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Kazakhstani life insurance sector shows strong profitability - S&P

The Kazakhstani life insurance sector is showing strong margins due to the dynamics of the industry and the characteristics of insurance products that lead to high profitability of companies in this segment, and despite low barriers to entry to the market for new entrants. This is stated in the S&P Global Ratings report.
Kazakhstani life insurance sector shows strong profitability - S&P

“We believe the regulatory regime is stimulating the industry with several initiatives that will support gross written insurance premium growth of at least 15-20% per annum over the next two years. In 2023-2024, we expect the return on equity to average around 30%-35% per annum and the return on assets around 6-7%, which is estimated by us as high compared to European life insurance companies,” foreign experts note.

The local financial markets less developed than Western European ones, limit the life insurance sector's ability to manage asset-liability mismatches and gain access to long-term investments, with the exception of government debt and deposits. “We note that the exposure to risks of the banking sector has a smaller impact on the average credit quality of assets of Kazakhstani life insurance companies due to the fact that they invest more in Kazakhstani sovereign bonds with a rating of “BBB-” and less in banks with ratings from B- to BB+, according to S&P Global Ratings.

Factors with a positive impact

The profitability of the life insurance sector in Kazakhstan has a positive impact on our estimate: they are higher than in other regions, in particular in Western Europe, where the ROE averages less than 10% in 2022. However, according to our estimates, the average five-year ROE (2018-2022) is approximately 34%, ROA is about 6% in the life insurance sector in Kazakhstan. The performance of the sector is less sensitive to interest rate volatility and low interest rates than in Western Europe, mainly due to the still emerging portfolio structure of life insurance companies, which currently offer endowment and annuity insurance. The interest rates remain high in Kazakhstan compared to Western European countries. The return on investment averaged almost 8.5% in the sector in 2022, excluding foreign exchange gains, and we expect this figure to be around 9.0% in 2023.

The level of penetration of insurance services in Kazakhstan is low, which leads to growth potential, especially given the measures taken by the regulator to stimulate further development of the life insurance sector and increase public awareness of insurance products in this sector. In 2022, the share of gross insurance premium in GDP was about 0.4% compared to 0.6% in Poland, 0.9% in Colombia, 1.3% in Uruguay and 3.5% in Portugal. “Despite a slight reduction in premiums in 2022 due to a decrease in retirement annuity, we expect growth to continue in 2023-2024 in both nominal and real terms. We are already noticing a 24% increase in insurance premiums in the first quarter of 2023 compared to the same period in 2022. The regulator's initiatives aimed at developing the life insurance market will stimulate the growth of this market in the medium term. We also note that after the COVID-19 pandemic, people began to use life insurance programs more actively, which also provided an incentive for insurance premium growth,” S&P is confident.

The agency believes that life insurance companies will maintain solvency margins and increase absolute capital values on the back of a forecasted rapid growth in insurance premiums.

“Kazakhstan's regulatory regime does not restrict the entry of new participants into the market. We see an increase in competition, but this has not led to significant changes in the life insurance sector over the past 12 months, as the market growth started from a very low base. However, it is currently highly concentrated, with the top three life insurance companies accounting for 72% of the market in terms of gross written premiums in 2022 compared to 73% in 2021, and we expect that the high level of concentration will gradually but not significantly decrease and will be less than 70% in 2023-2024. These companies have advantages in selling insurance products due to the presence of a network of branded insurance agents, well-known brands that are trusted by customers, an established banking sales channel, or serving certain groups of customers. We do not expect foreign companies to reconsider their strategies and return to the Kazakhstani market, despite the directive of the World Trade Organization (WTO) to allow branches of foreign insurance companies to enter the Kazakhstani insurance market. This is due to the dominance of local organizations in a relatively small market and the lack of sufficient scale for the international organizations’ activities,” analysts note.

Photos are from open sources.

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