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 KAZAKHSTAN International Business Magazine №1, 2008
 The Insurance Market: Results and Outlook
The Insurance Market: Results and Outlook
Even though new participants will appear in the insurance market in Kazakhstan during 2008, the rate of industry development is unlikely to achieve its previous level. The reason is that the major part of premiums received by insurance companies is directly connected with bank lending and according to bankers, a rapid growth in the industry is not expected in the near future. The 2007 results only reinforce that prediction.
Who Will Be the New Participants?
In 2007, the total value of premiums received by domestic insurance companies was 147 billion tenge, which was an increase of 22.5% on the previous year. Over the same period, the total assets of insurance companies grew by 65% to 223.5 billion tenge (data correct at 1 January 2008). The total equity capital of insurance companies rose by 57.5% to 126.2 billion tenge. The total amount of insurance reserves was 86.3 billion tenge.
According to the 2007 results, Alliance-Policy held the leading position among insurance companies in terms of premiums (25.7 billion tenge) followed by Eurasia (18.4 billion tenge), Victoriya (16.2 billion tenge), BTA Insurance (12.1 billion tenge) and Kazakhinstrakh (11.4 billion tenge).
During this time, the number of market participants has changed significantly. Currently, 41 insurance companies operate in Kazakhstan, of which seven are involved in life insurance. At the end of 2007, Seimar Alliance Financial Corporation obtained a licence to establish two companies:Alliance-Life Insurance, involved in life insurance, andGarantiya, involved in general insurance.
Astana-Finance also plans to establish insurance organisations involved in these sectors, whilst SAK Insurance is also waiting to obtain a licence for non-life insurance. In late September of last year, the Transport Insurance Association revoked its licence and terminated its business owing to unprofitability. Given that the primary activity for this company was car owners’ mandatory civil liabilities insurance, other market participants have assumed that the company was unable to comply with new requirements for this area of the business. The purchase of Kazakhstan ATF Policy by German Allianz was named "Transaction of the Year". In addition, some other foreign insurance companies, including those from Russia, are expected to appear in the insurance marketplace in the future.
However, according to current operators, new market entrants are unlikely to change the competitive environment. As Ivan Mikhaylov, Kazakhinstrakh’s vice-president noted: "Now, it is difficult to find a legal entity without an attached insurance policy, whereas individuals are not interested in obtaining them separately. That is why new market participants have no opportunity".
Experts presume that Seimar Alliance insurance companies will be focused on servicing corporate interests. Similarly for Astana-Finance: it is transferring a huge amount of insurance risks to subsidiary insurance companies, so it is clearly interested in developing its own insurance business.
Regarding the German Allianz purchase of ATF-Policy mentioned above, it should be noted that domestic insurance companies are expecting that German shareholders will implement new technologies and European standards. Because ATF-Policy was previously engaged in retailing, Mr Mikhaylov assumes that the new owners will make the company more profitable. “It happens frequently in the Russian market whereby corporate participants who started in the retail sector, begin to develop a corporate cluster. All participants in our market were universal from the beginning. This position is the most profitable for now, but it will be more difficult to work with obligatory types of insurance in the near future”, claims the expert.
Binding Decisions
According to the 2007 results, the total value of premiums received in obligatory insurance was 19.7 billion tenge, or 13.3% of the total volume, with Altyn Policy, Kazakhinstrakh and Atlanta Policy being leaders in this sector.
Since 25 May 2007, following approval of the relevant amendments to the legislation, the most topical issue for domestic insurance companies has been the preparation for working with new increased tariffs for insuring car owners’ mandatory civil liability. Old tariffs for insurance policies, effective up to 26 November 2007, were established as far back as in 1996. Since then, both the rate of inflation and the minimum specified rate have increased. According to new tariffs, a minimum price for an insurance policy is in the region of 13,000 tenge.
