Expenses of the insurance market of the Kazakhstan increased by 37%, and net profit – by 3%. This may result in loss | FinReview
23 March 2020

Expenses of the insurance market of the Kazakhstan increased by 37%, and net profit – by 3%. This may result in loss

In the coming years, insurance companies in Kazakhstan will need quality development. In 2019, their expenses grew faster than incomes, and the growth in net profit for the year decreased from 51% to 3%. If current trends continue, the insurance sector may become a loss-making area for 10 years.

The insurance sector for the economy of any country is the so-called financial stabilizer, contributing to the development of entrepreneurial structures, industries, market relations. In a market economy, insurance becomes virtually the only instrument guaranteeing financial protection of the interests of the population. On the one hand, the insurance sector removes the financial burden from the state and increases the responsibility of business entities by regulating civil law relations. On the other hand, it protects the population in case of incidents by paying compensation to the victims.

The development of insurance, as a tool to protect business and the economy from financial risks, is given great attention all over the world. In developed countries, the contribution of the sphere to the GDP structure exceeds 5%, for example, in South Korea this indicator is 11%, in Germany – 6%. And in Kazakhstan, according to the results of 2019, the share of the insurance sector amounted to only 1.95% (in 2018 – 1.78%). That is, domestic companies, satisfying the existing demand in the domestic market, practically do not expand the list of insurance services. So, the country has great potential for market development and growth of the insurance sector.

The insurance market in Kazakhstan is closely related to the state of the banking sector, as the largest companies are owned by banking conglomerates. Over the past eleven years, the insurance market, as well as the banking market, has seen a trend to reduce the number of players. As of January 1, 2009, 44 companies worked in insurance, and as of February 1, 2020, their number was 28 organizations, of which 8 were in life insurance.

Reducing the number of companies benefited the insurance sector

The reduction in insurance companies has strengthened market players. In particular, the assets of insurance companies over the past five years have doubled, and in 2018 for the first time exceeded the bar of 1 trillion tenge. At the end of 2019, assets already amounted to 1.2 trillion tenge.

The largest share in the structure of assets was formed by securities – 64.3%. Since the beginning of 2019, their volume increased by 42.5% and amounted to 775.1 billion tenge. In turn, deposits placed in second-tier banks decreased by 5%, reaching almost 181 billion tenge, and reinsurance assets decreased more significantly – by 38.3% and amounted to 69.1 billion tenge.

Also, capital growth contributed to an improvement in the financial performance of the insurance sector. In 2019, the volume of capital increased by 18.2% and amounted to 553.3 billion tenge. Nevertheless, a high concentration remains in the sector. The share of the assets of the top ten insurance companies in their total volume is 83.3%, equity – 82.2%, insurance premiums – 72.8%, insurance payments – 84.3%.
As a result of the strengthening of insurance companies, the volume of premiums increased by 32.1% and amounted to 508.5 billion tenge. The largest share of insurance premiums, namely 40.5%, was received from voluntary personal insurance, which is aimed at protecting the life, health and other interests of citizens. Voluntary property insurance accounted for 35.3% of premiums, and the remaining 24.2% of premiums were received from compulsory insurance.

Recall that mandatory types of insurance are:

  • civil liability insurance of car owners;
  • social and medical insurance;
  • employer liability insurance to the employee;
  • environmental insurance (for employers associated with hazardous production);
  • insurance of civil liability of the carrier to passengers (for transport companies).

In terms of development, the life insurance industry is ahead of general insurance

In 2019, the volume of insurance premiums in the “general insurance” industry increased by 21.9% compared to 2018 and amounted to 360.2 billion tenge. In turn, the increase in premiums in the life insurance industry amounted to 66.2%, and the volume – 148.3 billion tenge. At the same time, the driver of market development was annuity insurance, the amount of premiums of which grew by 106.6%, reaching 71.4 billion tenge.

At first glance, such dynamics demonstrate a high degree of development of the sector, however, in comparison with foreign practices, the indicators of Kazakhstan are significantly behind. For example, Europeans spend about a quarter of their monthly salaries on insurance premiums. As a result, life insurance companies in Europe are one of the largest institutional investors, which account for about 42% of investment income in the economy. In Kazakhstan, sector profitability indicators are sensitive to volatility in foreign currency interest rates. And the size of the available benefits from insurance is minimal, which in turn forms a low demand for services.

The total amount of insurance payments increased almost 3 times

Along with the growth of premium income, insurance payments also increased significantly. The total amount of insurance payments in 2019 for the first time exceeded the bar of 100 billion tenge, reaching 196.9 billion tenge. Compared to 2018, payments increased by 2.8 times (in 2018 – 70.8 billion tenge).
In terms of insurance payments, 61.6% were made on voluntary property insurance, 20.6% on voluntary personal insurance and 17.8% on compulsory insurance.

An increase in the volume of payments as a result leads to a decrease in the sector’s profitability. So, the net profit of the insurance sector amounted to 82.9 billion tenge. The growth compared to 2018 was only 2.6%. However, over the past five years, growth has been 62%.

Obviously, an increase in payments and a slowdown in profitability threatens to maintain the financial stability of companies and their solvency. But the insurance sector is one of the few sectors of the economy in which liquid assets still exceed its liabilities. Moreover, highly liquid assets in 2019 increased by 20.5% and amounted to 928.1 billion tenge, or 76.9% of total assets. Accordingly, the actual solvency margin also increased by 11% and amounted to 396.4 billion tenge (at the beginning of 2019 – 357.1 billion tenge).

What hinders the development of the insurance sector?

Kazakhstan’s entry into the World Trade Organization at the end of 2015 opened up access to foreign markets to domestic insurance companies, and large foreign companies to the national market. In 2020, the insurance sector will become open for access to the market of branches of foreign companies. Therefore, the need to build a sustainable and competitive insurance industry is only growing. However, there are restrictions in the sector that impede the development of insurance:

  • insufficiently developed voluntary life and health insurance of citizens, insurance of property of the population and entrepreneurship from various risks;
  • the capitalization of insurance companies is not enough to enable them to fully take on strass risks, automate their work and develop their products;
  • availability of individual income tax upon receipt of insurance payment;
  • there are no economic incentives and opportunities for the development of endowment life insurance;
  • there is no strategy for the further development of the insurance market.

How to stimulate the growth of the insurance sector?

To begin with, we note that Kazakhstan insurance companies have long had the need to look for additional sources of investment or investors. In 2020, the issue became more relevant due to the coronavirus pandemic, which had a negative impact on the economic development of countries around the world, affecting all areas of business. As a result, the relevance of attracting relatively cheap investments necessary for the implementation of socially significant institutional projects has increased.
Considering the fact that insurance companies are also actually investors, and the investment currency is already beyond tenge, they seek access to international financial markets. And with the opening of the Astana International Financial Centre – Astana International Exchange (AIX) stock exchange in Kazakhstan, such an opportunity became a reality.

The advantage of AIX is that the regulatory environment in which it operates complies with high international standards. On the one hand, this simplifies access to the exchange by foreign investors, and on the other, it provides additional guarantees to local investors. Moreover, insurance companies will be able to act as investors and acquire certain financial instruments, and in case of acquiring the status of AIFC participant, which implies obtaining a license to carry out activities, the company will have access to all privileges. These include protection in the AIFC International Court, the use of legislation based on the English Common Law, and the use of a simplified currency regime.