The market and regulator are constantly discussing problematic issues and developing proposals requiring amendments to the legislation on the platform of the Financial Institutions’ Association of Kazakhstan (FIAK). “The regulator came up with an initiative to develop a draft law “On Amendments to Certain Legislative Acts of the Republic of Kazakhstan on the Regulation and Development of the Insurance Market and the Securities Market” but the concept of the bill must first be approved,” explains the FIAK Managing Director Yerlan Burabayev.
According to Burabayev, the concept of the bill is aimed at insurance development in general and creating conditions for expanding the range of insurance products for both individuals and legal entities. However, LICs are given a special attention; it is best to increase the social security of people through their products. LICs can offer not only traditional endowment insurance but also investment plans with insurance coverage, which will contribute to the household income growth.
Therefore, the concept of the draft law finally includes a life insurance product with the participation of the insured in investments (unit-linked), the availability of retirement annuity is expanded by reducing the sufficiency threshold of pension savings for its purchase. It is planned to introduce deferred and joint (spousal) retirement annuities, and involve the LICs in the state educational funded system (GONS).
The LIC representatives have been talking a lot about the need for these products recently. If such instruments appear on the insurance market, the architecture of LICs may change significantly, says Kairat Chegebayev, the Board Chairman of the LIC Nomad Life. “It is hard for me to imagine that one LIC is able to successfully work in all activity areas. Perhaps we will see specialization and orientation towards certain types of activities, Chegebayev predicts.
Although all the products discussed were important to the market, unit-linked was the one to break the lance over. This is an innovative product for Kazakhstan that combines life insurance and investments, and can be claimed as a risky, more marginal investment strategy. So far, the implementation of unit-linked is hindered by a number of restrictions that reduce consumer interest in it. For instance, there are restrictions (no more than 20% of the LIC's net asset value) on the total amount of investments in financial instruments issued by one person. There are administrative difficulties associated with keeping records of units of mutual investment funds (UIFs) after their purchase in the LIC portfolio.
Chegebayev clarifies that LICs together with the regulator have developed amendments to standard regulations in order to empower LICs with the ability to create unit-linked investment portfolios by analogy with mutual funds.
“The first step in expanding the unit-linked possibilities was to make the product as flexible as possible. At the second stage, if LICs are included in the pension reform as managers, it is planned to establish additional requirements for carrying out activities on such a product,” the source adds.
However, unit-linked is unlikely to change the paradigm of the LIC's investment declaration. According to Chegebayev, the bill does not imply the liberalization of investments. A conceptually different approach is proposed within the framework of unit-linked: the choice of investment strategies are left to the client and the funds of the customer and the LIC are kept on separate accounts of the custodian bank, which will make the product as transparent as possible. The insurance company will be responsible for servicing the client, providing him with the most attractive offers.
In Chegebayev's opinion, it is too early to make any predictions on how much premiums will be added by LIC unit-linked. According to the developed markets’ experience, unit-linked fees make in average 40-60% of industry-wide charges. The LIC premiums amounted to almost 200 billion tenge, including 77 billion tenge on life insurance in 2019, so you could imagine the size of turnover.
“We are quite optimistic about this product, but we realize that development will take time, people need to understand and accept the product,” Chegebayev summarizes.
Along with LICs, general insurance companies are also expecting a package of changes. The main positive news is the change in tariffs on Compulsory Legal Liability of vehicle owners, the most common type of insurance. Statistics show that the general loss indicator on legal liability is at an acceptable level, but there is a significant imbalance among regions and groups of policyholders. According to Burabayev, this suggests that some regions subsidize other regions and, in general, it is advisable to switch to greater individualization of tariffs. This means an actual increase in the cost of insurance and, as a result, an increase in the collection of premiums for the market.
Photos are from open sources.