A large branch network is one of the basic conditions for insuring car owners’ civil liability. Major players in the insurance market say that even with an existing solid network, they have had to resolve problems, and that small insurance companies would have to incur significant additional costs. Experts think that these costs will not be paid back in the short term, so the number of insurance companies selling policies to car owners is likely to reduce. After new tariffs were introduced in November BTA Zabota and Interteach, both specialising in health insurance, refused to be involved with car owner insurance. Other insurance companies attempted to meet the requirements by creating a common database which would enable insurance companies to calculate premiums for individual car owners on a case-by-case basis, and which were dependent on their previous driving records.
Direct settlement of claims is another innovation in insuring car owners’ mandatory civil liability. Under this system, a driver has the right to select an insurance company to protect him or her in the event of a road accident. If an insured event then occurred, the insurance company of an injured person would indemnify losses and submit claims to the guilty person’s insurance company. In order to avoid court proceedings between the parties, the law provides for pre-trial settlement of disputes. An insurance ombudsman will carry out the functions of an arbitrator and insurance companies have already chosen Vitaliy Verevkin, BTA Insurance’s ex-director, as the ombudsman.
The interest in that type of insurance is obvious: according to the 2007 results, insurance companies received 8 billion tenge from insuring car owners’ civil liability, which constitutes approximately 41% of all types of obligatory insurance.
The insurance of employers’ civil liability ranks the second (7.9 billion tenge) most important obligatory insurance. However, there are problems with this type of insurance that may require further amendments to the legislation. At present, both general and life insurance companies are providing the employers’ obligatory civil liability insurance which means that general insurance companies are collecting premiums for liability insurance. In the event that an employee’s health or life is harmed at work, it is the expertise of the life insurance companies which is used to make payments and calculate the premium amounts which are then paid by the non-life insurance companies. Although all life insurance companies use similar methods for the premium calculations, some calculation results may differ significantly from each other. This is confusing for general insurance companies who may end up paying different amounts for similar events. This issue, uncovered by the legislation, causes disputes and delays payments to injured employees. In order to resolve the current situation, the regulatory body proposed considering a transfer of this type of insurance to the competence of life insurance companies. That proposal has been under dispute for a year. Non-life insurance companies are standing by their rights and do not agree to losing a profitable activity by putting forward their own proposals to solve the problem.
“It would be reasonable to permit general insurance companies to pay injured persons the required amounts by installments without intermediaries, as any actuary can calculate the monthly payments. To provide additional protection for injured employees, the guarantee insurance compensation fund must be responsible for functions similar to those in obligatory insurance of car owner’s civil liability. Thus all the issues, including the improved stability of general insurance companies and their ability to accumulate the necessary reserves, could easily be solved. This is because insurance companies will not have to pay large amounts to intermediaries, and income from those amounts can be accumulated at the initial insurance companies. This provides them with additional guarantees to fulfill their obligations and significantly accelerates a payment process”, says Vladimir Akentiyev, Kommesk-Omir’s vice-president. Limited numbers of agents and branches are among the main disadvantages listed by the opponents of life insurance companies.
Life insurance companies consider that they alone should be engaged in this type of insurance. "Life insurance companies are ready to take full control of this type of insurance. First of all, life insurance companies have a high level of capitalisation as established by the legislation. Secondly, they consider accident insurance as a specialised type of insurance”, says Gulzhan Jaksymbetova, director of the Kazkommerts-Life’s insurance department.
In any event, the issue must be solved during 2008.
Systemic Risk
Rates of expansion in the voluntary insurance market have exceeded the rates in obligatory insurance. Whilst the value of obligatory insurance policies has increased by 10% compared to the previous year, growth in voluntary personal insurance has been 25.6%, and 24.6% in voluntary property insurance. In the value of insurance premiums the latter is in the lead with its total standing at 111.4 billion tenge, whereas the value of voluntary personal insurance is only 16.1 billion tenge.
The following companies were leaders in property insurance: Alliance Policy (24 billion tenge), Eurasia (15 billion tenge) and Victoriya (15 billion tenge). Leaders in voluntary personal insurance were BTA Life (3.9 billion tenge), AMSG (3.1 billion tenge) and Kazakhinstrakh (1.3 billion tenge).
