At the same time the agency assessed the industry and country risk of Kazakhstan's P/C insurance sector as moderately high, similar to its assessment of the Russian, Brazilian, and South African P/C sectors, said the rating agency in its reports.
The agency views the influence of country risk on the overall assessment of the Kazakhstani life insurance segment as limited so far. Despite negative macroeconomic environment in 2020, the life insurance sector continued to expand at 16%, based on GWP, and showed robust profitability with return on equity (ROE) of 33%.
"Further diversification of products is underway, and the industry has lower exposure to interest-rate-sensitive products--like insurance products with guarantees--than European players. Considering the structurally underdeveloped domestic capital market in Kazakhstan, the life insurance sector mostly invests into quasi-government and sovereign bonds with quite a conservative investment profile overall. On the back of moderate economic growth and still low wealth, savings rates are still low, but regulatory initiatives allow for further high growth prospects in terms of life premiums", S&P said.
Among the strengths the agency noted robust market growth prospects, supported by economic recovery and regulatory initiatives to develop the life insurance market; solid life segment's profitability, which is significantly higher than that in developed markets and most emerging economies. Among the weaknesses - low penetration and still-evolving product structure; shallow capital markets limit available long-term investment instruments for life insurers; foreign exchange risk via foreign-currency denominated products that could add volatility to operating results and capital.
S&P's Kazakh P/C industry risk assessment reflects the sector's current and prospective solid level of profitability, supported by both underwriting performance and investment income. The agency forecasts the sector's return on equity (ROE) to be in the range of 13-14% in 2021-2023, which is close to ROE of 15% that the sector reported in 2020. S&P also notes the proactive regulatory oversight and limited potential volatility arising from product risk features, and sees limited growth prospects for the sector in the next three years because of the still-evolving financial literacy of the population.
According to S&P, the Kazakh P/C sector's combined ratio should not exceed 95% in 2021-2023. The sector's combined (loss and expense) ratio was 84% in the first five months of 2021, 91% in 2020, and 87% in 2018-2020. The agency expects upward pressure on the loss ratio in the motor segment, due to increasing cost of repairs following local currency depreciation (by 10% in 2020) as a significant share of car spare parts is imported from abroad and forecasts that the average loss ratio may increase to 43%-44% in the next two years from about 41% in 2020 and a 39% three-year average level in 2018-2020.
Among the strengths for P/C sector, S&P noted satisfactory profitability of the sector, supported by both underwriting performance and investment results; diversification of the property/casualty insurance portfolio across various business lines; proactive regulatory approach to limit excessive risk-taking and misconduct of local insurers; relative resilience of the sector to the high country risks. Among the weaknesses - low growth prospects because of still-evolving financial literacy of the Kazakh population; immature financial markets in Kazakhstan that limit investment opportunities for local insurers; less advanced governance standards compared with peers in developed markets.