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It is time to move away from financial dependence

Life insurance companies want to compete with banks in providing for financial needs of population.
It is time to move away from financial dependence

According to the numbers there are interesting events expected in the insurance sector. Life insurance companies (LIC), former outsiders due to the weak demand for their products by the population, suddenly began to press hard property and private insurance companies on insurance Olympus. As of early October, according to the most recent information by the National Bank, three of five largest insurance companies were life insurance companies. Life insurance companies’ assets now hold 28.5% of the total assets of all insurance companies due to a steady growth of collected premiums. As of October 2016 the sale of annuities grew by 36.9%, compulsory industrial-accident insurance policies – by 14.5%, life insurance products - by 20.4%, whereas, the entire insurance market showed a sluggish growth of 6.4%.  A cheerful march of LIC has strengthened their financial positions. As recently as a year ago, there was no LIC in the top three of the largest insurers' assets. Five years ago, in 2012, the only LIC to squeeze in the top ten, took the ninth honorary position. The share of assets of all LIC was 13%. Since then, the assets of the insurance market have increased by 1.7 times, and the assets of LIC – by 4.6 times.

Nevertheless, the renaissance of life insurance companies is more connected with technical issues, with growth of policy cost in particular. A full-scale development of the trade is held by the system causes; their elimination will speed up entry of insurance products and will give the population an option to choose various sources of individual financial packages. Against the backdrop of a new peak in banking sector unsteadiness, license revocations and negotiations with bank shareholders, it is time not only to save old financial institutions, but also think of developing new ones. Deputy Chairman of the Board of JSC "Insurance Payments Guarantee Fund" (FGSM) Yerzhan Konurbayev told how to do that.  

- It is widely stated in the professional environment that the current setting of the voluntary personal insurance has exhausted itself and new drivers of growth should be sought. In your opinion, what needs to be changed?

- Let's start with the fact that life insurance is a rather complicated product. This is not a deposit well-known by the public. People have a weak perception about the product. Although, we all recall that in the Soviet Union, almost every employee used to have a cumulative policy with a specific consumer purpose: child’s full age, education, or wedding. Why did people buy this type of insurance? Because it was stable, inflation rate for general goods was low. If luxury goods were becoming more expensive, bread and milk remained at stable prices. People were interested in saving this way, and they employed this service. Another important point that stimulates savings insurance of Soviet citizens is attractive rates. The rate of return on the Gosstrakh (governmental organization) policies was 2%; the rate on the bank deposit also did not exceed 2%. The insurance product was competitive.

Today insurance is so heavily regulated that no more than 6% annually can be officially given on the insurance deposit, even nominal ones. According to regulatory documents, life insurance companies are required to discount their cash flows no higher than 6%. When the bank rates on deposits are 10-12% and banks react flexibly on money value, raising or lowering rates, you will agree that interest in endowment insurance would be low. If the insurance rate (even nominal) were at least as close as possible to the banking rate, let’s say, 8-9% per annum, the demand for it would be higher in current conditions. Of course, this is a systemic issue, and it is necessary to mention other factors as immaturity of stock market (lack of financial instruments), and lack of people’s incentive to take care of their own well-being and fortune.

- In the Soviet period, endowment insurance allowed to save for various needs. Now the function of money saving and granting moved to banks that give you a cash loan for any purpose. Why save for years, when there are banks? As a result, the population is over-indebted not interested in other financial products. It is time to change consumer culture in personal finance management...

- The idea is correct, but you need to understand the purpose of one or another personal funding. Banking products are, in fact, short-term products, and an individual needs to plan his life and understand how he can finance his vital events.

If he has any money and he understands that it will be useful for him in a year or two, he goes to the bank to open a deposit. But if he needs to save for a certain period or event, only life insurance can be of help. The problem is that a person does not turn to an insurance company; he turns to a bank and gets into debts.

- Everyone wants money quickly and at once, and the banks give what they are asked for...

- In that case, we are encouraging financial dependence. We need to educate people, how to manage income rationally and send at least ten percent of their income to savings, as it is used everywhere in the world. It is not much. Such percentage will not dramatically affect the budget.

