The Insurance Market: Reality and Forecast
Although the insurance market in Kazakhstan is still evolving, experts believe that the investment potential of this sector is fairly good: in the next five years it is expected to increase by more than 25%.
This forecast is indirectly confirmed by recent developments. In the eight months of 2006, premiums collected by Kazakh insurance companies totalled 76 billion tenge, an 80% increase compared with the same period of the previous year. The total assets of these insurance companies increased by 52% to 111 billion tenge (as of 1 September), total equity capital by 40% to 63.4 billion tenge, and total insurance funds to 61.3 billion tenge.
Experts note that the rapid expansion of the domestic insurance market can be compared with the upsurge in the banking business six years ago, and this process attracts many potential investors.
At present there are 39 insurance companies that offer either general (non-life) or life insurance: under Kazakh law, an insurer may not offer both. By imposing this restriction, the national authorised body in charge of regulating the insurance business complies with the standards and principles of the International Association of Insurance Supervisors.
Only four Kazakh insurers offer life insurance: BTA Life (the leader), the State Annuity Company, Valyut-Tranzit Life, and the recently founded Halyk Life. The other market players offer general insurance, both compulsory and voluntary. The latter is in turn divided into property and personal insurance.
In addition to these insurers, there are also 11 insurance brokers that mainly act as intermediaries between insurance and reinsurance companies, and 33 actuaries that calculate insurance risks. By analogy with the banking sector, the insurance sector has the Fund of Insurance Compensation Guarantee comprising 31 insurance companies.
As of 1 September 2006, more than a half of the domestic insurance market was divided between five large companies: Yevraziya (13.2%), BTA Insurance (13%), Kazakhinstrakh (10%), London-Almaty (8.2%), and Almaty International Insurance Group (7%).
In the total portfolio of premiums collected in the eight months of 2006, this type of insurance accounts for 14%. The leaders are Yevraziya (2 billion tenge), Altyn Polis (1.3 billion tenge) and Viktoriya (1 billion tenge). According to the Financial Supervision Agency (FSA), as of 1 September 2006, the largest shares in this market belonged to civil liability insurance of employers (41%) and car owners (36%).
At present, compulsory insurance in Kazakhstan includes nine types, and two more types will be added pursuant to the Optimum List of Compulsory Insurance (approved by the Government in March 2003).
The Government’s stance is that, in the market economy environment, a portion of its social responsibility should be handed over to the private sector. However, if Kazakhstan follows this course blindly, it can well end up in the same kind of ridiculous situation as Ukraine, which until 2004 had as many as 42 types of compulsory insurance. Ukrainian experts believed that this policy was the result of intensive lobbying, and eventually a new law was adopted to keep down the expansion of compulsory insurance.
Back in Kazakhstan, the share of compulsory insurance in premium portfolios has been shrinking recently: from nearly 20% in the beginning of 2006 to 14% at present. At the same time, in absolute figures the amount of compulsory premiums doubled: from 4 to 8 billion tenge. In other words, compulsory insurance continues to expand, but its share in the total premium structure changes.
Now the Parliament considers amendments and supplements to the compulsory insurance law, particularly, the acts pertaining to employers’ civil liability and crop production. But the primary concern of insurance companies is to raise the rates of car owners’ liability insurance, as this business is becoming increasingly disadvantageous. As commercial companies, insurers must generate profit, but, given the current situation with road traffic and accident statistics, they can hardly maintain their insurance funds, let alone profitability.
But insurance rates are set by law, and the lawmakers are car owners themselves; apparently they are reluctant to buy more expensive policies…
The voluntary insurance market is expanding at a far more rapid pace. For example, from 1 September 2005 to 1 September 2006 compulsory insurance premiums increased by 28%, whereas voluntary personal and property insurance premiums increased by 46% and 102.8%, respectively. Property insurance portfolios are also much greater in absolute figures: 57 billion tenge compared with 7.5 billion in personal insurance.
