The life insurance industry in the whole world is the insurance market flagship; this segment of the market has demonstrated explosive growth in the last few years in Kazakhstan and neighboring Russia. Erzhan Konurbayev, the Chairman of the board of JSC LIC "Standard Life", told the editorial board of the site allinsurance.kz what caused such a trend.
- Erzhan Erkenovich, what factors do you associate with the growth of life insurance indicators and what underlies in this growth? What products are now the most popular on the market?
- Indeed, we observe the growth of life insurance, but due to the specifics of the National Bank's reporting, we do not see a clear distinction at the expense of which insurance product growth has occurred. From my experience I can say that, most likely, we are talking about two products: bank insurance or loan insurance and voluntary universal life insurance, as both these classes fall into this category according to the submitted reports by the National Bank.
How the growth can be explained? Firstly, the banks are promoting the segment of consumer lending and developing retail, which leads to growth of sales of credit life insurance products. This is a standard product, where the insurance amount is the amount of the loan received and the insurance companies are liable to the bank for payment of the outstanding principal amount in the event of the borrower's death.
As for universal life insurance, the growth is associated with the emerging distrust in bank deposits. Universal life insurance is an insurance product that includes three components: life insurance, investment income and participation in dividends of the company following the results of the financial year. The policies have become more competitive than they were with dividends.
This trend is promoted by the National Bank initiative in the development of voluntary life insurance with the linkage of income to the investment portfolio, the so-called unit linked products. Here a certain block of amendments was submitted to the Parliament and approved.
- What is the main content of the amendments that you mentioned?
- Amendments primarily involve procedural and regulatory issues. One of the key points is how to assess insurance reserves. By unit linked product the risk is divided between the insured and the insurance company. If earlier all the risk to ensure the rate of return was borne by the insurance company, now it will be shared by both the insured and the insurance company.
These amendments will be at the level of normative legal acts. So far, there are general phrases about the possibility of presenting of such products!!!
That is, a guaranteed rate would be 2-3%, everything higher than that would be non-guaranteed. And, accordingly, this will change the approaches to the reserve calculation, which will make the product more flexible and investment. The policyholder will be able to change the structure of the investment portfolio, or transfer the savings from one portfolio to another online, by using mobile applications. The client himself will track and determine the profitability, but at the same time keep insurance coverage.
- Are these the only changes that will affect only the unit linked or anything else being done?
- The law has not been adopted yet, but we hope that the changes will affect taxation, and we expect certain concessions. Previously, it was discussed that there would be a return to the earlier taxation scheme, where the premiums were paid out of income taxed profit, but the payment was not subject to income tax. This would be a good incentive for a start.
The second step is to further reduce the tax burden to strengthen incentives and equalize the taxation conditions with neighboring countries. There is an arbitration concerning taxation here and in Russia already. For instance, in Russia a customer who makes a contribution of 120 thousand rubles a year under the life insurance policy has the right to deduct these contributions for deductions in addition to the absence of taxation on payment. Thus, it turns out that it is more profitable to buy a policy in Russia than in Kazakhstan.
- And what changes have affected the guarantee system in terms of life insurance products?
- With regard to the guarantee system, we return to practice, which was in 2012 with guarantee on annuities for compulsory accident insurance and retirement annuities. The guarantee scheme will slightly change, but, in general, the payment guarantees will remain and their continuity will be guaranteed.
Previously, an insurance portfolio, an insurance premium, was guaranteed. This approach was rather complicated and expensive. In my opinion, it is enough that only the payment is guaranteed. This is the main amendment. Now, life insurance companies will be more actively involved in the work of the guarantee fund. And, most likely, will be represented in the fund management.
Let's talk about guaranteeing and universal life insurance. Very often, customers choose bank deposits, because there are certain guarantees by the deposit guarantee fund. As for the products associated with universal life insurance, they have always raised doubts about the insurers’ reliability, and the obligation fulfillment, in case the insurance company is liquidated. Are you currently considering issues related to the guarantee of universal life insurance?