According to the 2007 results, the combined value of insurance payments was 49 billion tenge with a 3.5-fold increase compared to the previous year. Re-insurance compensations paid by re-insurance companies amounted to 9.6 billion tenge or 19.6%. It is notable that the largest amount (88%) of the combined insurance payments made in 2007 refers to insurance against other financial losses.
“Insurance against other financial losses covers default on borrower’s obligations to a lending institution or a bank. The lending policy carried out by banks up to recent time was aimed at growth, consequently the risks taken by affiliated insurance companies also increased”, explains Gaukhar Kasymkanova, managing director of MOI Insurance Broker.
Experts confirm that insured risks, and payments on such risks, are connected with delayed payments on unsecured loans provided by banks and microlending organisations, which occurred before the liquidity crisis.
According to Galym Amerkhojayev, president of the State Insurance Corporation, both borrowers and banks could act as insurers against that risk. Each company independently defines insurance events in its voluntary insurance contract. As a rule, such insurance events refer to non-repayment in the event of a borrower’s death, acknowledgement of disability or loss of employment. In addition, these may also include an ordinary non-payment of an installment on a loan. In the event that a borrower is a legal entity, insurance events include risks on insolvency and bankruptcy.  
“I cannot judge whether the payments are connected with deterioration of the quality of a bank loan portfolio, but in any event, each bank must diversify its own risks and its holding’s risks, if the structure of such a bank includes an insurance organisation and a pension fund”, considers Galym Amerkhojayev. 
 According to Ivan Mikhaylov, amounts of premiums and payments on borrower insurance were affected because partner banks have reduced volumes of mortgage lending in recent months.
Serik Temirgaliyev, manager of the BTA Insurance Group, believes that the main flow of insurance premiums for car owners and house owners is received from parent banks. That is why a premium value directly depends on lending volumes. In recent months, a decrease in granting loans has resulted in a small reduction in amounts received by insurers included in bank groups.
Vital Issue
The life insurance sector showed the most impressive rate of growth with 26% increase. At the same time, a share of this sector still only shows moderate growth of 4.6 billion tenge, or 3.2%.
Today, seven insurance companies are engaged in the life insurance market, among which BTA Life, State Annuitant Company and Kazkommerts Life are market leaders.
On 5 January 2008, the Financial Supervision Agency suspended the licence of Valyut-Tranzit Life for the third time. Similar sanctions were previously applied to this insurance company in 2006 and 2007. According to the Financial Supervision Agency, the reason for the last suspension was non-compliance with prudential regulations on adequacy of the actual solvency margin and highly liquid assets.
As a result of the compulsory liquidation of Valyut-Tranzit Bank, its insurance subsidiary hit financial difficulties, since a major part of its assets was invested in the parent company. On 1 December of 2007, this insurance company placed 822,459,000 tenge (80% of its assets) in the bank. Such funds may only be withdrawn in accordance with a procedure established by law, which aims to satisfy the demands of creditors upon the bank liquidation.
Dilyara Karakulova, director of the insurance supervision department at the Financial Supervision Agency, notes that the value of Valyut-Tranzit Life’s obligations to insured parties is 453,761,000 tenge. The major part of those obligations refers to long-term insurance contracts of social importance (pension annuity and annuity) made within the framework of obligatory insurance of employers’ civil liability.
“In conditions of insurance market formation, liquidation of any insurance company has a negative effect on the whole industry and may result in a social resonance. That is why the Agency intends to negotiate with life insurance companies on possibilities for purchasing the Valyut-Tranzit Life’s insurance portfolio in order to solve the problem”, says Ms Karakulova.
In accordance with the existing legislation, any duly licensed participant of the insurance market may purchase the Valut-Transit Life’s insurance portfolio. However, investors who were initially interested in purchasing the Valyut-Tranzit Bank’s insurance structure are no longer very active. They are not satisfied with the volume of required investments which are not dissimilar to the unhappy state of the insurer. Valyut-Tranzit Policy, another Valyut-Tranzit bank’s subsidiary engaged in general insurance, terminated its activities on 9 January 2008 after the regulatory body revoked its licence. At present, the Financial Supervision Agency has assigned a liquidation committee to which all powers are transferred from Valyut-Tranzit Policy’s management bodies.

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