Life insurance institute is one of the most stable and fundamental in the world, as LICs, unlike banks, do not issue loans. Everyone knows that during crises, banks are often unable to repay loans, which leads to their bankruptcy. For example, during the years of independence, 136 banks were liquidated in the financial market of Kazakhstan. For five years, the number of second-tier banks has been reduced by nine.
LICs provide high income to clients through balanced investments in securities and other highly liquid instruments. “The advantages of endowment insurance are that in addition to life insurance and savings the customer receives investment income and participation in the life insurance company’s profit. Despite the fact that many LICs adhere to a conservative approach in their investment strategy, they have the opportunity to increase client income through a balanced approach and competent management of financial instruments,” explains Gulzhan Dzhaksymbetova, the Board Chairman of Centras Kommesk Life. In addition to high income, the insurance policyholder is also protected by the LIC coverage, so when an insured event occurs, the company’s client or beneficiary receives payments.
In international practice, life insurance companies, along with pension funds, are the most sustainable financial institutions. The specifics of the life insurance industry imply a long-term accumulation of capital with subsequent lifetime annuity payments. “This justifies the stricter requirements that the regulator sets regarding the size of equity capital, adequacy of the solvency margin, liquidity, quality and diversification of assets, regular stress tests, tests for the adequacy of formed insurance reserves,” says Kairat Chegebayev, the Board Chairman of Nomad Life.
As a result, throughout Kazakhstan’s independent existence, only one company in the life insurance industry has been liquidated. “Insurers are participants in the insurance payment guarantee system on some socially significant products, which gives an additional guarantee of maintaining payments for citizens. LICs also actively use the services of reinsurance companies, including foreign ones with the highest financial stability ratings. Thus, we believe life insurers in the Republic of Kazakhstan are quite reputable today,” stated by KM Life representatives.
Kazakhstani life insurance companies are evaluated by international rating agencies, for example, S&P, AM Best, Fitch and others. Based on the company’s performance analysis (solvency, financial stability, investment activity, etc.), foreign experts assess the reliability and predict the company's growth perspectives for several years.
Solvency and creditworthiness assessment allows judge the insurer’s ability to fulfill its obligations. Thus, the financial supervision regulates some of the financial indicators of the LICs. For instance, the standard of actual solvency shows how much a company is able to cover its obligations if it has to make insurance payments to all clients in one day. The higher this ratio, the more reliable the insurance company. “The ratio of highly liquid assets, which shows how quickly an insurance company is able to sell financial instruments to cover its liabilities. The higher this index, the higher the liquidity of these assets, - stressed Zhanar Zhubaniyazova, the Board Chairman of Halyk-Life. - The level of investment return reflects how successful the company is in its investment activities. The higher the investment income, the greater the increase in the company's equity capital”.
The size of equity capital allows estimate the financial stability. The larger the equity capital amount, the more sustainable the insurance company is to market fluctuations during crises, which means that the company will be able to cover more losses at its capital expense.
All these data are regularly published on the National Bank website.
Investments by life insurers
The main principles of life insurance companies in the securities market are liquidity, safety, and profitability. Thus, investment decisions are based on the analysis of risk of the issuer of the financial instrument, the macroeconomic environment and diversification of assets by issuer, industry, country. “Therefore, the behavior of LICs is quite predictable and determined, first of all, by reliability requirements. Given the business specifics, life insurers have “long” liabilities, and reliable long-term financial instruments are needed to secure their liabilities. As a result, LICs today invest most of their assets in medium-term and long-term instruments issued by the state and companies in the quasi-public sector,” comments the Chairman of the Board of Nomad Life.
LIC investment assets are classified by quality and liquidity. An important classification parameter is the issuer's credit rating. “For example, if non-government debt securities of foreign issuers have a rating of at least “BBB-” on the international scale, all 100% of these assets will be classified as high-quality and liquid, and if they have a rating below, let us say from “BB+” to “BB-“ on the international scale, then only 85% of these assets will be considered high-quality and liquid, the remaining 15% will put pressure on prudential standards,” explains the Chairman of the Board of Halyk-Life.
Thus, regulatory requirements do not allow insurance companies to take on high credit risks, but only ones of acceptable level. The investment portfolio of life insurers is often similar to the investment portfolio of pension funds; they are reliable instruments which income is constantly growing. “When forming life insurance products, insurance organizations usually set a fixed profitability. Thus, the average return on the investment portfolio of an insurance company must be at least a fixed level of return on LIC products. Dur to the need to pay remuneration on LIC products, a conservative investment strategy is more acceptable, it includes government debt securities with fixed income, corporate debt securities with a low risk of default and equity securities of large companies,” the Board Chairman of Centras Kommesk Life believes.
There are 797 companies operating in the US life insurance market. Over the past 13 years, only 3.7% have been liquidated. However, 9.32% of structures left the financial sector of the state during this period. This figure is three times higher than that in the life insurance market.
US insurers collected 28.58% of total global insurance premiums for all types of insurance in 2016 reflecting the high concentration of funds, as well as risk assessment inherent in the North American market.
Japan accounts for 9.96% of the global insurance market, which is explained, first of all, by its people’s interest in life insurance agreements as investment products. With collected premiums in the amount of $466 billion China ranks third (9.85% of the global insurance market), which is a major breakthrough since 2000, when the country has been the 16th in terms of this index.
About 400 million insurance contracts are annually signed in Germany. This means there are on average 5 policies for every resident of the country (including children). Insurance companies note that the amount invested by the Germans in life insurance increased by 11.3% last year. In general, residents of Germany paid 102 billion euros for this service.
Insurance services in the UK are well developed: insurance can be purchased at the bank, on all kinds of Internet sites and even in the supermarket. There are several types of life insurance, if your health condition can be assessed as good.
1. Insurance for a certain period of time is a life insurance plan under which in the event of your death within a specified period of time, the entire insurance coverage is paid. Some insurance plans also pay even if a fatal diagnosis has been made.
2. Mortgage loan protection: this type of life insurance is specifically designed to secure mortgage payments in the event of premature death. Under this plan the payment of the sum insured decreases over time in proportion to your mortgage payments.
3. Life insurance under critical illness. Unfortunately, the probability of getting a fatal disease before reaching the age of 65 has now increased. This life insurance plan provides a guarantee of your coverage in cases of cancer, heart attack, or stroke, unpleasant things, but at least you will be calm knowing that you can provide for yourself and your family and not think about medical costs.
The French life insurance system is attractive because, it implies solid payments together with small deposits in case of insured circumstances. Risk life insurance is an agreement concluded for a long time, 4-5 years at least, and usually 10 or even 20 years.
Photos are from open sources.