Zhanat B. KURMANOV: Compulsory types of insurance play an important role in countries where the international practices and insurance products are in the development phase and, in this case, compulsory insurance pushes the development of the overall market.
Given the fact that on the emerging markets the insurance literacy and the insurance culture also requires the development, it is necessary that people and businesses can perceive insurance as a reliable instrument for full protection of their interests.
At one time, when we just developed a basic law on insurance activity, we prepared the relevant articles of the Civil Code of the Republic of Kazakhstan and introduced a preferential tax system for insurance companies in the Tax Code of the Republic of Kazakhstan; it was around the beginning of the two thousandth's, in the country there was only one valid compulsory insurance - MTPL, which was regulated by government decree.
Participants of the insurance market allowed numerous violations of the policyholders' interests. Thus, the proper introduction of compulsory types of insurance became necessary through the legislation act. In this regard, based on the analysis of the international experience the optimal list of compulsory types of insurance (non-life and life insurance) was established, the gradual implementation of which has contributed to the establishment and development of insurance industry in Kazakhstan.
Currently, according to the results of the past ten - fifteen years, we can say that some types of compulsory insurance are successfully functioning, in particular MTPL, which is effectively developing in Kazakhstan. Unfortunately, with the other types of compulsory insurance there are problems due to the fact that the functioning mechanisms were not fully analyzed and adjusted at the moment of introduction.
As a result, significant changes were adopted to the law on compulsory insurance of third party liability of the employer to the employee, third party liability tour operators and tourist agents, but overall the work on these and other types of compulsory insurance was not finished.
For example, on the compulsory insurance of third party liability for tour operators and tour agents the insurers paid claims more than GWP; due to this, most insurance companies were forced to bring back their licenses.
Other types of compulsory insurance practically do not work: it is civil liability insurance of private notaries, and audit firms.
The National Bank carefully analyzes the state of the existing types of compulsory insurance. At the same time, the National Bank together with the Government works actively in order to improve mechanisms of insurance protection in these sectors.
For example, a serious revision is needed on the law on compulsory insurance of crops in order to provide an efficient system of agricultural risk management.
The existing system for crop insurance and insurance payments is not completely transparent and actually discourages the activity of efficient agricultural producers.
In this regard, the Ministry of Agriculture plans to revise the concept and conditions of compulsory insurance in order to adapt to the country's development strategy for the agro-industrial complex. Existing issues are discussed jointly by the Government and the National Bank. Moreover, the World Bank's experts are preparing the relevant proposals and actuarial calculations in this direction.
XPRIMM: Which is the National Bank's vision in terms to optimize the compulsory types of insurance?
Z.K.: At first, we propose to define the criteria that characterize compulsory insurance with the possible introduction in the Civil Code. The main criteria pertaining to the compulsory insurance are: frequency, mass character, lack of concentration risks, the ability to assess underwriting risk and loss, social and economic significance.
From time to time we receive proposals to introduce new types of compulsory insurance. But after the assessment it is clear that many of the proposals do not correspond to the criteria of compulsory insurance.
Second, in addition to the compulsory and voluntary insurance there are the so-called quasi-compulsory insurance types in the world. This type of insurance has no legal basis in Kazakhstan; despite this, the perspectives of such insurance are high enough.
Quasi-compulsory insurance allows the insurer to practice adequate underwriting risks and to establish adequate tariffs.
Quasi-compulsory insurance, defined by legislation, will allow insurance companies to set prices depending on the market's demand in order to ensure the effectiveness of businesses and to offer insurance protection.
Currently, the National Bank is working on a bill, which is projected to be adopted in 2017, where one of the issues is the introduction of quasi-compulsory insurance in Kazakhstan.
XPRIMM: What types of insurance will be appointed as quasi-compulsory insurance?
Z.K.: At first, insurance of civil liability of private notaries and auditors will be appointed as quasi-compulsory insurance. At the same time, there are others types of insurance which can be transferred to quasi-compulsory insurance: insurance of civil liability of customs brokers, insurance brokers, bailiffs.
In our opinion, there is no need to keep them as compulsory insurance and it is better to transfer to the "market environment," where the conditions will be determined by agreement between the parties.
XPRIMM: Now the professional community actively discusses the creation of the National Motor Insurance Bureau, further attending to the international Green Card Systemand implementation of amicable report. In which stage are these topics at present?
Z.K.: The discussions on these topics are not opened for the first year, for example, the integration on the markets an understanding is needed. At the same time, "Green Card" is a long-term project; we have the longest border in the world together with Russia, and it would be correct if Kazakhstan, along with Russia and other CIS countries, have also joined the "Green Card". Thus, when our car owners go abroad they can receive insurance protection under the international system. On the same note, we "keep" Kyrgyzstan, which practically cannot join the Green Card system, before it makes Kazakhstan.
"Green Card", based on the international practices, represents a good mechanism to improve the motor insurance situation in Kazakhstan and afterward, based on the requirements of the "Green Card" system, to create the National Motor Insurance Bureau. We analyzed the functions that should be fulfilled by the Motor Insurance Bureau and we came to the conclusion that the similar functions are implemented in Kazakhstan by the Insurance Payments Guarantee Fund.
Because the Motor Insurance Bureau also guaranties payments under the "Green card" policy, without the need of creating a new infrastructure. Thus, based on the Insurance Payments Guarantee Fund we can organize the activity of the Motor Insurance Bureau.
