Kazakhstan has yet to go through this stage, but so far the share of premiums in this segment is only 38%. However, double-digit growth has been recorded here over the past three years. Such dynamics is inherent in many developing countries, where regulatory initiatives and the macroeconomic environment influence the further sector development. According to the regulator, the assets of Kazakhstani life insurance companies in 2019 increased by 33% and insurance premiums - by 55.7% reaching 438.6 billion and 197.2 billion tenge, respectively.
The penetration level is still low
However, the level of penetration of insurance services in Kazakhstan is low, which indicates growth potential against the background of measures taken by the regulatory body to stimulate the further development of the life insurance sector and increase public awareness of insurance products. In 2019, the share of gross insurance premium in the GDP of Kazakhstan amounted to about 0.2% compared to 0.5% in Russia. We expect this sector to rapidly grow in three following segments: life insurance, annuity insurance, and compulsory employee accident insurance.
Reduction of rates on deposit products supports endowment life insurance growth. For example: the rate of foreign currency deposits does not exceed 2%, while insurance companies offer a higher rate of return of about 3-4%. However, the question of how long insurance companies will be able to maintain this level of profitability arises.
At the current level of interest rates (in many countries they are negative) in Europe, it is difficult for insurance companies to guarantee a high level of profitability, therefore, the companies are trying to refocus customers on other products.
The sector profitability indicators in Kazakhstan are less sensitive to interest rate volatility than in some European countries, mainly due to the still developing business structure of companies. The situation with low interest rates is not yet relevant, and life insurance companies can guarantee acceptable returns. According to our forecast, the profitability of accumulative products with a foreign currency component will be decreasing over time.
Further development of life insurance in Kazakhstan is highly likely to be associated with the local stock market development, financial literacy increase, growth of household savings rates, as well as openness of basic insurance products and further improvement of insurance sector transparency.
Though in 2018 the number of life insurance companies in Kazakhstan decreased to six due to the merger of two large LICs, in 2019 and 2020 we are noticing the interest of new participants in this market segment. There are currently nine life insurance companies in the market formed by industrial and financial groups. We expect competition to grow in the future, but this will not cause significant changes in the group of major players in the life insurance sector in the next 12 months. At year-end 2019, the concentration reached high values: three main participants formed more than 80% of the life insurance market. And we expect that the level of concentration will stay high.
Large companies have advantages in selling insurance products due to corporate chain of insurance agents, fairly well-known brands that are trusted by customers, established banking sales channel, or servicing certain groups of clients. New players will need time to promote their brand and increase brand awareness in these conditions. The presence of large shareholders may allow insurance companies to get access to the client base, as well as offer competitive products in the market. We expect large companies to play a decisive role in promoting new insurance products and offering them to consumers, as well as setting the tone in the interaction of the insurance community with the regulator and policyholders in the coming year.
Potential and Risks
Life insurance companies are the largest institutional investors in developed countries, while in Kazakhstan these players will need time to gain such positions. This is due to the fact that the less developed Kazakhstani capital market limits the life insurance sector and, as a result, the investment opportunities of LICs. This includes managing assets and liabilities by maturity, controlling currency risks, efficiently distributing capital and providing access to long-term sources of investment. In this regard, insurance companies invest mainly in government and quasi-government bonds in order to ensure sufficient diversification of assets and a generally conservative investment portfolio profile.
However, we note the exposure of insurance companies to foreign currency risk in connection with the use of instruments denominated in dollars, which may lead to increased risks associated with the mismatch of assets and liabilities by currency type. The Kazakhstani life insurance sector is subject to risks of assets and liabilities mismatch by the terms of asset allocation and settlement of liabilities, but to a lesser extent than European insurers. Large companies in Kazakhstan are taking measures to ensure a zero exposed position in terms. However, we see the risk due to the limited availability of long-term fixed-income instruments in the domestic capital market. This factor remains one of the pressing issues for the future development of the insurance market in Kazakhstan, including unit-linked product introduction.
Life insurance companies traditionally provide the economy with long money stabilizing and stimulating not only the financial market development but also the country’s economy as a whole. In addition, the life insurance market development contributes to the solution of social problems, for example: the inflow of funds into pension programs can provide a higher level of population’s financial stability.
The life insurance market in Kazakhstan is in its infancy showing growth from a very low base. In this regard we believe that there is an opportunity for insurers’ growth in the coming years.
Profitability indices of the Kazakhstani life insurance sector are evaluated by us as strong due to low barriers for new participants to enter the market taking into account the industry dynamics and characteristics of insurance products, which determine the high profitability of companies in this segment. The outlook for life insurance companies’ growth remains favorable amid moderate economic welfare as measured by per capita GDP. In the past 10 years, the Kazakhstani life insurance sector has demonstrated high resistance to adverse macroeconomic factors.
We expect that return on equity (return on equity, ROE) will be above 20%, and return on assets (return on assets, ROA) - about 6%in 2020. For the last three years ROE is below the average being about 30%, but remains high compared to European life insurance companies with ROE and ROA below 10 and 3%, respectively.
S&P Global Ratings expects regulatory measures to stimulate the life insurance sector development in the medium term. The legislative initiatives are the incentives for this area development. This concerns the introduction of tax benefits for insurance policyholders in 2018, the regulator's initiatives for the planned implementation of insurance products with an investment component (unit-linked) and the possible transfer of part of pension management functions to LICs, as well as implementation of state programs to support education. Further population growth and an increase in life expectancy provide very good prospects for life insurance development. The introduction of unit-linked products is likely to be carried out no earlier than 2021, and it will allow insurance companies to expand the range of insurance products.
Photos are from open sources.