Life insurance was a real breakthrough of 2018 in the Kazakhstan market. Annual sales in amount of 2 billion tenge have suddenly pulled up to 4.6 billion tenge. A significant share of premiums belongs to bank insurance, of course, when STBs insure the life and health of borrowers. Nevertheless, the LICs have established a full-fledged sale of accumulative life insurance, the basic product for foreign markets, which indicates that this direction has taken a big step forward.
Endowment combines life insurance with a capital saving scheme and is considered an alternative to a deposit. Nomad Life, the largest non-banking and most profitable player in domestic life insurance, was one of the first to offer a product with a link to guaranteed dollar yield. Kairat Chegebayev, the Board Chairman of LIC Nomad Life, explains Forbes Kazakhstan why people’s money goes to endowment insurance and how players intend to further develop the product line.
The fees increased by 2 times in 2018, what is the reason for this surge?
- Term improvement and simplification of taxation. Earlier, the insurance premiums under universal life insurance contracts were deductible and taxed upon payment to the client. This deferred tax often led to double taxation. Together with the regulator, the players have worked through this problematic issue, and as a result, life insurance products have been equated with bank deposits. Now the life insurance premiums are not taxed.
In my opinion, the full-scale development of life insurance in Kazakhstan is not yet visible. The explosive growth of premiums does not mean anything in comparison with the scale of the deposit base and pension savings, those industries which it is right to compare the life insurance market with. The LICs do not yet invest in promotion, and the average citizen knows only one saving product, the deposit, for promotion of which banks spent a lot of money. Meanwhile, LICs are universally recognized worldwide and one of the most stable financial institutions. Our companies need to start industry-specific marketing activities clarifying general conditions of the products.
What part of endowment is more important, investment or insurance?
- They complement each other. There is an investment component, traditionally the largest part of the product, and there is life insurance. When something happens to the insured person during the saving period, the insurance part is triggered. If nothing happens to the policyholder, the saving component is used and the clients get their savings.
However, there is a world trend when the insurance cover is shrinking and the focus is increasingly shifting to the investment part of the product. For example, unit linked, a product common in developed countries, is nothing more than an investment in an insurance cover, which sometimes takes 1%, although this is far from being the case everywhere. Unlike endowment with guaranteed profitability, where the investment strategy is usually conservative and tied to bonds with a high rating, unit linked allows customers to choose the strategy themselves and be free from the conservatism of insurance companies. Money is piled into investment funds (for instance, with a focus on investment indices), the number and variety of strategies is great. The customer’s risks are higher, as well as expectations on non-guaranteed returns. But we have not yet introduced such a product.
- For its full launch, it is necessary to finalize the legislation. For us, however, unit linked is very important and convenient as client determines his own investment risks and uses the legal preferences of the products of insurance companies.
Let us talk about the Nomad Gold product. It is a saving program with a profitability guarantee. What income percentage do you guarantee and from which investments?
- We guarantee up to 3.41% of investment income in foreign currency. The company's strategy is rather conservative; we buy eurobonds not necessarily by Kazakhstani emitents. We evaluate the financial situation of emitents on continuous basis. The average term of contracts is about four-five years.
How does it sell?
- The product was launched in Spring, 2018, but fully began to sell in Fall. People have invested about 12 billion tenge in it.
Reduction of deposit rates encourage people to withdraw money from bank deposits. Do you observe an influx of at least a portion of these funds into endowment products?
- Yes. According to Nomad Gold, we see that the attraction is higher than the average for banks on foreign currency deposits. But if you look at the total amount of the outflow from banks, it is clear that people withdraw more. Most likely, they look at the stock market as well. The most active capital owners go there: they want to take risks and assume they can earn money, but at the same time forget about the increased volatility and overheating of international stock markets. In our opinion, this is extremely risky. As part of Nomad Gold, we focus on conservative customers. For active investors, we want to launch a unit linked product, which involves attracting the best international managers.
You have begun to work with banks, what attracts you to this promotion channel?
- We chose banks for the simple reason that all our potential customers are clients of banks seeking alternative sources of investment. The bank employees have experience working with financial products, and all this is convenient for the client.
What is the bank’s interest in selling your product? You are competitors after all.
- We are by no means competitors. Banks around the world are becoming financial supermarkets, and the most successful of them have outgrown the concept of “bank” being financial planning consultants for the client and giving them the opportunity to earn money. If the bank does not have an alternative to give to the customer, it will lose him. As a rule, the client does not always possess the necessary knowledge, and the bank as a professional participant and investment specialist by analyzing all the proposals, has to share relevant information with customers, they appreciate it.
Can endowment be sold online?
- We are not ready to offer endowment online: it is a complicated product that cannot be bought in one click. The average investment in Nomad Gold is about $30-50 thousand (although you can invest from $1,000 as well), and it seems unreasonable to ask the client to fill in the data online and send money to the LIC by online transfer. It is a full-service VIP product, and only well-trained managers who can fully explain its benefits and features sell it. We don’t want people who do not understand it come to the product: it is very important for us that the client stays with us.
Does this mean that LICs do not need a digital ecosystem?
