Kazakhstan’s insurance industry showed a 15% growth in 2011 and, according to the industry experts, is forecast to grow by another 12-15% to a market of up to $1 billion in the upcoming years. The country’s relative stability and booming energy sector continue to mark it as an ongoing prospect for insurance sector products.
The first insurance companies started operating in Kazakhstan in the beginning of 1990s, when Kazakhstan gained its independence. The industry emerged at a time of economic transition which was marked by recession, inflation and unemployment – not the most optimal conditions for nascent insurance market. Since that time the local insurance sector has seen significant growth. The most notable driving forces behind it were the active banking sector development in 2004-2008 and introduction of obligatory insurance in auto and private property ownership by the government.
Although both the banking and insurance sector suffered sharply during the recent world financial crisis, when the insurance premiums declined from $1.1 billion to $900 million, the market started recovering in 2010 with 15% growth, reaching $1 billion, according to the industry experts.
Experts forecast that 2011 will show steady growth by another 12-15% and will reach $1.2 billion which is higher than the pre-crisis maximum. Despite the relatively high growth rates in recent years, the market still remains undeveloped.
Kazakhstan's relative stability and booming energy sector, continue to mark it as an ongoing prospect for cross border insurers. Of particular interest will be the expected absolute growth in non-life premiums, relative to other countries in the region, over the next five years. This should be quite large, and is an outcome which does not require a high GDP growth or a massive rise in the non-life penetration.
Such growth is, however, off a very low base. Kazakhstan’s insurance sector has almost non-existent life insurance segment, which accounts for just 4.1% of total premiums. This is compounded by the apparent lack of faith the Kazakhs have for making long-term savings through local financial institutions. The low level of assets of accumulative pension funds and their apparent growth of virtually zero highlight this.
The main problem of Kazakhstan’s insurance sector is low insurance ‘culture’. Kazakhstan’s population is not yet aware of the need to insure their income or property through policies that will cover them in case of death or illness. The main issues are pubic mistrust from the times when insurance was not developed and fundamental lack of understanding and knowledge about insurance benefits. People do not insure their business or personal assets unless it is obligated by the local law. ‘Obligatory’ insurance accounts for 24% of the total market and has shown 14% increase in the past year. It includes property insurance, transportation carrier insurance, ecological insurance, crop insurance, insurance of the tour operators and travel agents, auditing companies and notaries, insurance of the owners of dangerous objects, employees’ occupational accident insurance for employers.
The introduction of advanced and innovative non-life insurance products will continue to be in heavy demand as well as new marketing techniques for life insurance, especially in ‘voluntary’ life segment.
According to the regulators, life insurance activities of the insurance companies would not be combinable with general or non-life transactions as of 2012. Local insurers are establishing new companies to deal with the life segment of the industry. Currently, collections in life segment amount to $70 million, while the payments average at $20 million, which makes it a very sought after business line.
Lack of diversification of insurance services provided by local insurance companies is due to their concentration on ‘obligatory’ insurance. High profitability of corporate insurance and ‘obligatory’ insurance of individuals, make voluntary retail insurance unpopular among local insurers. Further development of voluntary retail insurance is a costly activity for these insurance companies.
In the meantime, the industry understands the need to develop the retail market but do not have the necessary background and resources to implement a strategy to properly develop it. However, the fact that countries with well established insurance markets usually have 60% percent of insurance premiums coming from retail insurance sector, which is usually the driving force of the whole insurance sector, seems to impress the local insurance business community.
During a recent conference on retail market development, the insurance sector representatives discussed ways of creating an insurance ‘culture’, educating and raising the population’s awareness of the life insurance advantages as well as seeking retail sector development through such means as internet sales and new software development.
