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How the life insurance market is developing and what changes await insurance companies and consumers in 2023

Mariya Khadzhiyeva, the Board Deputy Chairman of the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market, told how the insurance market was developing and what legislative changes were expected by insurance companies and consumers in 2023.
How the life insurance market is developing and what changes await insurance companies and consumers in 2023

- The last two years have been very difficult for the national economy. How is the insurance sector experiencing the high turbulence of recent years?

- When it comes to dynamics, over the past three years, the life insurance industry has been ahead of general insurance in terms of development. The volume of life insurance premiums has grown by 2.2 times and amounted to 237 billion tenge. The rise of the life insurance industry is, among other things, due to the measures taken to introduce tax incentives on individual income tax for policyholders, reduce the cost of retirement annuity by 40%, and introduce a deferred retirement annuity. However, there is a drop in premiums on retirement annuities by 58.5% in 2022, compared to the previous year. This is due to the possibility of using pension money for medical treatment and the purchase of housing.

The structure of reinsurance of accepted risks has changed significantly this year. Insurers began to reinsure more risks within Kazakhstan. The volume of insurance premiums reinsured within the country raised by 1.7 times. Incoming reinsurance from non-residents increased by 23.7%. All this testifies to the growing confidence in the Kazakhstani insurance market and the raised market capacity.

27 insurance organizations operate in the insurance market today, 9 of which are life insurance companies. Over the past three years, the market structure has not undergone significant changes. The main trends were the entry of new life insurance companies and consolidation of general insurance companies.

- Insurance organizations are major institutional investors in the domestic stock market. Considering the volatility of the stock markets observed since the year beginning, how are insurers coping with their obligations to customers? What measures is the regulator taking to control risks and ensure the sector sustainability?

- Insurance companies are controlled market entities. They are subject to prudential regulation, which determines the level of their financial stability and solvency. The insurers’ investment portfolio is well diversified. The share of financial instruments denominated in foreign currency is 20% of the total investment portfolio.

The risks associated with both investment activities and reinsurance have been realized during this year. The raise of base rate by the National Bank of the Republic of Kazakhstan and withdrawal of ratings from Russian issuers required a revaluation of financial instruments in the insurers’ portfolios. The rating downgrade of international credit reinsurers in Russia led to severization of risk-weighting requirements when calculating the solvency margin of Kazakhstani insurance companies.

In order to maintain the financial stability of the sector, the agency 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 the current year.

In 2022, for the first time, insurers took an independent risk assessment guided by the agency's methodology, which was developed on the basis of the international Insurance Regulatory Information System (IRIS). The internal system of risk-based supervision Supervisory Risk Evaluation System (SRES) was improved, on the basis of which the level of supervisory attention in relation to insurance companies was determined. Together, these tools allow the regulator to make a comprehensive assessment of the insurer's external and internal risks and take preventive measures to reduce them.

- Should the sector expect any global regulation reforms in the near future?

- The Agency is planning to improve the current stress testing model. To determine the 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. Along with that, additional scenarios that assess the risks of suspending the collection of insurance premiums, increasing the reserve for non-occurring losses, terminating insurance (reinsurance) contracts, late payment by the reinsurer, etc. will be developed. The draft regulatory document is currently being discussed with market participants.

Effective January 1, 2023, IFRS 17 Insurance Contracts comes into effect. This will be a significant challenge for the insurance market, as insurance agreements will need to be accounted for in terms of expected future cash flows, new disclosures and financial statements will need to be presented. To help the market achieve this goal, the agency has developed a "Guidelines for the valuation of insurance liabilities" this year, a recommendation for market participants on implementation of the basic principles of IFRS 17.

The insurance sector must introduce elements of the Solvency II international solvency standard by 2030. Certain work in this direction is being carried out this year. A Roadmap has been developed and a list of indicative risks for implementation of test interim calculations of Solvency Capital Requirements has been defined, the work on their assessment has begun. By the end of the year, a comprehensive assessment of the sector's readiness to implement this standard will be carried out and targeted steps to adopt the main elements of the standard into the national legislation will be taken.

- This July, the Head of State signed the Law, which contained amendments to 19 legislative acts only on insurance issues. How will the game rules change for insurers and their customers?

- The conditions for the emergence of new socially-oriented insurance products have been legislatively created. For the first time, an educational funded insurance product with a state subsidy appeared on the insurance market. It allows save up for child’s education and, in the event of the parent’s demise or loss of working ability, guarantees the full payment of education cost, regardless of the accumulated amount.

Availability of retirement annuities was increased. Deferred retirement annuity was introduced in 2021, which made 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 (marriage) retirement annuities by pooling the pension savings of spouses to provide lifetime payments to both of them.

Besides, people who entered into a retirement annuity agreement got the opportunity to change the contract terms and return part of the savings to the Unified Accumulative Pension Fund for subsequent use for medical treatment and the purchase of housing.

The active digitalization of the insurance industry continues. It will not only increase the availability of insurance services for consumers but also make the insurance market more transparent.

In order to protect the rights of policyholders, the infrastructure providing guarantees of payments and settlement of disputes has been reformed. Thus, the insured are provided with a full guarantee by Insurance Payments Guarantee Fund on all mandatory and socially significant classes of insurance, including retirement annuities and life insurance contracts under the State Educational Savings System. Besides, the mandatory pre-trial settlement of disagreements between clients and the insurance company by the insurance ombudsman is provided for. All disputes, the participants of which are individuals, small and medium-sized businesses, will be reviewed by the ombudsman in a mandatory manner, and only in case of disagreement with his decision, the consumer will go to court. These measures will increase insurance coverage and heighten the interest of people and business in insurance.

Photos are from open sources.

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