Marina SHIPOVALOVA: The past year 2022 was another year when the insurance market was overcoming consequences of the pandemic, and in addition was affected by tough conditions of the global market, as well as growth of geopolitical and economic instability.
Besides, due to a decrease of mortgage lending and the state program for early withdrawal of pension savings of citizens, there was a redistribution of interest from clients of life insurance companies in relation to products of voluntary pension annuity and life insurance of mortgage borrowers, which seriously affected indicators of the life insurance industry.
GWP growth dynamics in the market in general slowed down from 43% in the period 2020-21 to 11% in 2021-22, while life insurance GWP collection was seriously reduced: from +66% in 2021 to (- 1%) in 2022.
The armed conflict in Ukraine and sanctions imposed against Russia had the most negative impact on the long-standing and well-established cooperation with reinsurers both on the Russian and international markets.
The consequences of sanctions pressure on Russia and the overall economic situation in the world have affected the growing inflation in Kazakhstan, which could not but affect growing unprofitability in classes that provide compensation for property damage.
Among positive factors, I would note the long-awaited adoption in July 2022 of the law, work on which started even before the pandemic. The law, in fact, outlined the insurance industry's development for the next three to four years. The important innovations proposed by the law include introduction of new, socially significant life insurance products, further digitalization of the insurance industry, development of a system for guaranteeing insurance payments and improving the mechanism for protecting rights of consumers of insurance services and expanding the powers of the insurance ombudsman.
XPRIMM: Which insurers saw the greatest growth in 2022? What was the overall picture of the insurance sector in terms of insurance companies?
Marina SHIPOVALOVA: In 2022, the insurance market of Kazakhstan was represented by 26 companies, of which 9 companies are life insurers.
In 2022, the insurance market demonstrated a GWP increase by 11% (up to KZT 814.8 billion), and that growth was provided only by non-life insurance companies +20% (+ KZT 84.8 billion up to KZT 522.5 billion), while life insurance companies not only did not expand their business, but also reduced premium collection y-o-y by 1% (- KZT 2.9 billion to KZT 377.1 billion).
Concentration of the insurance market in terms of GWP, although it remains at a very high level, nevertheless decreased somewhat last year: the TOP-3 life insurance companies generated 66.5% (vs 70.6% in 2021), and the TOP-3 non-life insurance companies generated 70.8% (vs 71.8% in 2021).
Composition of the TOP-3 non-life insurers did not change: EURASIA (+24.7%, +KZT 32.0 billion), Halyk (+2.9%, +KZT 3.1 billion) and KAZAKHMYS (+25.2%, +KZT 9.3 billion). The last company in the first five leaders is JYSAN GARANT (+41%, +KZT 11.8 billion). It should be noted that the TOP-5 companies in relative terms did not show the highest results of premium collection growth.
There were quite outstanding results on the low base effect, for example: SINOASIA (+116.0%, +KZT 7.0 billion), VICTORIA (+146.7%, +KZT 6.1 billion), BASEL (+88.8%, +KZT 4.0 billion).
Separately, I would like to highlight the results of two insurers: FREEDOM INSURANCE (+75.1%, +KZT 4.6 billion), the growth of which was mainly due to takeover of LONDON-ALMATY and CENTRAS INSURANCE (+75.7%, +KZT 8.2 billion), which received a portfolio of non-life classes from KOMMESK OMIR.
The last transaction is most noteworthy in that for the first time in the insurance market, the shareholders of the non-life insurance company KOMMESQ OMIR decided to switch to life insurance, which became possible due to legislative changes that were adopted in 2022.
After completion of the portfolio transfer and registration of changes by the regulator, which will be completed in 2023, the non-life insurance market in Kazakhstan will lose two more players. At the same time, the number of players in the life insurance industry will not increase, since the CENTRAS group of companies, which is a shareholder of three insurance companies, decided to join the subsidiary insurance company CENTRAS-KOMMESQ LIFE to KOMMESQ OMIR after completion of the procedure for changing the company's main insurance activity.
