Russia's insurance sector will continue to see strong growth, aided byretail business development, regional diversification and new compulsory insurance lines, according to a report released by Fitch Ratings.

Further tightening of regulations will "dramatically reduce" the number ofinsurers and improve the financial strength of the market overall, thereport finds.

"Consolidation among large players and local market knowledge are likely tosupport the medium-term domination of domestic companies in non-lifebusiness," said Anastasia Voronkova, an analyst in Moscow on Fitch'sinsurance team.

"However, we expect more foreign entrants to becomeinfluential, both by establishing start-ups and by buying shares in existingcompanies - thus providing additional capital for the market."

The Russian insurance sector grew 4% in 2005, to € 14.3 billion in gross premiums written, compared to € 13.7 billion in 2004, Fitch reported. The low growth rate is due to the decline in tax-avoidance schemes using insurance, whichdominated the market in 2004.

Market commentators estimate the real growth of the insurance sector - notincluding the tax-avoidance schemes - to be 27% for 2005, Fitch noted.Growth has been mainly driven by corporate property, corporate accident andhealth, and retail motor insurance, Fitch said.

The rapidly developing insurance market has generated a growing demand forcapital, for which the major insurers are expected to go to the publicmarket to raise funds, Fitch said.

Medium-sized to large players that are not ready to become public are more likely to look for portfolio or strategic investors. Fitch sees initial public offerings representing a tough challenge for insurance players that are new to the public market.

Fitch noted that the Russian market is likely to see large mergers among thetop 10 insurers in the short term.

For example, Rosgosstrakh, the market leader with a strong retail position,and Kapital, an insurer with a large proportion of corporate propertybusiness, recently announced a strategic partnership. "Currently,consolidation seems to be the best way for players to preserve a nationalpresence in the market," according to the report.

Following discussions with the United States, Russia agreed last week to theterms for joining the World Trade Organization. Those terms include allowingthe presence of branches of U.S. insurers in the Russian market.

Fitch said the earlier inability to do this may partly explain U.S. insurers' previouslack of interest in Russia. In Fitch's view, the Russian government will "take steps to establish fair and equal requirements for U.S. branches, foreign subsidiaries and domestic companies."