According to BMI, in the event that the emergence of a sizeable true middle class coincides with an increase in confidence in financial institutions, life insurance could grow massively. This will create a lot of opportunities for U.S. insurance companies to enter the market with its developed product packages and innovative solutions. For additional information, please refer to Market Entry section of this report. It is worth noting, however, that the most practiced market entry strategy of the large global financial players was to follow their global clients into the market here. The American companies - Chartis Insurance, former AIG Insurance and Citibank have initially entered Kazakhstan to provide services to their global customers in Kazakhstan and used to restrict their product portfolio to corporate services.
Most Kazakhstan insurers are very small and unable to access economies of scale. Additionally, due to their small market capitalization insurance funds are unable to insure high corporate risks. For this reason about 90% of all corporate risks are reinsured with nonresidents as well. This creates another opportunity for U.S. companies. U.S. non-life insurance firms who do not have their offices in Kazakhstan have good potential in cross-border reinsurance sector.
BMI notes that further development of Kazakhstan’s energy industry will provide non-life insurers with new business as well.
Travel insurance is another area of product diversification. The number of overseas travelers including Kazakhstanis on business trips and students participating in language-training and college-degree programs, as well as tourists to developing countries has substantially increased as the nation gradually recovers from the financial crisis. Over the next several years and perhaps into 2015, the number of travelers is projected to grow continuously at an annual average rate of 5-10%, should the nation’s overall economy and per-capita income maintain its annual growth rate.
Kazakhstan Insurance Companies Association has also proposed to charge Kazakhstan citizens with compulsory insurance fees against future natural disasters. According to Oil Insurance Company, a working group is currently being created to define the amounts of compulsory premiums. The insurance cost will depend on a likelihood of the risks, territorial coefficients will be introduced.
There is also a strong lack of qualified insurance professionals. The organizations feel the need to train their stuff to become more specialized as that would provide a solid base for industry development. U.S. companies, offering training and certification programs preparation in the insurance sphere could have high demand potential.
The market is characterized with strong government monitoring with continued modification of legislative reforms. Along with restrictive regulatory changes since 2008, reflected in Market Issues & Obstacles, the Government implemented a series of important reforms, which included creation of insurance ombudsman, a single insurance database and introduction of bonus-malus system.
Financial sector overview
According to the insurance companies, an undeveloped Kazakhstan stock market and lack of good investment projects make it difficult for insurance companies to find profitable ways of investing their resources. The overviews below provide an insight into development of the financial sector and the local economy that are naturally reflected on the insurance sector. For example, there is a close link to the banking sector with key banks having insurance service companies affiliated with them.
The financial sector as a whole is dominated by banking sector, which is about 85% of the overall financial services. Insurance, private equity, leasing, microfinance represents the rest of the proportion. The banking sector is one of the most developed ones in CIS region.
Banks in Kazakhstan faced a solvency crisis in 2009. Since then, government restructuring of key banks has brought the banking system back towards stability. Hence, the banking crisis, which started in 2007, forced a healthy correction in external borrowing. In order to build a more transparent, less risky banking system, the National Bank of Kazakhstan (NBK) and the Financial Supervision Agency undertook a number of steps to enhance banking regulation.
Even though a number of crisis related issues remain - notably Kazakhstan’s backlog of non-performing loans (NPLs) and relative lack of activity outside the natural resources sector - the strong performance of the hydrocarbons and mining sectors in Kazakhstan, in particular resulted in stronger-than-expected growth in 2010.
Several private equity firms have shown an interest in Kazakhstan since the financial crisis first impacted on the banking and real estate sectors back in 2007. They include the Carlyle Group and a number of smaller players. All were attracted by the expectations of cheap deals in a country virtually guaranteed due to its rich commodity resources to return to strong growth in the near future.
However, investments didn’t follow, largely because of the continuing gulf between buyers’ and sellers’ price expectations.
However, private equity investors still believe the fundamentals of the Kazakh market are sound. Noting that Kazakhstan was one of the first countries to reflect the global liquidity slowdown in 2007 and has since recovered well before the rest of the world. The predictions that Kazakhstan would be first in, first out of the financial crisis have proved to be right. The rise in commodity prices over the last two years has boosted the natural resources sector, which has in turn dragged the rest of the economy, including the banking sector, along with it.