It has long been known that life insurance companies are the suppliers of long money in the economy. The bank funding is short, three-five years maximum. If a depositor has the right to come at any time and withdraw his deposit without any losses and penalties, why do we require banks to finance the construction of a plant that will return on investment in twenty years on condition of stable sales market? We need to clearly understand what we need banks, life insurance companies, pension fund and securities market for. All of them serve the economy, but the money of each of them is for different purposes. Banks give short money. Life insurance companies and pension funds are suppliers of long, cheap money. The securities market serves all, giving out shares and bonds, and redistributes capital.

My strongest belief is that we need to target life insurance companies to cooperate with pension assets. Let me remind you that earlier the securities market legislation presented such an opportunity to life insurance companies. The rate was removed for no good reasons and in spite of international experience.

Insurance companies, however, still manage the assets of their customers in the form of accumulative products and are able to manage their pension money. It is necessary to legislate again the right of life insurance companies to manage clients’ portfolios, including pension savings, as part of the regulator's work to revive competition in the pension asset management market.

There is another suggestion, how to make life insurance more popular. Why do not we have an alternative to the pension fund? Why do we send mandatory pension contributions exclusively to the pension fund? Let's give our citizens the right to choose: either to deduct money to the pension fund, or buy life insurance for those ten percent (or at least part of it) withheld from the salary. After all, we have repeatedly been convinced that the lack of competition is the main source and cause of inefficient management.

Life insurance policy is an accumulation and social guarantee that protects against loss of a family provider, serious illnesses, and disability. A baby is born, and a policy for his majority ages is bought. Then the money is saved for his education and wedding. When a specialist comes to work, he buys a policy for his children, saves up for his senior age. There is no dependency. In western countries, a life insurance company accompanies a person from birth to death, like a family doctor. There should be specific financial saving boxes. And there must be help from the state. Why does the state date the bank's loan interest rate? Why should not the practice be extended to insurance companies? They can also issue educational policies like educational loans. The same scheme can be applied with to the pension system. There is no competition in the pension market; the state fund has shown itself to disadvantage. Let's renew the competition in the pension sector and encourage it in every possible way, and the financial market in general.

-The draft on securities market law, developed by the National Bank, enables private asset management companies to manage part of the mandatory pension savings...

- What new can this scheme offer? We are stepping on the old rake again. Let's open the pension market and let insurers in. They are no worse than asset managing brokers, and sometimes even better, because they manage their own assets, comparable to the level of medium-sized banks. There will be more live competition.

- Insurers complain about arbitration on life insurance with the Russian Federation. What is the eye of the problem?

- Arbitration mostly takes place in taxes when buying a universal insurance policy. The Russian client, buying a policy in Russia, receives a number of advantages over our client, including tax benefits. Life insurance payments are not subject to income tax. Besides, since 2015, a client receives tax deduction from a premium not exceeding, to my knowledge, 120 thousand rubles a year.

In fact, it is more lucrative to buy a life insurance policy in Russia than in Kazakhstan. If a common financial market is finally set, it is most likely our citizens will buy Russian savings insurance policies.

- The common market is still in future...

- Nobody can forbid buying such a policy right away under certain conditions, for example, going abroad for education or work.

- Who is going to cover the risks?

- Back to the topic of reconfiguring the life insurance market, what should be corrected first?

- First of all, we need to adjust the regulation. The regulator should realize that it is the insurance companies’ reserves that should be regulated, and not sales. Now the opposite is happening. The limits on reserves and sales of insurance products are being set to the insurance companies. In particular, the transfer of the corporate insurance database to the national credit bureau actually means the penetration of the regulator into the operational activities of insurance companies.

I would specifically like to emphasize that the revision of supervision does not at all mean its absolute weakening, but only its differentiation, when to each product (type - insurance class) its regulatory requirements are presented, though we can also think about its liberalization. We have common templates, because of which the products that require flexibility, stay intact. This applies both to the classic product of life insurance, and to products with participation of the insured in investment income, investment life insurance. Products are tightly regulated and become non-competitive with regard to deposits, for instance. The second serious problem is the general lack of financial instruments.

- What kind of solution do you see to the problem?

- Long papers with real profitability should appear. It is possible, for example, to revive the good experience of issuing long-term bonds by the Ministry of Finance with reference of profitability to the current inflation - the long gone MEUJKAMs. Now there are no such saving tools. And, moreover, life insurance companies should be granted access to government securities auctions, so they do not pay commission to banks that have exclusive rights to auctions.

