|Project Rationale and Linkage to Country/Regional Strategy
In 2013, Kazakhstan had an insurance market penetration of 0.8% of the country's gross domestic product, which is low compared with the global average of 6.3% and emerging markets average of 3.0%. Insurance spending per capita is also low in 2013, the insurance density rate equaled $101 per capita, compared with the global average of $652. Most insurance activity is limited to urban areas, concentrated around Astana and Almaty. Although the subsector is small, it has been growing significantly, with total assets of T521 billion ($3.4 billion) in 2013. Premiums reached T253 billion ($1.4 billion) in 2013, a 20% increase from the end of 2012. Premium growth is associated with the government's health and pension reforms and a growing economy that has boosted per capita incomes and insurance demand.
The country has 34 licensed insurance companies (including 7 life insurers) and 14 registered insurance brokers. The subsector is moderately concentrated, with the three largest companies holding 40% of assets. These insurers, however, are very small by international standards, and unable to benefit from economies of scale. Two of the insurers are state-owned. Foreign insurers are practically nonexistent, with two insurers recently leaving the market. Due to their small market capitalization, insurance funds are insufficient to underwrite and they retain significant proportions of large corporate risk on their balance sheets. As a result, almost 90% of the corporate risk is reinsured outside Kazakhstan.
Reinsurance activity remains a key concern for the regulator given the significant share of reinsurance that takes place outside of Kazakhstan and the difficulty of monitoring these activities. Without large local reinsurance companies, most risks are ceded to reinsurers outside of the country (mainly Russian and European companies). In many cases, the primary insurer cedes all, or virtually all, of the risk of loss to a reinsurer who also controls the underwriting and/or claim-handling process (fronting process). Similarly, Kazakhstan insurers accept inward reinsurance premiums from foreign companies on a reciprocal basis. Since foreign reinsurers are not licensed or monitored by Kazakh regulators, concerns focus on reinsurance placements with or from institutions with low credit quality and without adequate transparency. The supervisor lacks the capacity and resources to monitor ceding company transactions, particularly for risks being reinsured through entities in offshore jurisdictions. New regulations were introduced in 2012 to increase domestic risk retention. As of 1 October 2013, only 25.2% of the insurance premium was ceded by way of reinsurance to foreign insurers and reinsurers. Rating requirements have also been increased for the placement of risk with foreign reinsurers. The new requirements encourage domestic insurers to work with large reinsurers and increase the domestic share of reinsurance, but concerns remain.
The National Bank of the Republic of Kazakhstan (NBRK) is responsible for insurance regulation and supervision. Most of the regulations are modeled on European Union directives. Consolidation of the insurance industry is under way, including tightening the prudential regulatory regime. Kazakhstan s participation in a customs union with Belarus and the Russian Federation, as well as the ratification of the protocol on the creation of a single insurance market for the Eurasian Economic Community member countries, are driving forces for harmonization of insurance legislation and unification of insurance markets by 2019. Protocols and procedures for cross-border supervision of branches, subsidiaries, and insurance intermediaries through supervisory colleges are likely to be established. This will help avoid the unintended consequences of regulatory arbitrage, while preserving the stability of the insurance market.
The insurance subsector has growth potential but faces several major challenges. Constraints include (i) fragmented market structure, with many insurers not having the critical size to build adequate risk pools, underwrite contracts, and innovate; (ii) weaknesses in regulation and supervisory capacity, and in consumer protection, which undermine confidence and trust, and the sound development of the market; (iii) grossly underdeveloped life insurance subsector, dominated by annuities; (iv) catastrophic insurance, which is rarely sold or reinsured for the risks taken; (v) limited availability of professionally qualified staff, including in insurance companies; and (vi) limited development of other segments of the finance sector allowing for long-term investments, which results in insurance companies having difficulty finding profitable placements for their funds.
ADB's country operations are guided by the Country Partnership Strategy (2012-2016). A diversified financial sector, with robust insurance markets that assess and price risks appropriately and support an efficient allocation of capital is a cornerstone for the development of the private sector.