In the life insurance industry, which has been growing at a very confident pace over the past few years, mainly due to voluntary pension annuities and life insurance of borrowers, there has been stagnation and a slight decline by 1% at the end of the year.
This is due to termination of preferential mortgage programs and providing citizens with an opportunity to early withdraw their pension savings (within the established limit) for the purpose of buying a home (including repairs), paying for health care services that are not included in the guaranteed volume of free medical care. A big part of the financial flows from the pension fund, which were previously directed to life insurers through pension annuities in 2022, was redirected to personal needs of the population.
Voluntary pension annuities fell by 38% in total, and for individual companies such drop ranged from 34% to 75% of the portfolio. But life insurers promptly increased their efforts in other lines of business and, thanks to voluntary life insurance (+6%), employer's liability (+68%), and other types of annuities (+81%), managed to keep premium collections almost at the level of 2021.
Composition of the TOP-3 life insurers did not change over the past year: HALYK (+0.4%, +KZT 0.5 billion), NOMAD (-25%, - KZT 29.7 billion), EUROPEAN (+73%, + KZT 23.3 billion).
The leaders in terms of premium collections were: EUROPEAN (+73%, +KZT 23.3 billion), FREEDOM LIFE (+42%, +KZT 23.3 billion), KM LIFE (+28 %, + KZT 5.5 billion). Thanks to the effect of a low base, CENTRAS- KOMMESQ LIFE saw impressive growth (+118%, +KZT 2.7 billion).
The life insurance sector also has its record holders of business volume decline: STANDARD LIFE (- 49%, - KZT 12.0 billion). As already noted, life insurers, which had significant amounts of pension annuities in their portfolios, had the largest GWP decrease. But with legislative changes in 2022, the regulator opened up new horizons for life insurers, achievement of which will have a serious impact on the industry's growth in future.
XPRIMM: What would you name as growth drivers of premiums and paid claims in 2022? Could you comment on the evolution specifics of various segments and classes of insurance?
Marina SHIPOVALOVA: Total GWP increase for 2022 was 11%, while paid claims grew by 50%. If we consider contribution of individual classes, then for compulsory insurance, GWP growth amounted to 28.5% (paid claims: +29.6%), voluntary personal insurance reduced GWP by 7.4% (paid claims increased by 17.0%), and voluntary property insurance increased by 21.6% (paid claims - by 133.2%).
Sector-wise, loss ratios (excluding reinsurance) look more than favorable: in the market in general, the share of paid claims in premiums is 25%, in the life insurance it is 15%, in the non-life insurance it is 31%.
The leading non-life classes in terms of the share of collected premiums in the total market portfolio were voluntary individual property insurance (18.4%, +13%), MTPL (12.4%, +11%), voluntary individual vehicle insurance (6.3%, +54%), voluntary individual civil liability insurance (5.2%, +45%).
The leading classes of personal insurance in terms of the share of collected premiums in the total market portfolio were voluntary personal life insurance (20.8%, +6%), voluntary personal pension annuity (9.0%, -38%), compulsory insurance of employees against accidents (7.8%, +68%), voluntary personal health insurance (5.9%, +35%).
Moreover, if we talk about the leading classes in terms of the share in the paid claims portfolio, the TOP-5 would be: MTPL (25%, +30%), voluntary individual property insurance (20.3%, +195%), voluntary personal health insurance (13.7%, +15%) voluntary individual vehicle insurance (7.9%, +50%), voluntary personal pension annuity (7.3%, +7%)
The growth of most of the paid claims within Kazakhstan was still due to inflation, in addition, paid claims in voluntary personal property insurance increased significantly due to several large losses settled in 2022 under international reinsurance agreements.
XPRIMM: What difficulties did insurers experience in 2022? Have new legislative measures been introduced which affected the insurance market's operation?
