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 KAZAKHSTAN International Business Magazine №1, 2012
 Insurers Are Expecting Hard Times
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Insurers Are Expecting Hard Times
Alexey Nigay
 
The year 2011 brought for the domestic insurance sector mixed results Inspite of continuing growth of insurance premiums, the rates of insurance payments proved to be much higher that adversely affected both the total profit and profitability of the industry as a whole. According to experts 2012 will be even less successful. The main reason is the global economic recession, which can affect us in the form of lower socio-economic indicators and, consequently, the fall in demand for insurance services.

According to the Committee for the Control and Supervision of Financial Market and Financial Institutions (FSC) of the National Bank of RoK, the total volume of insurance premiums received by Kazakhstan’s insurers in 2011 reached 175.5 billion tenge that 25.4 % is more than during the same period in 2010. As in previous years, the main engine of growth remained a class of voluntary personal insurance, where premiums collection increased immediately to 52.3 %. Positive dynamic is observed also in compulsory (28.3 %) and voluntary property insurance (10.3 %).

At the round table "Results of 2011 and prospects of development of the insurance market in Kazakhstan in 2012", the experts explained the continuing of high growth rates in the voluntary property insurance that last year, in fact, was the last financial year, when the captive insurance might be cost-effective as a way of tax optimization.

However, certain changes have occurred in the structure of the classes of insurance premiums. In particular, the share of compulsory insurance for the past year increased from 21.5 % to 25.9 %. Meanwhile the voluntary property insurance decreased from 50.7 % to 43.6 %, and private voluntary, on the contrary, increased from 27.8% to 30.5%.

Regarding the structure of the collection of premiums for certain types, the compulsory insurance 56.2 % of total revenues, or 25 575.1 million tenge had civil liability insurance of vehicle owners. Another 36.8 % (16 736.7 million tenge) takes the insurance of civil responsibility of the employer for damage caused to life and health of an employee during performance of his labour duties In the voluntary property insurance the largest contribution to the charges of premiums made property insurance – 48.4 % (37 075.6 million tenge), as well as insurance of civil liability, except of the CL of owners cars, air and water transport, 18.1 % (13 890.6 million tenge). In the sphere of voluntary personal insurance lead incomes on the annuity insurance – 44.9 % (24 005.5 million tenge), which are followed the accident insurance – 20.7 % (11 968.3 million tenge).

If to consider the dynamics of the premiums by sectors (life, non-life), then the amount of income to the "general insurance" grew by 19.6 %, reaching 145 049.9 million tenge, while the share of non-life companies in the total amount of premiums decreased from 86.7 % to 82.6 %. The latter is due to the fact that (as predicted by many experts) the leading rates of proceeds increment in the sector of "life insurance" remained in 2011. The premium income of life-companies increased by 63.5 %, reaching 30 478.8 million tenge. As a result, the share of life insurance for the past had increased from 13.3 % to 17.4 %. 

Among the companies, the best performer, based on the total volumes of premiums collected last year, won the DSK (Integrated House-Building Factory) of the National Bank of Kazakhstan Halyk-Kazakhinstrakh, which is accounted of 12.25 % of the whole market. IC Eurasia at 11.73 % fell to the second place, followed by the IC "Nomad Insurance" (6.05 %), IC Kazkommerts Policy (5.64 %) and JSC IC Victoria (5.43 %). 

Payouts are rising, profits are going down

A positive effect of the insurance premium growth is clouded by a dramatic increase of volume of made insurance premiums – an increase of 70.8 % – up to 43 139,1 million tenge. Upon that the greatest increase (2.9 times) is recorded in the voluntary property insurance. As a result, its share in the insurance payments for the year increased from 11.5 % to 19.7 %. In turn, the share of voluntary personal insurance has risen from 51.5 % to 53.1 %, and mandatory insurance, by contrast, has declined – from 37.0 % to 27.2 %.