Accident insurance predominates in the premium structure of voluntary personal insurance: 3 billion tenge or 44%. Other popular types are health insurance (1 billion tenge or 26%), life insurance (21%) and annuity insurance (8.7%) (see Chart 1). The leader in accident insurance is Almaty International Insurance Group: in the eight months of this year, it collected nearly 2 billion tenge in premiums. Other major players are the Oil Insurance Company (190 million tenge) and Kazkommerts-Polis (175 million tenge).
It should be noted that the increase in voluntarily insurance is mainly due to the growing consumption of bank products. Galym Amerkhodzhayev, Deputy Chair of the Oil Insurance Company, says that personal insurance types are in great demand solely because banks require their borrowers to maintain accident insurance. However, individuals rarely buy such policies on their own initiative.
As for voluntary property insurance, the most popular type is financial loss insurance: 21 billion tenge or 37% (see Chart 2). Civil liability insurance accounts for 30% (17 billion tenge), and property and car insurance for 20% (11 billion tenge) and 5% (3 billion tenge), respectively.
In the eight months of this year, the leaders in collecting premiums (for all property insurance types) were BTA Insurance (over 10 billion tenge), Yevraziya (over 8 billion tenge) and Kazakhinstrakh (6.6 billion tenge).
Vast new opportunities for domestic insurance companies are being opened up by the expansion of the oil & gas sector. Their management anticipates a dramatic increase in property, liability and drilling and transport risk insurance in connection with the development of the Kazakh sector of the Caspian Sea, including pipeline construction and oilfield development. For example, the start-up of the Kashagan development project has already yielded large property insurance premiums.
The Rules of the Game
FSA is in charge of regulating and licensing financial activities and the insurance business in particular. The relationship between this supervisory body and market players is governed by the On Insurance Act. The relationships between insurers and their clients are in turn governed by the Civil Code.
Now the insurance sector is being reformed in accordance with the three-year Programme of Insurance Market Development in the Republic of Kazakhstan in 2004-2006 (approved by Government Resolution No.729 on 1 June 2004). Under this Programme, FSA has focused on aligning the Kazakh insurance law with EU directives. Particularly, a new insurance classification has been adopted and minimum capital requirements for insurance companies have been imposed.
Gani Uzbekov, Deputy Chair of FSA, says that the priority goal of the insurance market development is to enhance its financial viability by perfecting its regulation methods. This includes raising the capitalisation level of insurance companies, perfecting the mechanism of current compulsory insurance, encouraging voluntary insurance (e.g. life insurance), and measures for ensuring compliance with law and the requirements of the regulating body.
In order to boost the capacity of the domestic market and to reduce overseas reinsurance, FSA has developed a plan of phased capitalisation of insurance companies in 2005-2007. This plan aims at aligning the main insurer self-sufficiency criteria with international standards.
During phase one, on 1 December 2005, the minimum authorised capital size was raised by 80 million tenge to 180 million for companies providing general insurance, and by 300 million to 430 million for companies providing life insurance.
On 1 June 2006, FSA introduced new prudential requirements, and the company capitalisation requirements now focus on the "minimum guarantee fund size"*. During phase two,from 29 December 2006, the guarantee fund size must be at least 250 million tenge for general insurance and 400 million for life insurance. And, finally, from 31 December 2007, these requirements will be raised to 350 million for general insurance and 500 million for life insurance. It is expected that eventually in 2008 the capitalisation level of domestic insurers will reach the minimum set in EU directives, which is €3 million for general insurance and €4 million for life insurance.
* Guarantee fund is a fixed minimum size of equity capital.
The phase one requirements were met successfully by almost all insurance companies; only the Transport Insurance Company and Temir At from Aktyubinsk encountered some difficulties. However, FSA decided not to suspend their licences. According to Gani Uzbekov’s forecast, the second phase of capitalisation will be completed as smoothly.
As of 1 September 2006, reinsured premiums totalled 30 billion tenge, which is nearly 40% of the total insurance premiums collected.
Only a few insurers in the retail segment work with domestic reinsurance companies. In the eight months of 2006, as little as 3.6 billion tenge (4.7%) was reinsured domestically.