- We know that in Western Europe and the United States in particular, there are a lot of funds that guarantee voluntary life insurance and this affects the development of the industry, its stability and a leading position. We must admit that we still have an imbalance in the financial market development, as we pay more attention to banks. And we need to pay more attention to life insurance, as this is a more stable business. The crisis showed that with the financial market fall, which we had faced, life insurance did not fall. It stagnated, but there was no fall, the clients of insurance companies did not withdraw money from life insurance savings programs. Life insurance is a very conservative business and therefore less prone to volatility in financial markets. Nevertheless, for the customers’ confidence and the industry stability, it is necessary to provide mechanisms for ensuring guarantees under life insurance contracts and, in general, have a consistent approach the life insurance development.
- And what do you mean by the systematic development of life insurance?
- There should be a chain: systematically means understanding the role of life insurance in the economy, target indexes, target audience, the complete sales cycle development: from signing the policy to placing assets, using life insurance instruments.
Systematically, in my understanding, means that the state would finally make a choice in favor of life insurance companies as long-term investors. In the whole world it is so. As only the life insurance companies have "thirty-year" policies, only the life insurance companies can buy "long" bonds, only the life insurance companies with their financial flows can issue "long" loans to customers. We need a clear understanding of what projects are funded by what financial institutions, as duration of assets should coincide with duration of liabilities. Therefore, if you are lending "long", then your assets should be "long" as well. For example, the mortgage ... How can a bank issue a 20-year loan, when it has funding of a 5 years maximum?
- How can you explain the serious drop in annuity insurance, especially retirement annuities? What is the reason?
- There is overlapping of factors. The first factor is demography. Since the number of retiring people is subject to wave dependence, now we are witnessing a decline in demography, when fewer people retire, which is also due to the gradual increase in the retirement age.
The second factor is the introduction of mandatory indexation of pension payments for those who have a retirement annuity. This by several times raised the price threshold for the pension annuity purchase. Initially, the system was set up so that the pension annuity was not a very expensive tool for securing a lifetime pension. In fact, it was the only instrument which allowed a depositor to convert relatively small money into a lifelong pension. Now this tool has become not generally available, but very expensive, which is not right.
If the government puts forward requirements for indexing pension annuity payments, then it is logical that part of these costs is to be covered by the state, at least in indexation rate subsidizing. We have programs for concessional lending and mortgages, but there are no programs that will make the pension annuity more accessible to the general public by reducing the price threshold?
Indexation, probably, should be. But, then it should be in the pension fund as well. It is not there now, but it exists for retirement annuities. The government should somehow stimulate the development of pension annuities.
- And what incentives could you offer?
- In addition to the requirements for indexation, the pension annuity cost is seriously affected by a low interest rate on investment instruments, which are acquired by life insurers. If we consider measures promoting the availability of pension annuities, then it is possible to offer subsidizing the interest rate on investment instruments plus subsidizing part of the indexed payments for pension annuities.
If, the rate of return on investment instruments is raised at least by 2-3%, it will significantly reduce the price threshold for the retirement annuity purchase. The state can stimulate the retirement annuity sales by subsidizing, since the annuity price will be available to a larger number of the population, and the pension annuity provides a decent life pension. Please keep in mind the fact that the pension annuity makes lifetime payments, while payments from the pension fund are limited to the age of 80.
- You mentioned that life insurers should become institutional investors, but, on the other hand, you say that the state should subsidize retirement annuity system in order to ensure its accessibility. Where is the logic?
- The logic is simple: the state can give instruments that will provide both investment duration and their increased profitability. For example, it could be special long-term bonds, the interest rate for which would be higher by 2-3% and they would be specifically provided for retirement annuities. In this case, the cost of pension annuity would decrease, and the government would receive "long money".
- It is necessary to understand what the long-term development strategy of such a business as life insurance for “long” projects is. Do you know how the regulator and the state are going to develop this market?
