Universal life insurance (ULI) is expected to be an alternative investment tool along with bank deposits. Insurers believe that the ULI is currently undervalued because the majority of people as well as the bankers does not know about opportunities of this product. It is the banks, which will be able to act as conductors of the ULI to the consumer, loading excess liquidity to this instrument. The authorities and the regulator are reviewing the Act on Insurance Activities, in their turn, which should help this field of industry starting immediately. Kairat Chegebayev, the Chairman of NOMAD LIFE, the leading life insurance company in this field, is telling about it.
- Kairat Sadyrbaevich, what is the current status of the life insurance sector in Kazakhstan?
– In my opinion, the life insurance market has great prospects for development to date. For many years the problems of this sector have been solving very slowly, and only during last year taxation for the universal life insurance has been radically changing, Unit Linked product is being finalized together with the market. I associate progressive changes with both the demand of the market itself and our clients, as well as with the activities of the National Bank of the Republic of Kazakhstan (NB RK), and specifically with the former Director of the Insurance Supervision Department (ISD) of the NB RK, Zh.B. Kurmanov (to date he is the Deputy Chairman of the National Bank of the Republic of Kazakhstan). Currently, the Director of the ISD is also a very experienced leader - G.Zh. Shaikakova, who has great experience both in the insurance market and in the SM; we have high hopes for continued fruitful cooperation.
At the dawn of Kazakhstan's independence, a progressive tax scale was introduced, which established the tax rate depending on income of the individual: the more income, the greater the rate. The ULI allowed a person to transfer his large gains to the period of retirement, when they will be needed most likely, thereby optimizing the taxes. However, there is a unified PIT rate, the existing tax privilege has lost its essence.
- And what is wrong with taxes to date?
– For example, a person has a salary in amount of KZT 100, theoretically speaking, therefore, he shall pay KZT 10 to insurance company upon entering into agreement for the ULI, and the remaining KZT 90 shall be taxed with PIT. The insurance benefit is subject to insurance payment. That means that there is no progressive taxation scale, and all logic is lost. But there are several points occurred, which have been the most problematic. Firstly, accountants do not withhold insurance premium from the base for income tax calculation upon wages payment. Secondly, the client pays for his universal life insurance from the income already imposed by PIT - from bank accounts or from deposits. Accordingly, the funds invested into accumulative savings, are being taxed twice. Another point, which causes the client's wariness, is the likelihood of the tax rate increase in the future.
- What can you say about compulsory and voluntary life insurance development?
– Compulsory insurance is being developed, voluntary insurance - not quite. Why does the voluntary insurance not work? Again, taxes, legislation. Then, I believe, the process is adversely affected by various restrictive rates for bank deposits and accumulative life insurance agreements. Deposits - 11-12% and life insurance - 6%. Of course, restrictions for remuneration are needed, because the period is different, but when there is such a huge imbalance, it's wrong. In Europe such imbalance is almost absent, but such imbalance in our country is almost in 2 times.
- What is the reason of imbalance?
– In Kazakhstan, within the whole period, banks have invested very large funds into promotion of the “deposit” term: outdoor advertising, the mass media and much more. A common man in Kazakhstan assumes that there is nothing else but deposits to date. This is a problem for not only insurance companies, but the entire investment market of the country - we cannot compete with bank deposits yet. Again, banks have an incomparably longer period of formation, not to mention investments into the banking sector. If to cite Europe as an example once again, then the volume of bank deposits is commensurate with the volume of insurance life-products, to a certain extent.
We do not relativize the importance of deposits in any way, but we just note that universal life insurance is one of the financial instruments, which should be used in financial budgeting. The current situation shows that underdevelopment of the ULI and the stock market as a whole has led to the fact that population keeps its savings only on deposits that means all eggs in one basket, which, as it is known, is not entirely correct.
- Which financial instruments at the intersection of insurance and investment you still see the potential in?
– We are very interested in the Unit-linked line, or investment insurance. The client, transferring funds to insurance company, can choose the investment program from the options offered to him by the insurance company. A very decent result can be obtained at the output. By the way, in Russia such line - Unit-linked - is gaining increasing popularity. Operators of these products are insurance companies, and banks serve as sales channels. Credit institutions understand that they cannot provide the required profitability to the client, and they become insurance agents, transferring some of their deposits into universal life insurance. For example, one of Russia's largest banks has insurance programs, whereby clients can invest into various strategies, for example, investing into shares of the leading pharmaceutical companies in Europe (Novartis, Roche, Sanofi, etc.), euro-bonds of large Russian companies, etc. Therefore, insurance companies in Russia have started to carve out a niche in investment markets. We hope that the Kazakhstani regulator will adopt necessary amendments to the laws and regulations (which are now being actively discussed and considered), and we will be able to use the Unit-linked in our proposals fully.
- How soon the insurance market will be able to respond to Unit-linked adoption?
– Soon. We have already been cooperating with the leading Russian companies in this direction; we are being consulted with foreign experts.
- Who should promote the life insurance market?
– We see the source of population literacy increasing in unification of efforts of all participants of this industry. NOMAD LIFE has acted as the initiator of advertising and PR activity arrangement, which will promote life insurance ideas in general, without being tied to a certain brand, but this sector has not been active yet. Similar events have been arranged by Thailand’s insurers. It has been said about the importance of long-term savings, caring for the family, children, loved ones in the commercials and printed materials. The advertising campaign has helped insurance entities to promote their products. To date, the Allianz experts predict a steady increase in the Thailand’s life insurance market at a level of at least 8% per year until 2026, as a minimum.
Such examples are effective not only in the insurance sector. For example, once, aluminum producers have promoted the idea of aluminum cans using for beer via the same advertising campaigns.
It is also necessary to consider ULI programs, for example, within the State Educational Accumulation System (SEAS), when the state annually pays a premium to accumulative savings for children’s education. There was an attempt to introduce SEAS in banks, but it failed, because deposits are short-term, and the essence of the SEAS is long-term accumulation, it is our product.
- Currently, amendments to the Act on Insurance Activities are being considered. What are the expectations from this Act?
– They are positive; the NB RK is really involved in development of such sector. In particular, an electronic insurance policy is considered, the adoption of which has been expected in Kazakhstan. I can say with confidence that online life insurance has a great future: the client “lives” in the Internet, (Internet of things) does not go to the bank (online bank) - his whole life was reduced to a smartphone (digital convergence). These opportunities allow us to reduce significantly the cost of long-term insurance agreements follow-up, speed up the process of the policy issuing.
There will be certain difficulties in introduction of an electronic policy, of course, for example, verification regarding money laundering and terrorist financing (VML/ TF), which is performed within the agreement signing procedure (60 questions to the client, with copies of documents attachment).
Author: Alexander Vorotilov, Deputy Editor-in-Charge of Forbes Kazakhstan