According S&P's, the operating environment is becoming more challenging for insurance companies in Kazakhstan, which is a reflection of negative economic trends in Kazakhstan and increased risks related to Kazakhstan's banking sector. However, the rating agency considers that the country's insurance companies remain resilient to the turbulent macroeconomic environment.
S&P therefore continues to believe that Kazakhstan's insurance sector bears moderate industry and country risk, comparable with that of Italy, Slovenia, and Poland.
Kazakhstan's established regulatory framework positively differentiates the country from some other insurance markets within the Commonwealth of Independent States, however, it still lags behind more developed western insurance markets, the S&P's statement said.
S&P considers that country risk for Kazakh insurers is high. This reflects its dampened economic outlook for Kazakhstan, owing to lower oil prices and increasing risks to Kazakhstan's fiscal, external, and monetary profiles. S&P expects GDP growth to slow to 2.8% in 2015-2018 against an average of 6% in 2010-2014.
Insurers are particularly exposed to credit and market risks associated with the banking sector. Banking industry risks remain elevated in Kazakhstan, namely as concerns the banking system's weakened funding profile. We also note that Kazakh banks and insurers both suffer from the country's weak payment culture and rule of law.
S&P notes that the net combined ratio of Kazakhstan's P/C sector worsened to 94% in the first eight months of 2015 compared with 89% as of year-end 2014.
S&P considers that this ratio will likely be closer to 95% in 2015-2016, based on gradual worsening of loss and expense ratios over the last five years.
In August 2015, the Kazakhstani tenge depreciated against the U.S. dollar by 26%. This movement supported Kazakh insurers' bottom-line results, as many of them had long U.S. dollar currency positions at that time. Factoring this one-off item into the profit and loss statement, we expect projected 2015 ROE to be around 20%-25%.
However, higher claims levels and some reserve strengthening would negatively influence full-year 2015 results for the market, in our view. The tenge's devaluation has necessitated additional reserve provisions for insurance companies with liabilities denominated in foreign currencies.
The impact is greatest for motor insurers, which represented about 33% of the P/C insurance market as of Sept. 1, 2015.
Over the last few months, individual spending on P/C insurance premiums has been gradually declining in dollar terms, due to devaluation of tenge, and was about $50 per capita at the end of the third quarter of 2015.
Overall, S&P doesn't expect this spending to increase significantly in the coming years, in particular in dollar terms. S&P estimates it at less than $70 in 2015-2016, taking into account decelerating premium growth, forecast inflation, and the devaluation of the tenge.
S&P sees a slower growth of 5% for Kazakhstan's P/C sector (based on GPW) for the first eight months of 2015, compared with the same period in 2014. However, the decline in growth is in part due to the lower demand for some voluntary insurance types, such as cargo insurance, which has dropped by 12% in the first eight months of 2015, amid lackluster economic trends.
S&P sees limited likelihood that we would revise up our assessment over the next 12 months.
"We could revise down our industry and country risk assessment for Kazakhstan's P/C industry if we see further deterioration, to what we consider as very high country risk, or if we see that the sector's current profitability does not safeguard it from country risk," the statement said.