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Why the life insurers’ clients make money despite the crisis and pandemic

Every year Kazakhstani life insurance companies (LICs) add interest to the investors’ savings accounts. Most of these programs are calculated in dollars, and the return reaches 4% per annum. Let us find out how insurers provide high income and 100% reliability.
Why the life insurers’ clients make money despite the crisis and pandemic

Life insurance companies make money for clients from investments in the stock market. However, the regulator limited the list of financial instruments that insurers can buy.

“For example, to be included in the list of highly liquid assets, debt and equity instruments of Kazakhstani issuers must be at least B- according to the international scale of S&P Global Ratings or a similar level rating by other rating agencies,” explains Gulzhan Dzhaksymbetova, the Board Chairman of Centras Kommesk Life.

The credit rating shows the level of investment risk. Issuers get this assessment from independent foreign agencies. “The higher the company’s rating, the lower the credit risk for the investor. And since the regulator imposes strict requirements on financial stability, insurance companies do not take high investment risks, investing most of their assets in instruments of high-quality and reliable issuers with high credit ratings,” says Oksana Radchenko, the Board Chairman of Halyk-Life.

Kazakhstani insurers offer clients fixed income products. Thus, the average return on their investment portfolio should be higher.

“The Kazakhstani stock market is small compared to international ones, however, there are quality issuers here, whose securities are attractive against the backdrop of good dividend policy, financial stability and corporate policy. It is worth noting, however, that when investing in tenge-denominated securities, there is a devaluation risk against the background of the national currency volatility,” says the Centras Kommesk Life executive.

Therefore, when diversifying their own portfolios and insuring them against unexpected losses, insurers invest money in financial instruments denominated in foreign currencies.

“It is more beneficial to form an investment portfolio, which includes both instruments of Kazakhstani and foreign issuers. Investing a part of the assets in various instruments of foreign issuers allows achieving a wider diversification of the portfolio and reducing geographic, industry, currency and other investment risks for the portfolio,” Oksana Radchenko emphasizes.

Insurers' investment strategies

According to the National Bank’s requirements, each LIC develops an investment policy according to its needs, but the main task of each company is to balance the safety and investment return.

“The regulator has developed requirements, the implementation of which is constantly monitored. For instance, when investing in securities, the amount invested in one issuer should not exceed 10%, deposits in STB, depending on the bank's rating - no more than 20%. Such restrictions when working on the securities market lead to a quite predictable behavior of LICs, it is determined, first of all, by reliability requirements. Insurance companies, however, should take into account their business structure when investing. We use a Liability-relative approach when investing, in accordance with the terms and currency of the obligations. The main risk for insurance companies is maintaining sufficient capital to ensure payments to customers, given that the main source of income for life insurance companies is investments,” explains Kairat Chegebayev, the Board Chairman of LIC Nomad Life.

The assets of LICs currently accumulate more than 500 billion tenge. Distribution of this money is strictly regulated by the system of prudential standards, which includes 15 indices that control the investments in financial instruments presented on the stock market.

“Any LIC has an approved investment policy in the form of a document. As part of this document, the company develops various investment strategies relevant at the moment and aimed at achieving certain investment goals. This approach allows build an investment strategy based on obtaining maximum return at a moderate risk level,” said Azamat Yerdessov, the Freedom Finance Life Chairman.

Reliability of LICs

In international practice, life insurance companies (along with pension funds) are the most sustainable financial institutions. It is due to the more stringent requirements that the regulator imposes on them regarding the size of equity capital, adequacy of the solvency margin, liquidity, quality and diversification of assets.

“For example, there are about 797 companies on the life insurance market in the United States, and only 3.7% of which have ceased to exist over the past 30 years. On average 9.32% of companies have been liquidated in the financial sector during this period, that is, three times more than in the life insurance market,” the Nomad Life executive brings in statistics.

By the way, the indices in Kazakhstan are matching, as since its independence, 140 second-tier banks and only one life insurance company have been liquidated in the country. The insurance company was removed due to the founder bank closure, and two more went through the restructuring procedure. However, the insurer fulfilled obligations towards all its customers.

“The insurance market has not suffered the fate of the banking sector due to several factors: initially insurers are conservative, their activities are constantly under the close supervision of the regulator (after all, we are trusted with money for long periods; some contracts are concluded for 20 years or more). All LICs undergo monthly monitoring of their own performance indicators from several regulatory organizations,” Azamat Yerdessov informs.

The Board Chairman of Centras Kommesk Life Gulzhan Dzhaksymbetova points out that the main priority for regulators (the National Bank and Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market) is to protect the interests of insurance consumers. “LICs have to comply with such prudential standards as minimum size of the charter capital, standards for adequacy of the solvency margin, sufficiency of highly liquid assets and asset diversification standard. That is why life insurance institution is one of the most sustainable and fundamental in the world, since it is based on long-term investments and is a source of long money."

Another factor of reliability of an insurance company is a financial strength rating by leading international rating agencies; it shows the ability of an insurance company to meet its current and future obligations towards policyholders.

“In the process of assigning a rating, the agency analyzes all aspects of an insurance company, from capital adequacy, investment reliability to the risk management system and market positioning. Along with it the rating agencies constantly monitor insurers’ activities. And in case of index deterioration or improvement they revise the current rating,” concluded the Halyk-Life executive Oksana Radchenko.

Photos are from open sources.

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