Nurlan ABDRAKHMANOV, Director of the Department of Control and Supervision Methodology, National Bank of the Republic of Kazakhstan

12 December 2013 —
Nurlan ABDRAKHMANOV, Director of the Department of Control and Supervision Methodology, National Bank of the Republic of Kazakhstan
nurlan_abdrakhmanovaXPRIMM: What are the main approaches of insurance market regulation in Kazakhstan?
Nurlan ABDRAKHMANOV:
At present, there are 35 insurance companies operating on the insurance market, including 7 life insurance companies, 13 insurance brokers and 77 actuaries. The participants of the JSC "Fund guarantee insurance payments" are 31 insurance organizations.

Government regulation and supervision of the insurance activities is executed by the authorized institution - The National Bank of the Republic of Kazakhstan.

The main objectives of state regulation of the insurance activities in Kazakhstan are:
  • The establishment and maintenance of a stable insurance system in the Republic of Kazakhstan and the formation of a national insurance market infrastructure;
  • The regulation of the insurance market, the control and supervision of the insurance business;
  • The legislative strengthening of the foundations of insurance, the establishment of compulsory insurance, the principles of participation of the Republic of Kazakhstan in the international security;
  • The protection of rights and legitimate interests of insured and beneficiaries.
To achieve these objectives, the government is authorized to implement the licensing of the insurance market, establishing a procedure for the creation of insurance companies, establishing capital requirements, shareholders, executives, prudential norms, the internal systems of risk management, a financial reporting insurance company, as well as the requirements for the formation and methods of calculation of insurance reserves, etc.

The authorized entity also has empowered the use of enforcement measures and sanctions in the cases established by law with regard to insurance companies, insurance brokers and insurance companies' members.

XPRIMM: To what extent has the global financial crisis had an impact on the insurance market of Kazakhstan? How has the crisis on the international market affected the development and pricing of the insurance market in Kazakhstan?
N.A.:
The insurance market in Kazakhstan is quite young and the creation of the domestic insurance market coincides with the recognition of Kazakhstan's independence. The strong economic growth in the country, the increase of production of goods and services, and the population's increased incomes contributed to the rapid growth of the insurance market. So, for the past 10 years, the amount of insurance premiums has grown more than 10 times.

During the crisis, the growth rate of the insurance market was kind of reduced. However, the overall insurance market withstood the shocks of the crisis. The influence of the environment on the insurance market, the volume of second level bank lending, the production of goods and services were all insignificant. Insurance companies maintained a high level of profitability due to the low loss ratio for voluntary property insurance.

Starting in 2010, there has been a positive trend in all the financial indicators of insurance companies: in terms of total assets, total liabilities, capital, insurance premiums and insurance claims.

In terms of the impact of the financial crisis on the development and pricing of the insurance market it may be noted that, with the reduction in the period of crisis of second level lending banks, there was also a decrease in the volume of bancassurance, which contributed to the development of insurance companies in other areas, types of insurance, and non-banking activities.

XPRIMM: What are the main and most important innovations in the insurance legislation that have been made in recent years? How much have they affected the market generally?
N.A.:
In the recent years insurance legislation has undergone many changes.

The most important of them are:
  • The introduction of restrictions on those wishing to buy and having the status of major party or insurance holding company, including non-residents of the Republic of Kazakhstan;
  • The maintenance of consolidated supervision of insurance groups and insurance holding companies, the establishment of a number of restrictions on the implementation by the insurance holding operations and transactions as business activities and transactions in securities;
  • Increased requirements for the capitalization of insurance companies, the introduction of differentiated limits of the risks retained by the insurance companies in case of reinsurance, the adoption of measures to increase the proportion of the local content in the reinsurance of risks, the introduction of rating requirements for Kazakh reinsurers;
  • The introduction of the independent actuaries' institution;
  • An increased responsibility of management staff and major participants (insurance holding companies) of insurance (reinsurance) companies for failing to meet the requirements of the legislation of the Republic of Kazakhstan and more.
These legislative amendments would eliminate such negative phenomena on the insurance market such as low capitalization of insurance companies, the low level of solvency of insurance companies, a high degree of business concentration, the lack of information transparency of activities of the insurance companies and their shareholders, as well as a weak degree of responsibility held by executives of financial institutions.

In recent years prohibitions and restrictions have also been introduced along with additional requirements for insurance companies and the expansion of authorized entities' credentials with regard to management staff, the major participants in the insurance companies, insurance groups and holding companies. Moreover, the strengthening of state regulations on the insurance market has been allowed and an increased level of the rights and interests protection of insurance service consumers has been imposed by minimizing the risks they are exposed to.

XPRIMM: How do you evaluate the prospects of Kazakhstan's insurance market in the conditions of the forthcoming integration of insurance markets in Russia, Belarus and Kazakhstan?
N.A.:
Currently, the Customs Union is actively working on the formation of the Common Economic Space (CES), in which the creation of a common financial market, including the insurance market, is anticipated. To this purpose, the countries signed a number of agreements that aim at ensuring the free movement of the capital, the service trade and investment were also developed through a number of projects involving the procedural requirements for the implementation of the financial markets.