Regarding the implementation of the amicable report in Kazakhstan, which is already implemented in other countries, including the Russian Federation - is a partner of the Kazakhstan on economic integration; the practice of using amicable report is positive, as it allows people to settle issues without to call traffic police. But, we do not plan to introduce the amicable report next year.
However, the establishment of the Motor Insurance Bureau and database in order to implement e-policies - these issues are planned to be implemented in 2017, with the adoption of the bill on the insurance and insurance activity, a proposal on which we are now preparing.
After the adoption of the law, we will return to the topics regarding the tariff for MTPL, to a system of adjusting the regional coefficients and to revise the system of calculating the "bonus-malus". These questions require the analysis of the accumulated statistics, of actuarial calculations and can be solved in a separate bill after 2017.
Reinsurance is one of the lines which needs modernization measures
XPRIMM: Statistics show its lack of effectiveness, when premiums ceded for reinsurance to non-residents exceed the compensation received from non-residents. For example, in 2015 about KZT 75 billion in premiums was ceded to foreign reinsurers, while only KZT 6 billion were back in the country as compensations.
What are the main measures which are planned to take in order to improve the efficiency of the external reinsurance, as well as strengthen the capacity of the internal reinsurance?
Z.K.: At the beginning of the two thousandth's, when the insurance industry was not sufficiently capitalized and could not take its own retention large risks, about 60-70% of premiums were ceded for reinsurance abroad. In recent years, the domestic insurance market has grown, and the total premiums ceded to foreign reinsurers fell to 35-30%.
Nevertheless, we cannot say that potential of the insurance market is fully involved in the reinsurance business.
Firstly, it should increase the level of capitalization of insurance companies in order to be able to take in its own higher retention risk and to increase the earnings from such operations.
If the companies' capitalization will remain at the same level, our national insurance market will not develop as an important sector of the economy. Moreover, Kazakh's insurance companies will be uncompetitive compared to foreign players, in case of opening of our market due to the WTO agreement.
In this case it is important to ensure the competitiveness of the national insurance market.
And one of the important directions for the regulator is to continue the activity to improve the level of capitalization of insurance companies in accordance to the international standards Solvency II.
At the stage of creation of the domestic insurance industry the regulator established a scale of gradual increase in the capital of insurers and in case of the introduction of Solvency II it is not necessary to do this.
Because with implementation of Solvency II prudential standards will change and the insurance company will manage its own risks: in case of written large insurance risks, company respectively will increase its capital. The expected step is that insurance companies will increase their capitalization.
Secondly, our insurance companies are not always effectively managing insurance risks.
The excess of risk should be transferred mandatorily to the reliable reinsurer in order to ensure the financial stability of the insurance company and the client as well.
However, the risks that the insurance company can take in for its own retention should remain in its portfolio or be placed inside Kazakhstan. Thus, the requirements for external reinsurance will rise in order to place risks effectively and reliably.
XPRIMM: In your point of view risks that insurers can take in own retention should remain inside of country. How this should be done?
Z.K.: If risks are acceptable, not concentrated and well distributed, they can and must remain in Kazakhstan. The insurance companies must assess the risks and leave them on own retention, or, if necessary, to use the potential of the national insurance market: Kazakh insurance companies, insurance pools, effectively combining the obligatory and facultative reinsurance programs.
Insurance companies need to understand what is the best way to use their capabilities and potential of the national insurance market.
Now, regarding the adequacy of the usage of reinsurance tools. For example, using the obligatory reinsurance programs sometimes the risks are transferred abroad instead of being placed in Kazakhstan or to keep on own retention.
Certainly, the large risks should be reinsured on the foreign markets, and we have provided a certain liberalization of the requirements for foreign reinsurers, given the fact that, for example, a large Russian reinsurer was interested in working with our market, but in terms of sanctions and the crisis on the world markets has increased the pressure on the ratings of insurance companies from the Russian Federation.
Therefore, we have already implemented a certain indulgence to the rating of Russian reinsurers. And this step is absolutely correct because our countries collaborate in a single economic space and are interested in the integration of financial markets.
However, there are still issues to be solved regarding the fact that some of our companies place their risks offshore.
In this regard, the regulator will also work in order to ensure that risks are placed among reliable reinsurers on the external markets. At the same time, it is planned to sign a memorandum on the disclosure of information between the regulators of the countries, which are members of the International Association of Insurance Supervisors (IAIS).
XPRIMM: Possible scenario: smaller companies that, due to need to increase capitalization, will be forced to consolidate their business; will all these measures lead to the concentration of risks inside the market?
Z.K.: We have no such tasks proposed, that small companies will leave the market and only large companies will remain. If a company manages its risks, in principle it may remain at the level of a small company.
And, regarding the requirements for the performance of reinsurance and capitalization, different standards of financial stability and solvency will be determined by the risk assumed by the company. If the risks are small and well distributed, the insurance company effectively manages them in terms of the capital; it is not necessary to merger with other companies.
In general, companies with a high net capital have greater competitive opportunities to work as a universal insurance company that allows taking more risks, and therefore generating more revenues.
The insurance market will develop dynamically, and those players who cannot independently conduct their business efficiently and provide an adequate level of capitalization, will surely analyze the options for consolidation. Once again, the regulator will not take any administrative steps in this regard.
General approach: if an insurance company is interested in the growth of the business, the first step in this direction is to increase competitiveness; it provides an adequate capitalization growth, the development of insurance products and an effective risk management.