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S&P: LICs are on the rise

Thanks to changes in legislation, the life insurance companies (LICs) can significantly expand the range of their services this year. Thus, in particular, the age of potential clients for concluding a deferred retirement annuity agreement was reduced, and so was the amount of savings sufficient to conclude a deferred annuity retirement agreement.
S&P: LICs are on the rise

The actual amendments expanded the age range for those citizens who would like to conclude a retirement annuity agreement. Yekaterina TOLSTOVA, the Deputy Director of the Financial Institutions Group, S&P Global Ratings, told DK whether the market was ready for changes.

- Yekaterina, what was the last year for life insurers?

- S&P Global Ratings continues to be positive about the growth prospects for the life insurance sector in 2021 supported by a number of regulatory initiatives and increase in insurance premiums from a low base over the past few years.

We observed that life insurance companies in Kazakhstan performed well in 2020 despite restrictive measures due to the spread of coronavirus infection and volatility in financial markets. The increase in premiums of LICs is about 16%, which is in the baseline scenario of S&P Global Ratings and higher than the indicators of general insurance companies in Kazakhstan.

Despite the restrictive measures and general economic situation, LICs demonstrated a sustainable performance. Return on equity (ROE) and return on assets (ROA) were about 39% and 7% in 2020, respectively. This is above the average ROA and ROE of life insurance companies over the past three years of 30% and 3.4%, respectively.

The financial results of LICs were formed by insurance and investment activities, including the positive foreign currency revaluation of financial instruments denominated in foreign currencies.

We expect the double-digit premium growth trend (over 15%) to continue in 2021 due to regulatory changes, including those related to legislative amendments on retirement annuities, already introduced tax benefits for the insured, improving the macroeconomic situation, increasing the purchasing power of individuals and the revival of economic activity.

- How will the amendments concerning the retirement annuity affect the life insurance market of the Republic of Kazakhstan?

- We think these amendments will allow insurance companies to expand their client base and increase the volume of signed insurance premiums. In 2020, they showed a positive trend in retirement annuities that increased by 9% proving the sector's growth potential in the future.

- How will the life insurance market change?

- We expect the largest players to maintain their positions in the market. The three largest companies made 70% of the market in 2020, compared with 72% in 2019. However, we expect that the concentration on the three largest players will decline in the medium term, as companies outside the top 3 will continue to increase their share in the life insurance market by strengthening their positions, market recognition and attracting new customers.

We believe, due to a number of factors the life insurance market has growth potential. First, the insurance service penetration remains rather low (less than 1% of GDP). Secondly, many insurance companies carry out activities to raise public awareness of insurance products, including life insurance, which increases interest in this type of insurance.

Another positive factor for life insurance companies in 2020 was the transfer of household assets to life insurance products rather than bank deposits, due to the higher investment return of such instruments. This is especially true for insurance products denominated in US dollars.

Due to underdeveloped domestic capital market in Kazakhstan, insurance companies invest predominantly in quasi-government and sovereign bonds in order to ensure sufficient diversification of assets and a conservative investment portfolio profile in general. However, local financial markets less developed than in Europe, constrain the life insurance sector's ability to manage mismatches of assets and liabilities by currency type, allocate capital efficiently and provide access to long-term sources of investment other than government debt and deposits. Thereby, this factor remains one of the main opportunities for future market development.

The situation for life insurance companies remains more favorable than for general insurance companies. S&P Global Ratings believes that the majority of Kazakhstani insurance companies rated by the agency are well positioned to weather the impact of the COVID-19 pandemic, thanks to their capital and liquidity reserves.


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