- If the barriers stay, what will tomorrow bring to life insurance?

- The market will stagnate and live exclusively at the expense of a compulsory insurance of the employee against industrial accidents, as well as bank insurance, when banks insure the lives of their borrowers. There will be no growth in the industry that would allow Kazakhstan to occupy a worthy place among the most developed and competitive countries of the world in terms of penetration of life insurance. Even pension annuities do not develop. Their volumes are far from what was expected and were several years ago, before the adoption of new standards that increased the age and the amount of pension savings sufficient to purchase a pension annuity.

- There are seven life insurance companies at the moment. Is it the optimal number?

- The question on the necessary number of companies is not quite correct. If the companies decided for themselves that they have a normal profitability, then the number of companies is optimal. If someone found the income unacceptable and left the market, it's normal too. When the market is receptive and competitive, and shareholders have put forward their demand for margin, why not work? This is a market and evolutionary issue, and I think that all arguments on the adequacy or excessiveness of companies on the market are simply unprofessional and incompetent to business.

- The bill on introducing amendments to the insurance legislation submitted by the National Bank to the Parliament intends to improve the positions of life insurance companies and necessarily cover them with the guarantee system. It is assumed that companies will have access to a financial cushion that will increase the loyalty of potential insurers, because their money will be protected, i.e. guaranteed by the guarantee fund. How will this guarantee system be organized?

- In fact, your question should not be addressed to Investment Payment Guarantee Fund (IPGF), but to those who want to introduce the guarantee. So far, we do not see concrete proposals and a clear mechanism in the bill, how the guarantee system of life insurance companies will be built. There are grandfather provisions and blurry formulations. Practice proves that if the law lacks a detailed mechanism on how the idea will be implemented, any positive initiative ends up badly for the market and people. The bill does not yet provide answers to questions of what we guarantee, how we guarantee and for how much. I would like to remind you that at the end of 2000s life insurance companies were already a part of IPGF. However, due to lack of a guarantee mechanism, the obligation was canceled. Unfortunately, we replicate the sad experience.

- Do you think it is easier to attach guarantees of life insurance companies to the Kazakhstan Deposit Insurance Fund (KDIF)?

- The idea seems quite sensible to us. The truth is that in the world practice the guarantee fund for general insurance companies is the motor bureau, as all such companies are in motor insurance. The idea of ​​creating a motor bureau on the basis of IPGF is quite relevant. Guarantee funds for life insurance companies are separate organizations. The fund’s capital should be substantial, as life insurance companies operate with significant reserves that are being accumulated for years.

Taking into account that the insurance market is already saturated in such classes as Mandatory Insurance of Civil Liability of Motor Vehicle Owners and Motor Hull Insurance the IPGF reserves are stable, and they are gradually approaching the maximum values. The reserves of life insurance companies will be growing: their contracts are long, and that is their specificity, the market in general is growing. They need another model of guarantee, which is not just there yet.

Besides, IPGF cannot provide the transfer of the life insurance portfolio in full. This is a difficult task. In our opinion, it would be optimal to only guarantee the payments under long contracts, and the portfolios are transferred from company to company with the remaining assets. IPGF in case of shortage will not be able to grant their transfer in full. Now one of the norms in the bill is a guarantee of the portfolio, and we disagree with that, as, in this case the contributions of guarantee participants are becoming absolutely unaffordable. Furthermore, a purchase of pension annuity contract is not mandatory in Kazakhstan, so its relevance is questionable.

It should also be noted that KDIF that guarantees deposits of individuals, is a 100% state-owned institution (100% subsidiary of the National Bank). So, the National Bank, being an initiator of these amendments, can become the main sponsor (shareholder) of the new guarantee system for life insurance companies either by allocating significant funds for establishing a separate guarantee fund, or by increasing the KDIF capital? Why should a private foundation do that?

- Does IPGF have to cover the risks by the general insurance companies' money in case the life insurance companies go bankrupt?

- Of course. The fund capital is joined, although the guarantee reserves are divided into general and life insurance.

In my opinion, the capital should be separated as well, and, of course, it is necessary to have a separate legal entity, since IPGF has slightly different development plans not suitable for life insurance companies. A good example is IPGF, when it was created by the National Bank with its own money, and when the funding became smooth and stable, the regulator left the fund by selling shares to insurance companies.

Tatyana Batischeva


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