“We believe that the economic and financial consequences of the pandemic, lower oil prices and instability in the financial markets will be testing Kazakhstani insurance companies in the next 12-24 months. It is too early to assess the financial impact that COVID-19 and the worsening macroeconomic situation will have on Kazakhstani insurance sector, given the fact that the situation continues to change rapidly. We believe the measures on containment have pushed the global economy into recession,” the S&P noted.
According to the analysts, the unfavorable macroeconomic situation and coronavirus may have a negative impact on smaller and weaker insurance companies which financial performance has been under pressure even before the pandemic.
“Most of these organizations will be able to absorb the insurance benefits associated with the virus and volatility effects in the financial markets. As a result, the forecast on ratings remains “sustainable” due to sufficient capitalization indices. We also expect the growth prospects for these organizations in the general insurance sector will remain low in 2020. The recovery is projected in 2021. It will depend on the macroeconomic situation improvement increasing the purchasing power of individuals and reviving economic activity. We still positively assess growth prospects in the life insurance sector in 2020-2021 predicting growth at almost 15% this year, which will be supported by a number of initiatives of the regulatory body,” the agency emphasized.
The analysts also commented on the forced restriction in the work of all financial organizations during the state of emergency and quarantine.
“The current crisis brings not only risks but also some opportunities for the insurance industry. The innovative companies can maintain their market position by changing customer behavior. The implementation of cost optimization programs during the recession can also determine the redistribution of sales channels.
“Thanks to their business models, insurers are generally more resistant to recession than companies in other industries (such as air carriers and tourism). The scale and portfolio diversification economies will have a positive impact on their operations. Small companies might experience difficulties due to increased competition and negative macroeconomic trends. The total amount of insurance premiums in several areas of business will come under pressure, because the low level of disposable income does not allow the population to make savings, especially now, when most households and companies, on the contrary, are cutting their expenses,” S&P explained.
The situation for the life insurance companies remains more favorable, since in the last two years the sector has shown growth from a very low base. According to analysts, the regulatory initiatives will stimulate the life insurance sector development in the medium term. They include the expected introduction of products with an investment component, the state education support program and a possible decision by the regulator to transfer part of the functions of managing pension funds to life insurance companies. An additional positive factor may be the transfer of people’s assets to life insurance products rather than bank deposits, due to the higher investment return of such instruments. This is especially true for products denominated in dollars.
We, however, are still confident that insurance companies should take certain measures to form a single sales chain, from issuing an insurance policy to settling insurance payments. The companies will need extra time and costs to build and turn it into a competitive advantage in the medium term. The sales through agent networks may decrease, and the share of sales via the Internet can grow in 2020 due to temporary social isolation. Nevertheless, we believe the companies with well-established agent networks in the country will continue to play an important role and retain certain competitive advantages, in remote regions in particular,” S&P expects.
The report also says that the future dynamics of insurance companies in both the general insurance life insurance sectors may be under pressure, so organizations are likely to take measures to reduce costs in 2020 to maintain profitability indicators.
“We believe that return on investment will constitute the main share in the structure of the final results of all Kazakhstani insurance companies due to still high albeit declining interest rates and profits from changes in the exchange rate amid Tenge devaluation. Besides, the share of investments in instruments in foreign currency (USD mainly) in investment portfolios of insurers remains high since 2015,” the organization noted.
As for corporate management, it remains an important factor for continuing operations.
“Most organizations are successfully implementing business continuity plans. However, operational risks, cyber risks and reporting risks increase for all insurance companies. Most of them will have to revise the budgets for 2020-2021. However, most likely, they will do it in the second half of the year, when the consequences of the COVID-19 pandemic are more obvious. Besides, the Agency for the Financial Market Regulation and Development (AFMRD) recommended insurance companies to postpone dividend payments and extended reporting deadlines. This was, in our understanding, optional. Such a decision is more likely indicative not of insufficient capital or cash, but of uncertainty regarding future expenses of insurance companies that may arise in connection with a pandemic. We noted that some insurance companies retained profits for 2019 in full, while others continued to pay dividends to shareholders,” summarized the S&P.
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