According to Dmitry Zherebyatiev, the Chairman of the Board of IC Kommesk-Omir, one of the main reasons for the increase of payments is a strong increase in loss of civil liability of vehicle owners, as well as the CASCO. To the internal factors that influenced the deterioration of performance in this segment he referred the higher prices for imported cars, as well as increasing the share of vehicles involved in accidents and, therefore, increase the cost of their restoration. In addition, the prices for medical care and incidents of fraud in the field of rail transportation have increased. The problem of over-pricing of the property by the appraisers is still not fully solved. All of these factors, according to Mr. Zherebyatiev, led to a sharp rise of insurance premiums.

Outstripping growth rates of insurance premiums affected on reducing of net income of insurance (reinsurance) companies, which on January 1st, 2012 was 34 500.2 million tenge, that is 3.3 % less than the same index in 2010. As a result, the profitability of the insurance sector continues to fall. In particular, the rate of ROA (return on assets), showing the efficiency of the assets of insurance companies dropped from 10.9 % to 9.5 % for the year. And the rate of ROC (return on capital), evaluating the efficiency of the work of deposits of the shareholders of insurance companies has decreased from 18.5 % to 15.8 %. 

The situation is compounded by the fact that the main source of profit for domestic insurers is the insurance operations: the structure of their income account for 87 %. And only 13 % they earn by investing of the involved assets. This is partly due to the fact that today the development of Kazakhstan's stock market does not give insurers the tools for investing available funds.

The fall of profit against a background of strengthening of control by the supervisory authority in part of raising the requirements for capitalization, as well as increasing competition reduces the attractiveness of the insurance market of Kazakhstan. As a result, activation of mergers and acquisitions, consolidation of players and reallocation of client base are expected on this market. Thus, the number of insurers has fallen from 40 to 38 in 2011. Meanwhile, according to experts, even today from 10 to 12 companies in the sector were put up for sale by the owners.

In this regard the withdrawal of the German Allianz from our market is quite demonstrative. Recall that the December 8th, 2011 for the first time in Kazakhstan's practice a deal on the buying-selling of an insurance company in the format of management buy-out (repurchase of shares of company by its top management) was made. Within the framework of the deal the Allianz SE has sold 100 % shares of Allianz Kazakhstan to the Chairman of the Board, Zhanar Kaliyeva. Commenting on the deal, she noted that the withdrawal of Allianz, primarily was induced by the revision of global plans of the company, which has decided to concentrate on the major markets of developing countries, limiting its own presence in local markets, which do not playing an important role in the overall structure of its business. "Kazakhstan's insurance market, certainly, has great prospects, but today it does not meet the minimum global insurer's requirements of $100 million of sales in the retail segment. A similar decision was made in respect of some other local markets."

Not everything was a success at the Allianz and in the corporate segment. Despite the fact that the level of industrialization of industry is growing, nevertheless "the quality of risk" remains very low for the global insurer. "We need more information; we need transparency in business, quality pre-insurance examining operations. Therefore, in terms of industrial risks for Allianz, Kazakhstan has a very high level of risk and in 2011 we reduced our corporate portfolio, abandoning several projects that have been kept for six years". With the development of industrial production, transport infrastructure within the Customs Union, as well as the international projects, our market may again become attractive for Allianz, and therefore Ms. Kaliyeva not exclude that in next five years the question of the direct presence of this global insurer in Kazakhstan may get back.

As for the plans of the new owner of JS IC Allianz Kazakhstan, the company intends to position itself as a medium-sized, steady player, focusing on its key customers and providing a wide range of services. The main objective is to increase the retail share by 2015. "Today we have 12 banks-partners in Kazakhstan. And we believe that this is the most promising retail, to which we have access inasmuch as clients of these banks form a quality, effective segment of potential consumers of insurance services", – summed up her plans, Ms. Kaliyeva. 

Stagnation is ahead? 

Speaking of predictions for 2012, Zhanar Kaliyeva notes that only large and professional companies can survive in the market, so it is not impossible that in the insurance sector there will be an association of some more companies.