- No, it does not. We still need a qualified specialist participation in saving programs and explanation the product terms and features to the client at the initial stage. The ecosystem is becoming needed with the introduction of unit linked products. The LIC task is to study the best investment proposals and management companies. We will come to what banks are doing now: when a client, sitting in the application, can change investment preferences, transfer money from deposit to deposit, from one currency to another, etc. He will be able to automatically transfer money from one fund to another, change the proportions of insurance and investment parts. A very serious automation is required here.
We already use the digital ecosystem, but in the post-sales period of contract administration: the so-called client cabinet reminds them of upcoming payments, it allows him to quickly and conveniently get the necessary information, make changes in his insurance saving program.
LICs have been wanting to participate in the retirement asset management for a long time, but in the latest version of the pension management reformation concept they were not found...
- The reform, an initial part of which involves the transfer of asset management to the PAMC, is planned. We are talking about the fact that LICs have always been present in the pension market of Kazakhstan and are now the most prepared and stable financial institutions for the retirement system. For example, we already have experience indexing liabilities and payments on the inflation rate, on fixed rates (pensions received from the LICs are indexed 5% annually).
It is assumed that PAMCs will give customers the opportunity to choose an investment strategy that involves variable returns from investment results. However, LICs can offer a guaranteed rate through a deferred retirement annuity instrument, which implies the indexation of lifetime payments and is a criterion for the sufficiency of the client's pension savings. If PAMC and LIC line up, the client will have a choice. Don’t you think the system and client will benefit from the symbiosis of PAMC and LIC?
Within the retirement system framework, the LICs can offer unit linked, if the client wants a narrow investment strategy, whereas PAMCs have several basic strategies.
With unit linked, we can offer retirement plans in the broad sense, where one of the parts has a variable profitability and the other one - guaranteed. The client can choose the proportions of the instrument: either conservative strategies, for example, investment in bonds with a high rating, or a larger percentage of shares. This is a flexible solution for the system.
What is the difference between a life retirement annuity and deferred annuity, and how will unit linked work in the pension system?
- A classic retirement annuity is bought upon reaching a certain age and necessary amount of money in the account. Today, for example, women need to reach the age of 51 and save 13.7 million tenge, for men, the corresponding age is 55 and the amount is 10 million tenge. We propose the introduction of a so-called deferred retirement annuity, when, regardless age, a person with sufficient savings can conclude an agreement with LIC and get a guaranteed rate of return, as well as future payment annual indexation. Working citizens whose retirement period will come after a certain time can buy a deferred annuity as part of the retirement plan.
As for investing in unit linked, we say that a deferred retirement annuity is a criterion for the adequacy of savings. If accumulated contributions are sufficient for a life-long retirement annuity, the investor can direct the surplus of these funds to the risk part, unit linked, that is, the client has already secured a lifetime pension (deferred annuity), but is still working and can afford to direct money to risky investments.
Thus, we propose to remove the age concept for the life annuity purchase from the law, and also make the presence of a deferred annuity as a sufficiency criterion for investments in the stock market, including unit linked. This approach ideally fits into the scheme for which the current pension reform was conceived. Besides, the guarantee system for insurance payments from the LICs is already working.
What else the LICs are concerned about?
- Unfortunately, few people ask what happens to the financial market after Kazakhstan joins the WTO. Some experts say that foreigners will not come to us, that they have already been here, and have left irrevocably and nothing threatens our market. However, to my mind, foreign companies were in general insurance with a quite competitive market with many players and a low business margin requiring serious efforts. The LIC business is completely different. With open borders large European life insurers with endowment insurance and a high rate of return, which is not difficult for them, will come to the country. There is a risk that a significant part of the deposits will immediately leak there. If there are no worthy offers for customers in the local market, the country will face the problem of a significant outflow from banks, that is, it is not only and not so much the problem of life insurers.
Therefore, we focus on development issues, and we need the assistance of state bodies. If we do not manage to launch unit linked by the start of markets for the WTO, then it may be too late.
We are concerned about presence of tax incentives for LIC clients in Russia and the opening of financial markets within the EAEU; this puts Kazakhstan insurance companies in a non-competitive position.
The state historically often pays attention to the banking industry because of its size and impact on the country's GDP, therefore it is trying to solve banking problems, while we ask to pay attention to those industries that have greater development potential, and the LICs are beyond competition. I would like to note that the state represented by the National Bank has very qualified specialists who have accumulated by now a great deal of experience in the financial sector including non-standard products, know foreign practice. Therefore, taking into account the foregoing, we hope that the process will advance much more actively.
Don’t you think that customers will turn to more reliable and experienced, in their opinion, LICs than yours if unit-linked is launched?
- The answer is that in this case the client will have a choice where to go. And the insurance company rating will not be so critical, since the client’s funds will belong to him and will be accounted for separately from the funds of the insurance company. We realize that we can lose the start. But these are different things: either we lose because we have nothing to offer, or we offer our customers a finished product and, having a great presence in the local market, we have the opportunity to further realize our advantages.
Of course, the entry of foreign players is also an opportunity for us, we will be able to adopt their technology, service, etc. With the unit linked launch the Kazakhstani LICs will be also able to offer clients foreign managers’ funds. It will not be so important for the client if the operator is a local or foreign LIC, because in any case, money is invested in foreign markets as well. Besides, from the perspective of local market knowledge and presence in the regions, we sell not only unit linked, but also retirement annuities, CAI, so it will be beneficial for foreign LICs and management companies to cooperate with local players.