 cases. In such a way, accountability mechanisms are not applied in 72.5% of CI cases, including the insurance of property risks in the industrial development of oil and gas fields and civil liability for damage that may be caused to third parties as a result of blasting operations. Such a situation invalidates the compulsory insurance concept.

The analysis of compulsory insurance regulation indicates the need for radical changes . Legislative requirements are now rather a tool to restrict access of participants to the market , than a mechanism of effective insurance coverage. A new CI model should become a risk management system based on laws to establish common CI requirements and ensure free tariff formation, as stipulated by the EU Directive, and provide effective accountability mechanisms,” the head of the BRDO’s Control and Supervision sector Volodymyr Holovatenko said.

For example, while the European practice implies that compulsory insurance is only requirements for individuals and legal entities regarding their mandatory insurance coverage in certain areas, in Ukrainian realities, it also means additional requirements for insurance companies and the necessity to obtain additional licenses to insure certain types of activity.

The EU-Ukraine Association Agreement provides for the implementation of Directive 2009/138/EC that should change the current approach of the Ukrainian legislator to insurance licensing and CI regulation. The Directive introduces the licensing of insurance companies depending on the chosen class and the risk of activities, and not on insurance forms and types as it is now.

According to the BRDO Office, the new model should include the following purposes of compulsory insurance:

  • minimizing the risks of an insured event(preventive function);
  • ensuring the maximum possible compensation for damage caused as a result of an insured event (compensatory function).

Criteria, in which it is advisable to use the CI:

  • liability to third parties;
  • carrying out activities that have a high degree of risk and engage a large number of persons or use high-risk facilities;
  • international obligations.

The event was also attended by Olha Maksymchuk and Oleksandr Zaletov, Members of the National Commission for State Regulation of Financial Services Markets, Oleksandr Filonyuk, President of the League of Insurance Organizations of Ukraine, Halyna Tretyakova, Director General of the Ukrainian Insurance Federation, Yevgen Stepanyuk, Head of the Financial Sector Reform Office at National Bank of Ukraine, Volodymyr Shevchenko, Director General of the Motor (Transport) Insurance Bureau of Ukraine, business and expert community representatives.