The Draft Law “On Amending the Law on the Organization Insurance Activities in the Russian Federation” (the “Draft Insurance Law”), currently progressing through the Russian legislative process, would, if adopted, impose tighter regulation of the insuranceindustry in the Russian Federation.

Notification/Approval Requirements for Purchasing a Stake in an Insurance Company

The Draft Insurance Law provides that the acquisition of a stake of between 1% and 20% in an insurance company by Russian individuals or legal entities must be notified to the Federal Insurance Supervision Service (“FISS”) no later than 30 days following the acquisition.

The acquisition of a stake of over 20% in an insurance company by Russian individuals or legal entities would be subject to the prior approval of FISS. FISS would be required to either approve or refuse an application within 60 days of receipt, and any such refusal must contain the reasons for such refusal.

The Draft Insurance Law provides that the acquisition of a stake of any size in an insurance company by foreign individuals or legal entities would be subject to the prior approval of FISS. The new requirements, if adopted, would apply in addition to the requirements established by the RF Federal Law No. 135-FZ (“On Protection of Competition”), dated July 26, 2006.

Prohibition on the Acquisition of Stakes in Insurance Companies Following Violation of Insurance or Other Financial Laws

Under the Draft Insurance Law, the acquisition of a stake in an insurance company by Russian individuals or legal entities or their affiliates would not be permissible if: (i) within the previous three years such persons committed violations of any insurance or other financial laws which led to a failure to fully discharge the demands of creditors of insurance companies or other financial organizations; (ii) within the previous three years such persons had performed the functions of the sole executive body, management board or were founders or the chief accountants of legal entities declared bankrupt due to the fault of such persons; (iii) such persons had performed the function of the sole executive body of (a) an insurance company which had failed to comply with certain requirements of the RF Law No. 4015-1, dated November 27, 1992 “On the Organization of Insurance Activities in the Russian Federation”, resulting in the revocation of an insurance license within the previous three years or (b) another financial organization whose license had been revoked within the previous three years.

Introduction of Self-Regulatory Organizations and Procedure for Inclusion of Self-Regulatory Organizations, Unions and Associations on the FISS Register

The Draft Insurance Law allows insurance companies, insurance brokers, insurance societies and insurance actuaries to create self-regulatory organizations (hereinafter “Insurance Organizations”). In addition the Draft Insurance Law sets out the procedure for the inclusion of unions, associations and Insurance Organizations on the FISS register. A list of members of each Insurance Organization and the identity of an elected head of the Insurance Organization must be provided to FISS, which would be required to make a decision on the inclusion of the Insurance Organization in the register within 15 days of receipt of such request. The Draft Insurance Law provides an incentive for insurance companies to form or become members of an Insurance Organizations since such organizations may confirm the compliance of certain changes in the activities of insurance companies with Russian law which would otherwise have to be approved by FISS (please see the section titled “Control by FISS over the Current Activities of an Insurer” below).

The Draft Insurance Law specifies the grounds for exclusion from the FISS register, which would include, inter alia, discovery by FISS of violations of Russian laws by the Insurance Organization. FISS would discuss with representatives of the relevant Insurance Organization the circumstances behind any such discovered violations. An Insurance Organization included in the FISS register would be required to submit reports to FISS in accordance with Federal Law No. 7-FZ of January 12, 1996 “On Non-Profit Organizations”.

Licensing Insurance Activities

The Draft Insurance Law sets out the documents required to be submitted to FISS by an applicant seeking a license for insurance activities. These include additional documents confirming compliance of an applicant with the requirements of federal laws regulating mandatory insurance and the provision that all insurance companies must confirm the title (right to use under a lease (sublease)) to the building or separate non-residential premises where their management bodies (including those of their branches and representative offices) are located.

Control by FISS over the Current Activities of an Insurer

Pursuant to the Draft Insurance Law, changes by insurance companies to the regulation on formation of the level of insurance reserves, insurance terms and conditions, the calculation of insurance rates, or the structure of their rates would ordinarily need to be approved by FISS. However, a notification to FISS of such changes would be sufficient where a self-regulatory organization of at least 100 members confirms the compliance of such changes with Russian law. FISS would need to respond within 60 business days following receipt of an application for approval and inform the insurance company of its decision within five business days after the decision has been taken.

Appointment of the Head and the Chief Accountant of an Insurance Company

Under the Draft Insurance Law, neither the head of an insurance company (the sole executive body, their deputies, members of the collective executive body) nor its chief accountant or the head of its branch would be able take positions in other insurance companies or in companies affiliated with insurance companies. There is no definition of “affiliate” provided in the Draft Insurance Law, however the most commonly used definition of “affiliate” in Russian legislation is that set out in Article 4 of the RF Law No. 948-1, dated March 22, 1991 “On Competition and Limitation of Monopolistic Activity on Product Markets”. This law defines an “affiliate” as an individual or legal entity which can influence the business activity of another individual or legal entity and includes, inter alia: companies belonging to the same group of companies; and companies who control more than 20% of the total number of the votes, granted by the shares or participation interests, in a company.

The insurance company would also need to obtain permission from FISS for the appointment of its head and the chief accountant. The Draft Insurance Law specifies the grounds for refusal which would include a failure to meet existing qualification requirements, previous crimes, administrative offences, failure to pay creditors and holding a similar head or chief accountant position at another insurance company or an affiliate of another insurance company, and certain other grounds.

Refusal to Issue a License and New Requirements for the Founders of an Insurance Company

The list of grounds for refusal to issue a license to an insurance company would be amended to include: (i) where the head or chief accountant fail to comply with the new requirements outlined above; or (ii) where the founders of the insurance company include bankrupt persons, persons who were previously responsible for an insurance company or other financial organization having become bankrupt in the previous three years, or persons who were responsible for a company having its insurance license revoked or cancelled in the previous year.

Revocation of a License

A decision on the revocation of a license could be taken by FISS without warning and without enforcement of sanctions against an insurance company such as the restriction or suspension of a license. Grounds for revocation would be expanded to include: (i) accounting or statistical reports with respect to the financial stability of the insurance company being inaccurately submitted to FISS several times, or the submission of incorrect figures about insurance company stability (i.e., where the actual figures are different by over three million rubles); or (ii) where the size of the charter capital does not comply with the provisions contained in the law.

Date of Commencement

The Draft Insurance Law was submitted to the State Duma on March 11, 2010 but has not yet passed any readings. New requirements regarding heads and chief accountants of insurance companies would be applicable to such persons appointed to their positions prior to the entry into force of the Draft Insurance Law. Such requirements would only be applicable at the expiry of a period of 120 days as of the date of the publication of the Draft Insurance Law.

It should be noted that as the Draft Insurance Law passes through the legislative process it may be amended and may enter into law in a different form, if indeed it does enter into law. We will monitor the Draft Insurance Law and will report on significant developments as they occur.