Some 26 billion tenge (over 34%) was reinsured with non-resident companies. At present, the major reinsurers of premiums collected in Kazakhstan operate from the United States (20%), Russia (12.8%) and Switzerland (12.9%).
Until May 2006, the market share of Russian reinsurance companies was equal to that of US reinsurers, and the rates of Russian reinsurers were much lower. This can be explained by the fact that, unlike Kazakh companies, Russian reinsurers enjoy reduced rates on the secondary reinsurance market due to their huge reinsurance business.
But on 1 June 2006 FSA introduced new prudential requirements for reinsurance. Now, if a domestic insurer wishes to work with a reinsurer whose Standard & Poor’s rating is lower than “A-”, it must double its insurance funds for the premiums being reinsured, and it is very expensive. As a result, most Russian companies that do not have the above rating lost their business in Kazakhstan.
However, the proportion of premiums being reinsured with non-resident companies increases year by year. Whereas in the past year foreign reinsurance totalled 11.7 billion tenge (28%), in this year it has increased to 26 billion. The market players explain this trend by the increasing risks involved in large oil & gas projects which they cannot handle themselves.
The relative indicators of the insurance market are improving steadily. In 2005, the ratio of insurance premiums to GDP was 0.56%, and now it is 0.87% (see Table). This suggests that the insurance sector is becoming an attractive target for investment.
At present there are seven insurance companies with non-resident shareholders. As of 1 September 2006, premiums collected by these companies totalled 10.4 billion tenge (13.7% of the market).
The giants of the Russian insurance business, Ingosstrakh and ROSNO, repeatedly announced their intention to invest in Kazakhstan, and so did Ceska Pojstovna of the Czech Republic, whose application for a licence is now being considered by FSA. Possibly, a new domestic company, Kazkommerts Life, will appear on the life insurance market in the next year.
On the whole, life insurance can be regarded as the most promising target for investments: Kazakhstan has a working population of at least 5 million, and the client base of all life insurers totals a mere 70,000.
However, in the opinion of Aiman Mukhatbayeva, Chair of BTA Life, the number of foreign market players is unlikely to increase significantly, because the capacity of Kazakhstan’s market is no match for that of Russia or Ukraine. In terms of population size, the market potential of the entire country is approximately equal to that of Moscow alone. In addition, says Yergali Begimbetov, Chair of London-Almaty, an average person in Kazakhstan spends as little as 13% of his or her monthly income on insurance, compared with 50% in Russia and 55% in the Czech Republic. Therefore domestic players can disregard the threat of foreign expansion on the Kazakh market in the next five years.
But, when foreign investors eventually come to our market, they will be much more competitive. Mikhail Mumin, Director of Reinsurance of ROSNO, says that Kazakh companies offering life insurance are still very young, whereas a foreign investor can bring to the country its brand, good financial history, and a wider range of services. Today Kazakh companies lack advanced sales technology and expensive information systems – all that their Western competitors regard as a decisive advantage.
Another question is, should an investor start a new business or buy an existing company? To found an insurance company in Kazakhstan, the potential shareholders will have to obtain a licence, and the licence terms in our country cannot be called lenient. The investing company must have a Standard & Poor’s, Moody’s, Fitch or AM Best rating which is at least equal to Kazakhstan’s country rating – only then it will be permitted to buy a share in a Kazakh insurance company or found a new one. Although potential investors generally agree that Kazakhstan now has advanced insurance laws based on the EU directives, they believe that these excessive licence requirements seriously restrict the inflow of foreign capital into the country’s insurance industry.
When Kazakhstan joins the WTO, foreign insurance companies will be permitted to open branches in the country. This step will make the entrance into the Kazakh market much easier, since foreign investors will no longer be required to have a certain level of authorised capital. At present negotiations are under way to establish a preparatory period during which foreign companies will not be able to open branches in Kazakhstan. However, in 5-8 years’ time the Kazakh financial market and, accordingly, the insurance industry will be opened up for investments in all forms.
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