– Mr. Mynbayev, the Nomad group of companies has been successfully operating in the Kazakhstani insurance market for 20 years and confidently occupying a leading position. How would you assess the current state of the domestic insurance market?
– At the end of 2023, the Kazakhstani insurance market showed growth in almost all types of insurance, including compulsory insurance of employees against accidents, and retirement annuities.
In general, the insurance market in Kazakhstan has currently reached 1.055 trillion tenge, of which 502 billion is formed by life insurance and 553 billion – by general insurance. However, if we look at the share of insurance premiums in total GDP, it is only 0.8% - this is a very low level, more than eight times lower than the global figure of 7%, which indicates the need for structural reforms to develop the insurance industry market.
– In September 2022, the President Kassym-Jomart Tokayev approved the program for development of Kazakhstani financial market by 2030, within the framework of which the task to increase the share of insurance premiums to 4% of the republic’s GDP was set. What measures, in your opinion, will help the Government and insurance companies achieve the target?
– It is important to note that last September the President also announced the need to double the national GDP by 2029 ensuring annual economic growth of at least 6%.
Thus, insurance premiums should reach 8.2 trillion tenge in five years, increasing eight times from the current volume. To solve problems of such magnitude in terms of ambition and effort, serious and urgent structural reforms of the financial sector are required. We should bear in mind that the expansion of the insurance market will have a huge social effect improving the lives of millions of citizens of the country. What do I mean?
First of all, the development of the insurance market radically changes the financial culture of population in favor of long-term savings moving away from the current rampant consumption and enslaving debt load. 84% of the working population of Kazakhstan have active loans, which is more than 8.4 million people.
Secondly, the development of the insurance market creates a long-term money market that is so necessary for the Government and the country allowing long-term infrastructure and other investments to be made. With the exception of the Pension Fund, there is virtually no long-term capital today. The development of the insurance market forms the basis for the creation of new national market investors making the country much more sustainable in economic development.
Thirdly, a market of alternative savings is being created for the broader public making it possible, for example, to increase the fund of voluntary pension contributions with the possibility of obtaining insurance coverage.
Thus, the practice of state support of Otbasy Bank has proved its effectiveness, since the state, in order to stimulate people to improve their living conditions, makes additional charges of 20% to citizens’ savings. Similar measures could be taken for voluntary pension contributions of citizens who want to further increase their pension savings, in addition to the mandatory 10%.
The government continues to largely finance pensions, and its share of current pension payments reaches 85%. Thus, the issue of stimulating private pension savings through insurance companies is very relevant, since it will not only make a voluntary increase in old-age contributions attractive for people, but it will ultimately reduce the burden on the state budget.
Thus, starting from January 1 this year, a special state program of long-term savings was launched in Russia, within the framework of which for every ruble saved by a citizen of the country, the state adds from 25 kopecks to 1 ruble on top over the next three years depending on the amount and level of the person’s income. The period of accumulation of funds must be at least 15 years; the capital has tax benefits and is managed by non-state pension funds at the choice of the depositor.
The analysts note that the number of participants in voluntary contributions may exceed 1.5 million people.
If government measures are introduced to stimulate voluntary pension savings in Kazakhstan through additional government charges on the depositor’s capital, similar to Russia, or the accrual of an additional government premium in the amount of 5% on income, according to our calculations, in five years, voluntary annual contributions may exceed 200 billion tenge by 2029. For information, voluntary pension contributions for the entire 2023 amounted to 2.3 billion tenge.
In general, the practice of stimulating social programs through government co-financing is more effective than compensating for government spending by increasing actual taxes on employers, as, for example, in the case of mandatory employer pension contributions (MPC). Starting this year, employers have begun paying it at the rate of 1.5% and by 2028 they will pay 5% of the employee’s monthly income.
– You are talking about concrete measures to improve the segment of social insurance services. In this regard, what other reforms can be undertaken to achieve the insurance market development targets approved by President Kassym-Jomart Tokayev?
– We are currently working on a number of proposals with all participants in the insurance market. Among them, the increase in the health insurance market through the development of an alternative to the existing monopoly system of healthcare financing has great social significance.
Medical institutions are now simply flooded with money, however, they are often criticized for their low efficiency. On February 7, the President Kassym-Jomart Tokayev also spoke about the need to increase efficiency setting tasks for the new Government of Kazakhstan. All funds in the amount of 5% of compulsory medical contributions are currently transferred by employers to the state Mandatory Social Health Insurance Fund (MSHIF), we are talking about 2% from the employee and 3% from the employer.
Moreover, as of 2025, it is planned to increase the limits of these payments from the current 10 times the minimum wage (MW) to 50 MW. Such a mechanism is a social tax on employers to finance the medical industry.
Raised financing of medical industry is obviously necessary measure, and we hold the same position with the Ministry of Health, but this funding should also improve the quality of medical care, which can be very difficult to achieve under conditions of aт actual monopoly without structural changes.
What can be done here? Medical industry financing can be partially diversified so that it is targeted, and payers (employers) can be given the right to direct part of these contributions, for example, 1% of 5% of payments to health insurance for their employees through personal voluntary health insurance contracts.