During the pre-crisis times, the local Government has established a plan of development of the Regional Financial Center of Almaty (RFCA), country’s commercial capital that would correspond to international standards and ensure successful integration of the Kazakhstani financial sector with international capital markets, attracting foreign and domestic investments, further developing Kazakhstan’s securities market, creating conditions for exporting Kazakhstan’s capital.
The transit of main capital flows between the countries of CIS, Eastern Europe and Asia was the eventual goal of RFCA creation. But the financial crisis and the government’s change of focus on an anti-crisis program, restructuring key system-forming banks that it partially nationalized, has drawn its attention from securities market development.
Recently, the government announced its National Welfare Fund, Samruk Kazyna an umbrella structure managing government assets in key and largest partially state-owned companies, would launch a national IPO program, where the large semi-nationalized local companies would have their IPOs on the local exchange. Currently it holds stakes in four of the largest commercial banks which it intends to sell.
Analysts expect dual listings, with an offering on the KASE (Kazakhstan Stock Exchange) and in either London or the Hong Kong. Since China is the primary consumer of Kazakh raw materials, investor interest in Hong Kong is high, while London remains the international hub of emerging markets investment. Assets include National Oil & Gas Company - KazMunaiGas, national rail operator Kazakhstan Temir Zholy and the Development Bank of Kazakhstan among others.
The government has a very low level of debt. Investors are looking at quasi-sovereign companies and anything owned by the state, as these look virtually risk-free and are quite interesting yield wise. So, with the crisis behind, the focus is back on proactive securities market development, which is expected to push financial sector activity in the upcoming years, thus, creating opportunities for investment banks, insurance companies, brokers and other market participants.
Kazakhstan has made significant progress in liberalizing its economy since independence, and growth has been supported by strong natural resource prices over the past few years. The global financial crisis, however, reached Kazakhstan in the second half of 2007 and put a damper on growth.
Beginning in the late 1990s, the financial sector was strengthened, rural and urban infrastructure improved, and investment in the private sector encouraged—especially in small businesses. These reforms helped Kazakhstan overcome the difficult transitional years. Reforms and natural resource wealth attracted significant foreign direct investment (FDI) flows, a key driver of strong GDP growth over the last several years pre-crisis. Due to a commendable post-independence reform effort, coupled with sound fiscal and monetary policies, Kazakhstan is considered to have one of the best performing economies in the Commonwealth of Independent States (CIS). Developments in the extractive sector and sustained high commodity prices continue to drive overall growth of Kazakhstan’s economy.
• Per capita GDP, which at more than $9,000 has risen twelvefold since 1993. Exports grew to $60 billion in 2010 from $5.3 billion in 1995. Gold and foreign exchange reserves, including the National Fund that collects windfall oil revenues, have grown from zero to $63 billion, breaking into the world's top 50.
• The recipient of $122 billion in foreign investment since independence, Kazakhstan also topped the World Bank's 183-country list for introducing pro-business reforms in 2010. Import volumes are set to rise significantly over the next few years due to the need for capital imports for large projects, and increased demand for consumer imports resulting from rising real incomes.
• Kazakhstan has the second largest oil reserves as well as the second largest production among the former Soviet republics, after Russia. It is aiming to become one of the world's top oil exporters in the next decade, based on the development of three major oilfields. The Kashagan oilfield in the Caspian Sea is the world's biggest oil discovery in 40 years. Commercial production is due to start by the end of 2012 or in early 2013. Oil exporters and those that financed domestic lending with foreign capital were under significant financial strain in this region over the course of the global financial crisis.
Population: 16.9 million. Geography: Landlocked Kazakhstan is the world's ninth largest country with an area of 2,699,700 sq km (1.042 million sq miles) and is slightly larger than Western Europe.