The insurance market in Kazakhstan is still developing; the total insurance premiums do not exceed even 1% of GDP. However, life insurance has become the catalyst for the insurance market growth. At the end of 2019, LIC premiums made 38.8%. “The business of life insurance companies today is one of the most attractive for the economy and is able to influence the economy through the same mechanisms: saving of the state budget expenses (in terms of compensation for damage to life and health, for example, at work), impact on the socio-economic field (for example, impact on pension system through annuity insurance) and supporting the economy (through investing in securities of Kazakhstani issuers),” explains Azamat Yerdessov, the Board Chairman of the life insurance company Freedom Finance Life.
Impact on Social Services
Life insurance plays an important social role in the economy. Firstly, it is a well-built system of protection of the insured in case of premature death or disability and additional income for older people upon retirement. “Practically all economic entities of Kazakhstan are covered by the system of compulsory insurance against industrial accidents implemented by the life insurance industry. The number of insured individuals is estimated in millions, and organizations - tens of thousands. It is a very big responsibility for the industry,” says Kairat Chegebayev, the Board Chairman of the life insurance company Nomad Life.
LICs perform a number of social functions of the state. For example, it is insurers who make payments to people who have lost their professional ability to work, as well as to dependents of people who have died in the performance of their labor duties.
“According to foreign experts, a 1% increase in insurance premiums raises GDP by 0.06%, thus, there is a direct long-term relationship between the life insurance market development and economic growth, - says Gulzhan Dzhaksymbetova, the Board Chairman of the life insurance company Centras Kommesk Life. - Moreover, the positive impact on economic growth varies depending on the economic climate in different countries, income level of residents, insurance penetration, as well as regulatory framework, which creates a healthy competitive environment that promotes the industry development as an additional stimulus for economic growth."
Oksana Radchenko, the Board Chairman of Halyk-Life, notes that life insurance for legal entities acts as a financial stabilizer necessary for the development of entrepreneurial structures and industries. “By concluding a life insurance contract for his employees, the entrepreneur has the opportunity to shift some of the risks onto the insurer, thereby allowing him to protect his business from unforeseen losses, to promptly compensate for the damage incurred through insurance compensation,” says Oksana Radchenko. Thus, insurance reduces the expenditure budget and frees the state from spending.
Impact on the individual wealth of Kazakhstanis
Life insurance services are an important tool for ensuring financial and social security of the entire population, as they provide and maintain the achieved standard of living and well-being of an individual and an individual household, through the payment of insurance compensation in case of harm to the life or health of the insured client. “Along with mutual investment funds, a new investment product, Unit Linked, has appeared in Kazakhstan. The client will be offered a choice of several investment portfolios, consisting of assets managed by global investment companies with a worldwide reputation,” explains the Nomad Life executive.
As deposit rates decline in Kazakhstan, the economically active population will start looking for affordable alternatives. In this sense, endowment life insurance products can already offer Kazakhstanis more favorable conditions, for example, on foreign currency deposits. “The tendency of transition of client assets from simple risky products to complex structured investment and insurance products sustains worldwide. Therefore, in developed countries, most of the insurance premiums fall on such life insurance products as endowment and unit-linked. A similar scenario is quite possible in the future 10 years in Kazakhstan," Azamat Yerdessov believes.
Impact on the Stock Market
Along with investment and pension funds and banks the insurance companies are the largest institutional investors. Funds generated from policyholders' money (insurance premiums) allow life insurance companies to have large sums of money at their disposal. It is likely that each individual insured does not have the amount necessary for effective investment, but the money of insurers accumulated by the insurance company becomes a powerful source for investments in the economy. “As of today, there are over 500 billion tenge concentrated in the assets of LICs. The distribution of this money is strictly regulated by a system of prudential standards, which includes 15 indicators that regulate the volume of investments in financial instruments on the stock market,” says Kairat Chegebayev. As a result, the basic principles of LICs’ work on the stock market are liquidity, safety, profitability, and investment decisions are made taking into account the risk analysis of the issuer of the financial instrument, macroeconomic environment and diversification of assets by issuer, industry, country.
LIC will also be interested in Kazakh financial instruments, which in optimal balance will combine reliability and profitability. This factor can become a trigger for the domestic securities market development increasing competition in it and improving the quality of supply, which, of course, cannot be disadvantageous for the state. “Insurers as institutional investors will contribute to the financial market modernization and accumulation of new capital. The advantages for LICs are the accumulation of savings, diversification of risks and effective allocation of financial resources,” emphasizes Gulzhan Dzhaksymbetova.
Cash inflows in the form of insurance premiums and income from active operations typically exceed the annual payments to policyholders. “This allows insurance companies to increase investments in long-term securities with fixed maturities from year to year, mainly in bonds of industrial corporations, government bonds,” says the Board Chairman of Halyk-Lifе.
World Experience
Long-term insurance products have boosted the insurance industry to become the largest institutional investor in Europe. If we turn to the official data, in 2018 more than 30% of all European institutional assets under management were assets of insurance organizations. “Over the past twenty years, traditional financial saving channels such as banks have gradually given way to mutual funds and the insurance industry. It is emphasized though, that countries with developed insurance sector have achieved higher development rates of the stock market,” notes the Nomad Life executive.
The share of insurance premiums in developed countries exceeds 10% of GDP. Taiwan (19%), Hong Kong (17-18%), South Africa (14%), South Korea (13%) and Finland (12%) are leading in terms of this index. However, a significant share of premiums is made by life insurance (endowment and unit-linked products, in particular). “Since bank deposits in developed countries often have a zero interest rate (and in some countries it is even negative), for the economically active population life insurance (for example, unit-linked) is one of the main financial instruments that allow diversifying risks and accumulating capital. Thanks to it, life insurance accounts for up to 70% of all premiums,” they believe in Freedom Finance Life.
