As it has become known to Lifeinsurance.kz, the regulator is offering the following innovations:
No 1. "The share of the reinsurer in the unearned premium reserve under non-proportional insurance contracts is equal to 0 (zero)";
No 2. "The share of the reinsurer in insurance reserves under contracts or classes of compulsory insurance of civil liability of vehicle owners or voluntary insurance specified in sub-clauses 12), 13), 15-1, 16) of clause 3 of Article 6 of the Law is equal to 0 ( zero)".
Dina Urzhumova, an experienced actuary, CFA and an economist with extensive experience, an independent consultant on economics, finance and actuarial calculations, shared her opinion on the innovations proposed by the regulator. In the early years of the Society of Actuaries of Kazakhstan, she was the Chairman of the Management Board (2001-2005). And from the establishment of the Company to present she has been the Chairman of the Qualification Commission of the Society.
The opinion of Dina Urzhumova (quoted in full):
Critical innovation No 1: "The share of the reinsurer in the unearned premium reserve under non-proportional insurance contracts is equal to 0 (zero)".
For Kazakhstani insurance companies, the new version of the Requirements, in fact, means a ban on non-proportional reinsurance, which involves the transfer of a substantial portion of losses to the reinsurer. The negative consequences of the amendment proposed by the NBK are as follows:
1. A significant reduction in volumes of large insurance risks by Kazakhstani insurance organizations, since non-proportional reinsurance ceases to serve as an instrument for reducing the burden on capital.
2. Obstructing the development of insurance organizations by attracting foreign reinsurers’ experience (note that for a number of major risks in the Kazakhstan market there is no reliable statistics for estimating rates, and insurance is possible only with the involvement of experienced foreign reinsurers).
3. Taking into account Kazakhstan's accession to the WTO, only one or two large local insurance organizations in each industry will remain on the market, and, in general, the market will be controlled by foreign insurers. The profit and assets providing reserves will gradually fly abroad.
The struggle against non-transparent reinsurance schemes practiced in the market should be carried out by clear identification of problems and development of special targeted measures that prevent their use, and not by "uprooting" non-proportional reinsurance as a whole. In practice, the schemes of non-proportional reinsurance are diverse and can be carried out on the terms of the reinsurer priority, for example, with the transfer of the first major line to the reinsurer and own retention of the upper line, within the overall limit of liability under the contract.
Taking into account the new version, the degree of reserve duplication of future (not derived) losses will be higher the lower the retention rate of the cedent is; as the reinsurer share in the unearned premium reserve will be formed twice: by the reinsurer and cedent, no matter how high is the reinsurer rating. This contradicts the generally accepted world practice and undermines the very idea of reinsurance.
The current version, in which the actuary is assessing the reinsurer share in the unearned premium reserve on the basis of the reinsurance model, corresponds with world practice. If necessary, the NBK can add the current regulation with special requirements to the actuarial justification for estimating the reinsurer share in the unearned premium reserve in non-proportional reinsurance, along with the requirements for a minimum rating of reinsurance organizations and introduction of the list of prohibited insurance (reinsurance) organizations-non-residents of the Republic of Kazakhstan.
Critical innovation No 2: "The share of the reinsurer in insurance reserves is equal to 0 (zero): under reinsurance contracts providing for the transfer of all or a part of insurance risks to reinsurance under a contract or classes of compulsory insurance of legal liability of vehicle owners or voluntary insurance specified in sub-clauses 12), 13), 15-1, 16) of clause 3 of Article 6 of the Law, concluded after July 1, 2019".
I believe the change was dictated by the NBK's intention to prevent the use of shady transactions involving banks. However, the inclusion of classes 12 (insurance of civil liability, except for legal liability of vehicle owners) and 16 (insurance against other financial losses) in the list of classes that are in fact "not subject to reinsurance" will have significant negative consequences for non-financial enterprises.
Major risks in these classes, in fact, will be impossible to insure, and the need for such insurance in the non-financial sector is very significant, for example, class 16 includes the risks of business interruption; risks of delay in income receiving caused by exceeding the deadlines for the construction site development; risks of loss of revenue associated with equipment breakdowns; credit risks associated with non-payments for goods sold on credit; risks of license suspension or revocation; risks of information systems hacking and others.