Marina SHIPOVALOVA: During 2022, risks associated with both investment activities of insurers and reinsurance materialized. The increase in the base rate by the National Bank of the Republic of Kazakhstan and withdrawal of ratings from issuers of the Russian Federation required a revaluation of financial instruments in the portfolios of insurers. The downgrade of ratings of international credit reinsurers in Russia led to an increase in risk-weighting requirements when calculating the solvency margin of Kazakhstani insurers.
To maintain financial stability of the sector, the insurance market regulator changed the procedure for calculating prudential standards for insurance companies. This allowed insurers to restructure their reinsurance and investment portfolios, while maintaining stability and solvency in the difficult conditions of 2022.
In addition, the insurance market regulator plans to improve the current stress testing model. To determine vulnerability of insurance organizations to risks, 9 stress testing scenarios will be updated. In particular, currency risk stress testing will be improved taking into account the scenario of tenge depreciation against various foreign currencies. Besides, additional scenarios will be developed that assess risks of suspending GWP collection, increasing reserves for non-occurring losses, terminating insurance (reinsurance) contracts, late payments by reinsurers, etc.
Effective January 1, 2023, IFRS 17 "Insurance Contracts" comes into force. This will be a significant challenge for the insurance market as insurance contracts will need to be accounted for in terms of expected future cash flows, new disclosures and financial statements will need to be presented. In 2022, the regulator, together with the market, was preparing transition to IFRS 17 and developed guidance on implementing the basic principles of IFRS 17.
Until 2030, the insurance market must introduce elements of the Solvency II international solvency standard. Some work in this direction was already carried out in 2022. A Roadmap was developed, and a list of indicative risks was determined for implementation of test interim calculations of Solvency Capital Requirements, and work began on their assessment. Currently, the regulator is conducting a comprehensive assessment of the sector's readiness to implement this standard and is developing specific steps to implement the main elements of the standard into national legislation.
XPRIMM: How would you comment on the results for profit, expenses, reserves and assets in 2022? How did inflation in 2022 affect the work of insurers?
Marina SHIPOVALOVA: The assets of insurance companies as of January 1, 2023 amounted to KZT 2.1 trillion, having increased by 13.0% since the beginning of 2022. In the structure of assets, the largest share (74.1% of total) is occupied by securities in the amount of KZT 1.5 trillion with an increase over the year by 16.2%. Deposits placed in second-tier banks with a share of 3.6% at the end of 2022 decreased by 54.8% compared to the beginning of the year. Reinsurance assets amounted to KZT 65.9 billion at the end of the year with a share of 3.2% of total assets, a decrease from the beginning of 2022 was 6.8%.
Liabilities of insurance companies as of January 1, 2023, amounted to KZT 1.29 trillion, having increased by 18.8% y-o-y. In the structure of liabilities, the largest share (85.1% of total) belongs to insurance reserves, which have grown by 23.1%.
The net profit of the insurance market as of January 1, 2023 amounted to KZT 137.5 billion, which is 16.2% more than a year ago.
The ratio of net income for the last 12 months to average total assets (ROA) was 7.1%. The ratio of net profit for the last 12 months to the average equity (ROE) was 18.1%.
Cumulative inflation for 2022 in Kazakhstan amounted to 20.3%. Prices for food products increased by 25.3%, for non-food products - by 19.4%, for paid services - by 14.1%. This, of course, was reflected in the cost of claims settled by insurers.
Growth in paid claims amounted to 50% with a relatively small increase in the number of losses. Moreover, the largest increase in paid claims was observed in motor insurance (Motor Hull by 50%, MTPL by 30%) and property insurance (+195%), which is precisely due to inflation.
As for voluntary insurance, insurers have already taken into account the impact of inflation in tariffs when renewing contracts, and for compulsory liability insurance of vehicle owners, the regulator has provided for regulation of tariffs at the end of 2023 in accordance with the growth of unprofitability by regions.