In turn, Dmitriy Zherebyatiev believes that according to this year-end results it will be very good anyway if the industry will reach a break-even point. According to him, against the background of budgets shrinking and aggregate demand the competition among insurers will increase particularly in the civil liability of vehicle owners and life insurance. "In respect to premium income, due to the fact that the regulator seriously took up the re-insurance, we will see the downturn in this form. In addition, with the transition of insurance companies to the general taxation regime, those volumes, which were "inflated" at the expense of tax optimization, will become a thing of the past. The last change will strike primarily at the companies with large volumes of captive insurance, which either came to abroad or were optimized. Rising of the corporate income tax from 4 % to 20 % in 2012 will lead to renunciation many shareholders from keeping of illiquid assets and unprofitable companies.

At the same time, players of mid-level, aimed at the development and long-term presence in the market will increase their shares and premiums amounts after the departure of competitors. "If earlier we used to pay corporate tax of 4 % of total insurance premiums, then now it makes up to 20 % from income. And because we are retail Service Company, then in this case 20 % of income is much less than 4 % from our incoming premiums. For us it is very beneficial", – stressed Mr. Zherebyatiev.

Head of advertisement and PR of JS IC Centras Insurance, Irina Leshchenko, from her own part, believes that in 2012 processes of redistribution, closures, mergers and acquisitions will continue. "Reducing the concentration of the market has been observed for the past three years. This is largely due to the consolidation of insurers of middle managers, clearing the market, as well as with a reduction in the volume of captive insurance.” As predicted Centras Insurance, with the new order of taxation, changes in the activities of insurance agents, as well as increasing of requirements to reserves, etc., volume of market will be reduced by 15 % in current year. 

The Chairman of the Board of JS IC Alliance Policy, Zauresh Daleeva follows a similar scenario of development: "In connection with the general financial situation in the global market we do not expect the growth. Considerable changes on increasing the market will not happen. The main products of the insurance companies will be required types of insurance, while on auto CASCO increment is not expected. "

The Councilor of the Finance Chairman of the Board of BTA Insurance, Aida Aydarhanova has a slightly different assessment: "The world economy is at a stage of slow recovery, and meanwhile the second wave of crisis is not expected. This is also confirmed by the forecast of Government of RoK for GDP growth in 2012. Thus, a positive scenario of the economy development creates quite favorable conditions for development of the insurance market." Therewith, she believes that the transfer of responsibilities on implementation of compulsory insurance of worker against accidents to insurance companies licensed in life insurance industry will influence on the situation. "It will not generally affect the rate of growth of the market, but will impact on its structure as a result of redistribution of shares. Sounded changes in insurance legislation will stimulate significant growth of competition on the main market types of insurance, which will be accompanied by the development of infrastructure and the possible emergence of new retail products, especially in the general insurance sector."

Chairman of the Board of JSC Oil Insurance Company, Zharkyn Alzhanov is looking forward to further develop of alternative sales channels such as TV marketing and sales of products through the Internet. In his opinion, the compulsory insurance, voluntary medical insurance, as well as possibly insurance products related to bank loans, on which the growth is predicted will remain as the leaders of increment.

Incidentally, the fact that in 2012 life insurance companies will “bite off" such large and low unprofitable segment as insurance by employer against accidents at the non-life players forces the latter to seek replacement for it. Even today, many companies are in favour of the introduction of new compulsory insurance. In particular, in their opinion, in the medium term, mandatory insurance of catastrophic risks and compulsory health insurance may become the new driver of market growth. They will contribute to the deep penetration of insurance services and a significant increase in the volume of collected premiums.

The position of insurers is well clear: voluntary insurance of individuals is rather costly measure and does not give high returns. On the other hand, everyone understands that retail business is important because it suggests more stability than corporate one. However, insurers of themselves do recognize that they got spoilt because of high incomes from the corporate segment, which create a comfort zone, and the majority of players just do not want to go out of it for retail development (which requires considerable effort). As a result, over the past five years, the dynamics has not undergone strong changes in the ratio of voluntary and obligatory types of retail insurance. Meanwhile, as notes Zharkyn Alzhanov, in countries with a developed insurance culture 60 % of all insurance premiums is the share of voluntary retail, but because "everyone understands that we have something to strive for".

 


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Mission Is Possible   Editorial 
Course for Innovations  Blitz Poll 
On Thin Ice  Editorial 
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· 2015 №1  №2  №3  №4  №5  №6
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· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
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· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





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