Firstly, the creation of even a small alternative would allow us to see the possibilities of diversity in the industry and would create competition among medical institutions and program operators, thereby significantly improving the quality of medical care. Secondly, the opportunity to choose for citizens and payers of healthcare organizations would become a visible and obvious manifestation of reforms, where employers would feel a direct feedback on the payments they make.
As for the impact of such a reform on the insurance industry, if it were implemented, health insurance premiums could reach 287 billion tenge per year by 2029.
– What other measures by the Government could, in your opinion, have a breakthrough effect on the insurance market? The goal of eightfold increase in the insurance market in five years still looks very ambitious.
– Nevertheless, this is achievable depending on what strategic objectives the Government sets. If the state policy is aimed at increasing the economic resilience by creating “long-term money” in insurance funds, then thanks to it the Government will be able to more effectively solve the important social tasks in the field of education or pension provision. Moreover, insurance will have an immediate positive social effect among the great masses of population.
For example, increasing flexibility in the payment of pension savings has had a great social effect through the introduction of retirement annuity, which has already been used by a large number of Kazakhstanis. From the age of 40–45, people can now direct part of savings accumulated in the UAPF to purchase retirement annuity. However, until this age, citizens have no alternative but to continue to transfer funds to the UAPF. Besides, they do not have any benefits or social advantages during the long-term period of formation of pension savings, although insurance mechanisms could provide them.
Thus, insurance companies could provide health and life insurance services to a citizen during the period of pension accumulation, as well as offer various mechanisms for managing this money, including providing a full link to hard currency, for example, US dollar, which would significantly reduce the risk of depreciation of accumulated funds.
There used to be private pension funds, the employer, at the request of the employee, sent contributions to the employee’s special account in the fund. The same mechanism can be applied with insurance companies when paying compulsory pension contributions to an individual special account with an insurance company, while the insurance company will additionally provide insurance coverage - life and health insurance of the policy owner. Not the entire amount of mandatory pension contributions will be sent to this account, but, upon application and at the choice of the payer, only a part of it, for example, 2% of 10% of pension contributions in the first year, and then on a progressive scale of 0.5% per year up to 5% by 2029.
Such an insurance product can provide insurance in case of disability or premature death, but its main benefit is that the citizen receives socially important insurance services already during the period of accumulation of pension funds. Again, we are talking about a voluntary system, where people have the right to choose thanks to greater flexibility in managing their pension savings.
The estimated increase in insurance premiums if this initiative is implemented could amount to 3.422 trillion tenge in 2029, and in fact, this one step will allow us to significantly approach the targets set by President Kassym-Jomart Tokayev, while giving an immediate positive social effect.
– Since we touched on the social aspect, a savings program for education “Keleshek” should start in Kazakhstan this year. How do you assess its possible impact on the insurance market?
– This important state initiative can become a good driver for the growth of the voluntary savings system in order to obtain vocational education precisely thanks to state incentives, where depending on category, one-time starting capital in the amount of 60 to 120 MCI will be allocated from the state for children who have reached the age of 5.
Extra annual state premiums of up to 7% on the amount of savings and remuneration by the life insurance company, which also accrues interest on its clients’ contributions, are already being awarded.
The result is a system of raising funds for children's education that motivates citizens to voluntarily save. Managed by insurance companies, these funds receive an annual premium and are indexed in currency. This is exactly the positive case of synergy between the state and insurance mechanisms, which has tangible benefits for the government, insurance market, but, above all, for people.
However, in my opinion, there is a need to link all government initiatives to stimulate savings by citizens into a single window, in particular, an account in the State Educational Savings System (SESS) and conditional accounts in the UAPF from the National Fund within the framework of the National Fund for Children program. They now exist as separate accounts.
Such a measure would increase the transparency and simplicity of savings making it more comprehensible, thereby increasing the interest of parents to save for their children’s education.
If this initiative is implemented, insurance premium collections could amount to about 1 trillion tenge in 2029, and a significant portion will be contributed by parents thanks to government support measures.
– A significant part of the country’s regions are exposed to natural disasters, including earthquakes, mudflows, and floods. The state now bears the costs of restoring the damage. Do you have any proposals for protecting the population and their property from natural and man-made disasters?
– After the earthquake in Almaty on January 23, we all witnessed the shock of the largest metropolis residents. Fortunately, it was without casualties or destruction, but on February 8, a landslide occurred in the foothills of Almaty, and there were casualties. We all remember that after the February earthquake in Turkey and Syria, about 60 thousand people died, more than 100 thousand were injured, and the homes of more than 15 million people were damaged.
Many countries around the world use the legal requirement for insurance coverage in emergency situations as a way to reduce the financial burden on the state. For example, after the earthquake in Turkey, which destroyed more than 345 thousand apartments and damaged about four million buildings, insurers compensated for the damage, since the country had a mandatory earthquake home insurance program.
In our country, the government is involved in rectification the consequences of emergency situations, although it is possible to share these risks with insurance companies by creating a program to insure property against damage in emergency situations. It will allow the state to relieve the budget burden, and the population will have confidence in compensation for damage.