Let's hope that measures to reduce the effect of inflation in paid claims will yield results and the combined loss ratio of insurers will remain within comfortable ranges. The data at the end of 2022 show that the insurance sector's actual solvency margin adequacy ratio is 5.19, and the aggregate loss ratio, considering the reinsurer's share, is 34%. This indicates a sufficient margin of safety and a stable financial position of Kazakhstani insurers.
XPRIMM: Can you say that development of digitalization in insurance reached a new level last year? What innovations have contributed to the development of the market?
Marina SHIPOVALOVA: On July 12, 2022, the Head of State signed the Law on Development of the Insurance Market, the Securities Market and Banking Activities, which amends 19 regulatory acts on insurance.
Previously, a procedure for online sales of policies was already provided for, which was successfully implemented, and now, in accordance with the adopted law, by 2024, the second stage of digitalization is to be introduced - online settlement of insured events for all compulsory types of insurance. This will make it possible to convert into an electronic format relationship between clients and insurance companies for all types of compulsory insurance and significantly simplify the procedure for receiving insurance payments.
Online settlement of insured events will make insurance payments transparent, and all stages of claim settlement, starting with preparing a set of documents and ending with compensation payment or appeal of an insurer's decision, will be recorded in the Unified Insurance Database - UIDB.
Filling in the UIDB and its integration with government databases will allow insurance companies to get an access to complete statistics on all types of insurance, as well as create scoring models and expand the offered insurance product lines, digitize the main business operations of insurers, such as, underwriting.
As part of the online settlement introduction from January 1, 2024, a simplified settlement of MTPL insured events - European Accident Statement will be introduced, which will ensure prompt receipt of insurance payments for traffic accidents online, without involvement of the police and court.
Introduction of legal requirements regarding digitalization of selling policies and claim settlement stimulates insurance companies to develop applications that greatly simplify interaction of insureds and insurers, increase efficiency of insurance companies, and contribute to emergence of new products, which makes insurance affordable and demanded.
XPRIMM: Could you briefly talk about insurance plans for 2023 and expectations?
Marina SHIPOVALOVA: The main expectations of the insurance market for 2023 are related to the legislative changes adopted in 2022 and their implementation to let the market grow and improve.
In 2022, opportunities for life insurance companies were significantly expanded, as conditions were created for emergence of new socially oriented insurance products.
For the first time, an educational accumulative insurance product with a state subsidy appeared on the insurance market. It will allow to save up for education of children and, in the event of a parent's death or loss of his/her ability to work, guarantees full payment of the education cost, regardless of the accumulated amount.
Increased availability of pension annuities. In 2021, a deferred pension annuity was introduced, which makes it possible to conclude a contract from the age of 45 with sufficient pension savings and receive pension payments from the age of 55 for life. In 2022, it became possible to purchase joint (spousal) pension annuities by pooling the pension savings of spouses to provide lifetime payments to both.
In addition, citizens who entered into pension annuity agreements got an opportunity to change the agreement terms and return part of their savings to the Unified Accumulative Pension Fund for subsequent use for treatment and purchase of housing.
All these innovations provide significant opportunities for the life insurance industry to "win back" the losses of 2022 and reach a new level of qualitative growth.
An important innovation in 2022 was expansion of the list of insurance classes covered by the Insurance Benefits Guarantee Fund from 5 compulsory insurance classes to 10 classes. Now the Fund guarantees all types of compulsory insurance, except for imputed insurance, as well as life insurance within the framework of the State Educational Accumulative System. This will increase confidence of citizens in the insurance market.
Non-life insurance companies are counting on the transition to a flexible tariff system in MTPL, when tariffs will be reviewed annually, considering actual unprofitability of the regions. This will lead to the adequacy of tariffs in the regional context and will allow insurers to manage loss more effectively in the most massive class of retail insurance - MTPL.
And of course, insurers hope for stabilization of the geopolitical and economic situation.