Despite the unfavorable macroeconomic situation in the past year, the life insurance sector continued to develop: the growth of the gross insurance premiums signed was 16%, profit indices were high, return on equity (ROE) was 33%.
“The diversification of insurance products continues to increase, with the sector's exposure to risks related to insurance products that depend on the level of interest rates (for example, insurance products with a guarantee), lower than in European countries. Due to the underdevelopment of the domestic capital market in Kazakhstan, insurance companies invest mainly in quasi-government and sovereign bonds in order to provide a generally fairly conservative investment portfolio,” explained Yekaterina Tolstova, Deputy Director of the Financial Institutions Group of S&P Global Ratings.
The resilience of the life insurance sector to unfavorable macroeconomic situation is noted by S&P, however, it is partly due to the fact that it is developing from a very low base. The level of financial literacy of population is also insufficient, which leads to a low average insurance premium per capita in the life insurance sector, $29 in 2020 compared to an average of $2 thousand in the developed countries of the EMEA region (Europe, Middle East, Africa). This figure is close to the ones of emerging markets, where insurance costs is about $32 per capita in average. “The insurance expenses are low in Kazakhstan. However, there is an upward trend as the regulator introduces new products, for example, new products in the life insurance market. We also see companies' efforts to educate consumers on the terms of new products. Financial literacy is an important factor, enlightening consumers about the point of insurance coverage. This is a long-term factor. It is less noticeable in the general insurance sector at the moment,” said Yekaterina Marushkevich, Deputy Director of the Financial Institutions Group of S&P Global Ratings, expressing her point of view.
The insurers contribute to a significant potential for the sector growth. The regulatory initiatives, however, play a significant role in the market development, which will lead to a gradual increase in household spending on life insurance to almost $47 by 2023. “The legislative changes in annuity insurance have pushed the market for further growth, and we expect that they will have a positive effect on the life insurance market. In four months of 2021, compared to the same period in 2020, the life insurance market grew 1.1 times in terms of premiums primarily thanks to retirement annuities. This suggests that there is interest in these products and it will be supported by both the supply from LICs and demand from the population,” Yekaterina Tolstova shared her thoughts.
According to S&P Global Ratings, the life insurance sector in Kazakhstan is characterized by strong profit indicators due to a low barrier for new participants to enter the market, given the industry dynamics and characteristics of insurance products that determine the high profitability of companies in this segment. “We expect that in 2021-2022 the return on equity (ROE) will average about 20% -25% per year, and the return on assets (ROA) will be about 4-5%, which we estimate as a high indicator in comparison with the indicators of European life insurance companies, - said the Deputy Director of the Financial Institutions Group of S&P. - The industry risk of life insurance sector in Kazakhstan is assessed at the same level as the ones in Italy, South Africa, Uruguay and Oman, where the life insurance sectors are at very different stages of development. However, we are confident about the opportunities for future market growth and profitability indicators in all these countries.”
The decline in bank deposit rates in the past two years has also stimulated some clients to move from deposits with relatively low returns to alternative life insurance products with higher investment returns. This is especially true for the USD-denominated life insurance products that Kazakhstani life insurance companies have been able to offer in this market segment, which has seen rapid growth from a low base in the past three years. We find this situation favorable for the further development of life and retirement insurance. “Exposure to foreign exchange risk associated with the use of instruments denominated in foreign currencies may cause some volatility in operating results and equity ratios. This risk is inherent in both life insurance companies (LICs) and general insurance. We monitor this risk and flag it as one of the factors. Some LICs offer products with a currency component, so it is necessary to look at the product structure of each LIC separately. For example, some LICs offer products with yields of up to 4.5% in US dollars for periods longer than 10-15 years, but such “long” products are purchased by few policyholders. Most clients are insured for a shorter period and, therefore, the return on these product instruments is significantly lower. In this regard, we believe that LICs are able to partially neutralize this risk. It is important to note, however, that most LICs invest most of their portfolios in bonds, including government and quasi-government instruments. The return on this portfolio amounted to about 7.7% in 2020, which we considered to be a fairly high indicator in comparison with developed markets,” said Yekaterina Tolstova.
In conclusion, S&P representatives add that life insurance companies will maintain solvency margins and increase absolute values of equity against the backdrop of projected rapid growth in insurance premiums.
Photos are from open sources.