Stakes Greater Than Life: Life Insurance Market
The Dinastiya (presently BTA Life) company, which started operating in the life insurance sphere in 2002, can be rightly regarded as the pioneer of the Kazakh life insurance market. In addition to BTA Life there are the State Annuity Company, Valyut-Transit Life, Halyk Life and Kazkommerts Life, which entered the market this year. This list may possibly change in the near future. The future of Valyut-Transit Life remains unpredictable: its licence was suspended for six months on 26 December after the Valyut-Transit Bank faced a default and the Financial Control Agency decided to close it down. At the same time there is a new player on the horizon: the Czech insurer Ceska Pojistovna has already received permission to set up a life insurance company in Kazakhstan and is expected to enter the Kazakh market in 2007. In addition, the Financial Control Agency is currently considering an application submitted by the Seimar Alliance Financial Corporation to set up a further two life and non-life insurance companies.
According to a study by Swiss Re (published in Sigma e-magazine in 2005), Switzerland occupies first place in the world in terms of premiums per capita ($5,558), of which 55% is life insurance. A high ratio of life insurance premiums per capita is typical of all the top 10 countries, including Britain, Ireland, Belgium and the Netherlands. As for CIS countries, the life insurance ratio does not even exceed 5%. For example, in Kazakhstan life insurance accounted for 3.1% of total premiums as of 1 January 2007 (2.1% on 1 January 2006).
These low figures can be explained, the deputy chairwoman of Halyk Life, Gulfayruz Shaykakova, said by the fact that life insurance is a “voluntary product” in contrast to other types of general insurance, which are mandatory or necessary to receive financial services. It is therefore much harder to sell. That is why life insurance is a real indicator of the insurance culture in Kazakhstan.
However, despite its tiny share, the life insurance market has been developing rapidly in Kazakhstan since 2004. For example, it grew by 116% in 2005 and 132% in the first 11 months of 2006. As of 1 January 2007, life insurance premiums totalled 3.7 billion tenge, up by 160% from 1 January 2006. According to Kazkommerts Life’s forecasts, the figure is set to grow by 20% to 4.2 billion tenge by the end of 2007 and to 5.25 billion tenge in 2008.
Local insurers say that life insurance mainly depends on the state social insurance system. “When this system is developed quite well, people are not interested in investing their savings,” Gulfayruz Shaykakova believes. “In some countries, insurance companies collect large premiums because the state pays premiums in favour of citizens.”
Problems of Competition
The huge potential of the life insurance market makes it very interesting for new investors. However, the director of the group of BTA insurance companies, Serik Timirgaleyev, has said that growth in the number of life insurance companies does not boost competition. Life insurance is a specific service that “is not bought but sold”, which means that only insurance companies that build up efficient distribution systems can be seriously competitive. As a result, the “people’s involvement in insurance” mostly depends not on the number of life insurance companies but on the number of distribution companies (insurance agencies) and personal distributors (agents).
The fact that there are certain banks behind each insurance company (except for the State Annuity Company) means that these companies target their parent banks’ clients because it is the simplest way. The only exception is BTA Life, which started with the most complicated sector — people’s retail insurance.
All these arguments have been partly confirmed by the managing director of Kazkommertsbank, Beybit Apsenbetov, who said that Kazkommerts Life expected to acquire the lion’s share of premiums from its parent bank’s clients. However, Mr Apsenbetov believes that new players can easily take away part of the clientele of the present leader, BTA Life.
If an insurance company is part of a holding company which has a credit organisation, then the main task of this insurance company at the initial stage is to ensure that risks are covered properly and that it smoothly joins the business processes of the credit organisation without disturbing established links. This opinion is shared by the deputy chairman of the State Annuity Company, Kayrat Chegebayev.
On the other hand, through offering additional non-banking financial services (such as insurance) banks can diversify their sources of revenue and reduce dependence on the interest on deposits and loans. In addition, Timirgaleyev said that banks could also reduce marketing expenses through cross sales and receive resources with longer terms than deposits.
However, there are still barriers that separate life insurance companies from clients; that is why new insurers should understand their role in fostering a general culture of insurance among people. The deputy chairwoman of Halyk Life, Salima Dzhurunova, believes that before setting up a life insurance company its founders should clearly define both a strategy for the company to enter the market and its place within it. Shareholders should be ready to work on overcoming people’s “mistrust” and “doubts” about life insurance. Another difficulty a new player can face is a shortage of highly-qualified specialists with practical experience in this sphere.
As has been mentioned, the only player in the life insurance sector that is not part of a banking group is the State Annuity Company, which was set up with the specific aim of ensuring annuity payments in favour of workers insured under the compulsory insurance of the employer’s liability. Today it is the employer’s liability that is the subject of heated debates in the professional insurance environment. The situation now is that two types of insurer — the general insurer and the life insurer — are involved in the mechanism to implement this type of insurance. According to the law, the former collects premiums because the employer’s liability is classified as a matter of property insurance and the latter does not have the right to deal with property risks. However, when this liability is taken on, payments to a worker who lost the ability to work should be borne by a life insurer or annuity company. That is why when an insurance incident takes place a general insurer pays premiums to a life insurer. As a result, this leads to endless disputes about the size of premiums between the two insurers. Taking this into account, the market regulator is currently considering the possibility of excluding the general insurer from this mechanism. According to international practice, the employer’s liability is classified as a subject of personal insurance, that is why the risks are assumed by life insurance companies. Parliamentarians are also discussing this issue at the moment. Should a final decision be taken, the employer’s liability will become a matter of personal insurance in Kazakhstan too.
However, many experts believe that the market and annuity companies themselves are not yet ready for such changes. The small number of staff working in life insurance companies does not make it possible for them to conclude contracts with all the country’s employers. In addition, the deputy chairman of the Oil Insurance Company, Galym Amerkhodzhayev, has said that these changes may lead to a consumer not being able to use insurance services because all the annuity companies are based in Almaty and Astana and do not have regional networks. Opponents of the innovations believe that general insurance companies will be “getting out” of this segment as early as in three years’ time. By then annuity companies will be able to solve the problems with regional networks, assets and personnel. Should this issue be put point-blank, Mr Amerkhodzhayev said, general insurance companies would be quite up to setting up their own life insurance companies.
At the same time, life insurers themselves believe that there should not be any difficulties because all the financial institutions in the Kazakh market have already created or started to create their own life insurance companies. Kayrat Chegebayev thinks that “simplifying” the extremely complex scheme of work stipulated in the Law On Compulsory Employer’s Liability Insurance1, above all, will benefit insurers themselves.
1. The Kazakh Law On Compulsory Employer’s Liability Insurance, adopted on 7 February 2005.
Firstly, this will be cheaper because the employer now has to pay commission to two companies at once. Secondly, legal costs rising from different interpretations of the law by general insurers and life insurers are not only unjustifiable but this also slows down the very process of concluding a contract. Mr Chegebayev suggested that both types of companies should be able to insure their liability under the law. In this case, the insured himself can choose the form which is the most efficient and convenient for him.
The close attention being paid to this problem by all the players in the market is quite understandable. The employer’s liability is a very profitable business at the moment, despite the fact that mandatory types of insurance in general are believed to be loss-making. For example, almost 100% of the premium portfolios of the State Annuity Company and Halyk Life are formed by the employer’s liability.
The employer’s liability made up almost 40% of general insurance companies’ premiums on compulsory types of insurance in 2006, or 7 billion tenge, whereas payments on it did not exceed 1.9 billion tenge.
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