In the framework of these agreements the terms and conditions of the integration activities are provided. In insurance a harmonization of the legislation is being considered in accordance with the international standards, the cooperation in the field of compulsory insurance, the reinsurance and brokerage business, consumer protection and financial stability of insurance companies. The integration activities will be staged and until January 1, 2020 it is expected to complete the harmonization process and to ensure the mutual recognition of licenses for activities on the financial market, including insurance.

The creation of a common insurance market is the next step in the development of the domestic financial sector, which aims at further strengthening the financial market.

The creation of a common market within the Common Economic Space, taking into consideration the number of insurance organizations in Russia, will increase competition in the insurance sector, and therefore on the domestic market we cannot rule out the possibility of reducing the number of insurance companies, including mergers and acquisitions.

Therefore, the Kazakh insurance companies, in order to gain a competitive advantage, should concentrate their activities on improving the quality of the insurance services, rather than maximizing revenue. In this regard, given the high level of competition in the segment of the insured entities, we believe that insurance companies must focus on retail insurance, develop new insurance products, improve the quality of service, enhance advertising policy to raise public awareness, etc.

XPRIMM: Is the insurance market in Kazakhstan considered to be interesting for foreign investors? Are there any legal restrictions for foreign capital to enter Kazakhstan's market?
N.A.:
At the moment 7 out of 35 insurance companies have non-resident participants.

The insufficient development of a system of voluntary insurance in Kazakhstan as well as the low competition level within the insurance companies are triggering a lack of interest among foreign investors on Kazakhstan's insurance market.

The current legislation provides for the possibility of participation of non-residents as founders and shareholders of insurance companies, according to the requirements of the Kazakh legislation. There are no limits set on foreign participation in the share capital of the insurance (reinsurance) companies.

Legal entities registered in offshore zones, may not directly or indirectly own and (or) use and (or) to dispose of the voting shares of the insurance (reinsurance) companies-residents of the Republic of Kazakhstan.

This restriction does not apply to insurance (reinsurance) organizations which are subsidiaries of insurance (reinsurance) of non-residents of the Republic of Kazakhstan with the minimum required rating from rating agencies.

Non-resident legal entities in the Republic of Kazakhstan can obtain the consent of the authorized authority to acquire the status of insurance holding companies or that of major participants in insurance (reinsurance), provided that the minimum required rating is granted by the rating agencies.

XPRIMM: According to your opinion, what is the current state of development of the local reinsurance market? What are the main challenges and what are the immediate prospects for development?
N.A.:
Analyzing the performance of the reinsurance market, it may be noted that over the past few years, this market situation has remained virtually unchanged. The main countries that attract the risks present in Kazakhstan, as before, are the Russian Federation, the United Kingdom, Germany and Switzerland.

The volume of reinsurance premiums ceded abroad in the 1H2013 amounted to KZT 32 billion or 23% of the premiums received (23% also transferred in the 1H2012).

Due to the tightening of the rating requirements in 2012 there was a marked increase in the proportion of the UK and Germany, and the decline in Ukraine, Spain, Bermuda, China, and Turkey.

However, there was a trend of increase in reinsurance from non-residents by 21% in the first half of 2013, mainly from the Republic of Korea, the United States and the Russian Federation.

XPRIMM: In 2012, the demands for the rating requirements for non-residents were tightened. In your opinion, could this be a signal of "closing" of this market?
N.A.:
Changes in the rating requirements in 2012 were associated primarily with ensuring the transparency of the reinsurance market and increasing the financial stability of Kazakh insurers.

Also, limits were set on the amount transferred to non-resident liability and insurance premiums in order to increase the local content. The purpose of these restrictions is to encourage insurers to conduct a reasonable assessment of their underwriting risk and the possibility of self-retention, and not the "closing" of the external reinsurance.

XPRIMM: What are the plans of the regulator to improve the legislative framework of insurance and reinsurance?
N.A.:
In the near future, the National Bank will improve the legislation on insurance and insurance activities, including those aimed at:
  • Improving the effectiveness of the compulsory insurance system, including the establishment of clear criteria for the introduction and optimization of the list for compulsory insurance;
  • The further development of Islamic finance, including through legislative regulation of the activities of Islamic insurance companies and the establishment of the principles of Islamic insurance;
  • The implementation of international regulatory standards, including standards based on Solvency II and the principles of the International Association of Insurance Supervisors (IAIS).
However, within the framework of the integration process and the harmonization of insurance laws, member states of the Common Economic Space are supposed to create the common insurance market, the introduction of common rules in the system of reinsurance risks by the insurance companies, including uniform requirements for the procedure for transferring the risks to reinsurance.

It should be mentioned that the system requirements for reinsurance risks within the Common Economic Space will also be established in accordance with the international standards and regulation principles.

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