However, it is now necessary to create interaction algorithms and financing mechanisms at the legislative level without waiting for the “X-hour” and giving insurance companies the opportunity to place these risks, including on the world market.
– When choosing a mechanism for protecting against catastrophe risks, the Agency for Regulation and Development of the Financial Market considered the mechanism of so-called catastrophe bonds. What model of insurance against the risk of natural disasters can insurers offer?
– We propose to implement a program of social and material protection of population from damage in emergency situations. It provides cover of loss in the event of damage or loss of housing as a result of natural or man-made emergencies. According to the Bureau of National Statistics, there are 2 million 44 thousand private houses and apartments in cities alone.
Our proposal provides for compensation of insurance cost through tax payments made by the insured. The insurance premium is compensated from the individual income tax insured in the amount of no more than 10% of the tax amount. For that, it is necessary to make amendments in the Tax Code of Kazakhstan.
– In this case, the insured does not pay anything for insurance out of their pocket. And if an insured event occurs, for example, a person’s house collapses after an earthquake, does the insurance company compensate for the damage?
- Exactly right. The program is differentiated by coverage limits and provides an affordable price for a wide range of policyholders, including everyone who receives a small salary and makes fewer tax contributions. The insurance premium will be within 0.1% per month of the insured amount, which will be differentiated according to coverage limits from 2 to 20 million tenge.
Even if the program covers only 15% of the urban housing resources, or 306 thousand houses and apartments, and the minimum insured amount is 2 million tenge for each insured person, the volume of insurers’ liabilities will amount to 613 billion tenge.
– In developed countries, imputed insurance is also often used to protect people from professional errors and liability insurance for entrepreneurs to third parties. Is the company ready to develop this direction?
– Over the past 10 years, more than 5 thousand fires have been registered at heavily trafficked facilities in Kazakhstan, in which 172 people have died, and the property loss has exceeded 13 billion tenge. Restaurants and shopping centers burn, and therefore this risk must be insured, and people must be sure of compensation.
Imputed insurance is planned to be extended to medical workers. Every year, hundreds of criminal cases are initiated against medical workers for improper performance of duties, so this type of insurance is very relevant.
The Kazakhstani Ministry of Health submitted a corresponding bill to the Mazhilis in the fall of 2022. At the initial stage, 11.6 billion tenge were budgeted for these purposes; insurers will cover the damage to the victims.
– Mr. Mynbayev, thank you for this great and detailed interview. To summarize it: will these initiatives provide the necessary groundwork to achieve the goal set by the President - to ensure the growth of the insurance market to 4% of GDP?
– The proposals we have prepared will give an increase to the insurance market in the amount of 5.1 trillion tenge by 2029 forming a total of 8.2 trillion in insurance premiums, thereby achieving the goals set by the President.
It is important to understand that one should not rely only on changing the culture of insurance among the population or digitalization. The government measures will play a key role.
As an example, it is enough to look at the current state of voluntary pension insurance, which, precisely due to lack of effective government incentives amounts to an average of 2 billion tenge against the backdrop of 2 trillion tenge of compulsory contributions. Thus, the government regulation measures that will allow the insurance market to develop are needed, and the issue of greater differentiation between participants in the insurance and banking markets, by analogy with global practice, may arise.
With the total assets of the Kazakhstani banking sector at 49 trillion tenge, the assets of insurance companies amount to 2.24 trillion, or less than 5% of the banking sector. However, the US banking structures are largely regulatory protected within the framework of one financial organization from participation in the insurance and brokerage markets in order to prevent their monopolization.
Consequently, the assets of the US insurance market make up a third of the banking market ($21.6 trillion to the 8 trillion insurance sector). The situation in Europe is the same: the banking assets there amount to 28.2 trillion euros versus 8.6 trillion in the insurance sector.
Speaking about the central role of the state in regulating and stimulating specific economic and financial sectors, we can cite the example of Uzbekistan, where a proposal to limit banking activities to financing large businesses is being actively discussed now. SMEs and retail should be given under financing by microfinance organizations, as a result of which the landscape of the financial market will structurally change to stimulate lending to the real sector.
Here is a simple example of how government regulation can influence the structure of the financial market by stimulating the development of targeted industries or solving social problems.
The initiatives we propose are not so radical in nature and represent a combination of “environmentally friendly” measures that will allow us at least a little to move away from the hypertrophied bank-centric system.
If we rely solely on digitalization without structural changes in the financial sector, it will be almost impossible to achieve the goal set by the President in developing the insurance market, and it will never leave the current limits of 0.7–0.8% of GDP.
It is important to keep in mind that the main beneficiaries of all of the above measures will be firstly, the citizens. For that it is necessary to introduce more flexible and multi-structured systems that provide for the participation of people in their choice, encourage the voluntariness of contributions and legislate the protection of their interests.
We hope that these initiatives will become the beginning of a discussion with participation of all interested parties, and these are not only central government departments represented by the ministries of labor and social protection, health, but also the Financial Regulation Agency, Parliament, as well as the expert community and insurance market participants Kazakhstan.
Source: https://kazpravda.kz/n/dostich-mirovogo-urovnya/
Photos are from open sources.