- Indeed, in addition to motivation that can work quickly, we need to understand the long-term perspective, that is, where we eventually move and how we plan our business. If supervision changes regulatory norms very often, reacting to the current situation, we will not have a comprehensive vision for the future. This interferes with business.
We need a long-term state strategy for life and annuity insurance development, under which insurers will carry out their long-term planning, since the current planning horizon of 3-5 years does not allow to see the business for 20-30 years ahead.
- Given the WTO prospect and the current state of the life insurance sector, what strategies can be effective?
- Some regulatory norms can be loosened, making the Kazakhstani market more competitive, or not... Taking into account that we are entering the WTO, the main instrument of protection against aggressive foreign investments and non-residents is the creation of a professional SRO, which will establish and control business activity standards in the market. Nothing prevents insurers from creating an SRO, but the self-regulation must first of all be recognized by the regulator. We see future development in that.
It is clear that the regulator has some doubts about the financial stability of the market. But, if you look through the entire previous history of life insurance market in Kazakhstan, how many insurance companies did really go bankrupt? How many clients did really suffer? Not a single client was hurt. All customers, if they were the policyholders of companies that went bankrupt, received payments from the guarantee fund. So with all the anticipation, the guarantee system and transfer of the portfolio of defaulting companies reliably work; and the market can be given some decisions for self-regulation.
"The WTO topic will become a reality in a couple of years. Do you think the number of life insurance players will increase and how will this affect competition?
- I'm pro a healthy competition, and believe the market is ready for it. But the opportunities of our market should be compared with capabilities of those foreign companies that may enter Kazakhstani market. It makes no sense to compare, for example, the GDP of the European Union and Kazakhstan, since our economies are historically different, and clearly we lose. However, the capital requirements for life insurers in the European Union and Kazakhstan are compared, and the main conclusion is that whoever has a bigger pocket is better. They always try to intimidate us with foreign companies’ coming. But, in fact, this is a very great benefit, because, they are not competitors, but, first of, new technologies and experience.
I would like to see the requirements for business by our regulator correlate with the capacity and capabilities of our market; make sure that comparison is not made on absolute values, but rather on measured efficiency, return on capital, and quality of business processes. Evaluation should be based on the criteria that show the business pros and cons. Quantitative parameters should be correlated with our GDP, our income per capita and premiums per capita. When we transfer everything in absolute numbers, we a priori lose. This is a wrong approach.
- In your opinion, what advantages for the companies will create a competitive position in the medium term?
- Regardless of the planning horizon, it will always be focus on customer, flexibility and mobility.
- What do you mean by flexibility and mobility?
- Flexibility is a unit linked product. It must be very flexible, i.e. the client may change the strategy at any time. For example, transfer his savings on the product in any currency, instrument or investment portfolio. Flexibility is an office for every client of any age. Mobility is technology. These are mobile applications, online access, various operations via smartphones, gadgets and so on, i.e. with no intermediary participation, no company office visiting, and so on. We must be prepared for any client's wishes. We need every customer to realize that life insurance is a product for all times and occasions: from birth to death.
- Customer orientation means that the customer is always right. Are you ready to follow this principle?
"The answer is yes, but we must not forget that life insurance is primarily a business; and, like in any business, we always need to balance interests of the triangle "shareholders, client and company". The principle "the customer is always right" is more declarative than practically realistic. The client can be 100 times right but if there is no company, there is no service. The same is with shareholders. Shareholders can be super happy, but customers may not be satisfied. It is also not good. Therefore, we need a balance. It is always a middle ground between the interests of the a client, shareholder and insurance company.
- You have taken a lead of the company recently. What are your plans and prospects?
- I believe we should build our business in a consistent manner, so it can work independently of any person. Every employee should clearly understand his responsibilities, but, at the same time, be universal. This would increase the level of flexibility, mobility and client-orientation; otherwise we will not be able to compete in the market.
I see the task not in building a team, but in building a team spirit.
- What products do you plan to develop, what will you be specializing in?
- We are a universal company. We will sell everything that can be sold. Naturally, we would like the regulator to continue paying special attention to private life insurance, as we see a great potential there.