For insurance classes 12 and 16, the rules regarding the reinsurer share in the unearned premium reserves remain the same.
LIC: "Innovations will have a more positive effect"
When asked how effective these measures can be, representatives of life insurance companies in their official responses to our editorial board as a whole were in solidarity.
According to Askar Shakenov, the Deputy Chairman of the Board of JSC LIC NOMAD LIFE, these innovations will have more positive than negative effect for the life insurance industry.
"Potentially shady schemes for disinvestment and inadequate pricing will be excluded, when there is practically no reinsurance coverage, but this is difficult to prove," he said.
Mr. Shakenov suggested the following measures to prevent the use of shady schemes in reinsurance in Kazakhstan:
"An end-to-end protection for residents, i.e. on a specific risk (and reinsurance contract in general), the reinsurer share in reserves of the reinsured should correspond to the size of the reinsurer's reserve. Thus, there will be no gaps in the capital of the entire insurance industry. For non-residents, it is probably more complicated, the direct preventive measures proposed by the regulator are the most effective."
Qazqom Life in response to our request noted that "the company is solely engaged in reinsurance of “compulsory industrial injury insurance”.
"Most of our business is related to retail products that are deductible, i.e. not reinsured," the press service of the company said.
"Therefore, we cannot comment on the proposed innovations, since these factors are not applicable in the activities of our company, and we cannot assess how these innovations will affect the situation on the market," the Qazqom Life press service added.
Halyk Life could not provide comments for the same reason.
Meanwhile, Azamat Yerdesov, the chairman of the board of JSC LIC Asia Life, in response to our question about the effectiveness of measures proposed by the regulator, noted that the supervisory authority had repeatedly pointed a fairly high proportion of insurance premiums transferred to reinsurance, in particular, to non-residents. Up to 35% of collected premium volume in periods by 2018, up to 27% - as of August 1, 2018, more than 80% of which are transferred to non-residents.
"The main reason was the low level of capitalization of insurance companies," he stressed. - In our experience, cooperation with non-resident reinsurers allowed access to information on international products, available underwriting technologies and statistics, which in many companies is insufficient for adequate pricing. However, there was a lack of transparency in reinsurance, which, in the supervision opinion, could be used to optimize the activities of companies in terms of taxation, etc."
According to Mr. Yerdesov, in order to ensure transparency, the National Bank of the Republic of Kazakhstan adopted legislative measures: the requirements to the reinsurance contract were tightened, the register of mala fide reinsurers was maintained; the issues of creating an insurance and reinsurance pool were adjusted, which would allow placing certain risks on the domestic insurance market. "All the amendments were discussed on the JSFC platform with the active participation of the insurance sector," the expert added.
"As for the draft of the new version of the resolution "On Approving the Requirements for Formation, the Methodology for Calculating Insurance Reserves and their Structure", an active discussion is currently under way," said Azamat Yerdesov. - In particular, regarding the zeroing out the reinsurer share in the unearned premium reserve in nonproportional insurance. We support the view that this rule may negatively affect the development of the Kazakhstan insurance market. Reinsurance is a tool to reduce the burden on capital, which allows insurance companies to deal with major risks, this is important given the prospect of accession to the WTO."
"Indeed, in the draft of new Requirements, the share of the reinsurer in the Reserve of unearned premiums under non-proportional reinsurance contracts is 0 (zero). Perhaps, the regulator seeks to prevent shady reinsurance schemes in the insurance market this way," replied Asel Makanova, the Acting Chairman of the Board of JSC LIC State Annuity Company. - The effectiveness of this rule, provided all the prudential requirements of the insurance company are fulfilled, in our opinion, will be low. JSC LIC State Annuity Company carefully evaluates the risks, and also seeks to choose reliable reinsurance partners with a good reputation."
As you can see, the opinions of market participants in something converge, but in some ways divide. In any case, the discussion of these innovations continues. And, we think, market experts and the regulator will come to a common consensus.