The guarantee of an insurance company's solvency and effective operation is, first of all, its compliance with all the requirements of the supervisory body. These functions were formerly performed by the Committee for Supervision and Control of the Financial Market of the Republic of Kazakhstan and the National Bank of the Republic of Kazakhstan; today the regulation and supervision of the insurance market is carried out by the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market (ARDFM). In insurance there are many differing opinions about the rules and standards applied to insurance companies. For example, it remains a matter of debate which prudential standards are needed in health insurance, or, as it is commonly called, in medical insurance — on this we, of course, agree. But in such types as motor insurance, comprehensive motor insurance (CASCO), compulsory employee insurance, life insurance and so on, certain requirements cannot be dispensed with. Leaving the financial market to its own devices and waiting for insurance companies to develop an internal sense of responsibility is a rather risky step, which neither the state nor the supervisory body would take.

There are two views on regulation and on insurance companies' compliance with prudential standards. Insurance contracts, both voluntary and compulsory, have become firmly part of the life of every citizen of Kazakhstan, so the question of who should be responsible for insurers' solvency concerns everyone.

  1. The market should be given the opportunity to regulate itself and to determine the need for, and the size of, reserves. This approach has its advantages. If insurers themselves determine the price and weight of the risk they accept, two scenarios are possible: either insurance companies will make the right decisions from within, taking into account both the insurer's capabilities and the policyholder's needs, or they will slide into the abyss of loss-making risks. In the second case the company will be able to meet its obligations for some time by covering payments with new receipts, but bankruptcy will be inevitable.
  2. The market should be regulated by the state, and it is the state that should set the boundaries within which insurance companies may operate. The advantage is that only companies with strong financial capacity at the start will enter the market. The disadvantage is that strong and competent insurers, or groups of professionals who dared to set up an insurance company, may fail to enter the market because of the high "entry ticket".

Polis Re has its own view of this situation, which is expressed in a balance between these two methods of market regulation.

The most important prudential standard is the "solvency margin standard", which shows a potential client how correctly an insurance company builds its reserves and indicates the so-called safety margin ratio.

What prudential standards are

Prudential standards are mandatory quantitative and qualitative requirements that the regulator sets for financial organizations in order to limit the risks they take and to ensure that they fulfil their obligations to clients. The word "prudential" means "cautious": the standards do not dictate to an insurer whom to insure and how, but they set the limits beyond which the company must not go if it is to keep its ability to pay under contracts. The specific list of standards, the procedure for calculating them and the minimum values are set out in the regulatory legal acts of the ARDFM and change from time to time, so the current version should be checked in the "Adilet" legal information system (adilet.zan.kz).

Main groups of requirements for insurers

  • Minimum share capital — the entry threshold for establishing an insurance organization; it differs for general insurance companies, life insurance companies and reinsurance organizations.
  • Solvency margin — the ratio of the company's own capital to the volume of obligations it has assumed. It shows whether the insurer has enough of its own funds to cover unexpectedly large losses in excess of reserves.
  • Sufficiency of highly liquid assets — the requirement to hold part of the assets in a form that can quickly be converted into cash for payments.
  • Insurance reserves — funds that the company is obliged to build up for future payments: the unearned premium reserve, reserves for reported but unsettled claims, for incurred but not reported claims, and others.
  • Requirements on the structure and diversification of assets — restrictions on investments in a single instrument, a single issuer or related parties, so that the problems of one borrower do not bring down the whole company.
  • Retention limits and reinsurance — the company passes part of large risks to reinsurance, without keeping more than its capital allows.

Why this matters for the policyholder

For a client, prudential standards are not abstract accounting. An insurance contract is a promise to pay in the future, sometimes after several years. The price of a policy by itself says nothing about whether the company will be able to keep that promise when an insured event occurs. It is the standards, and supervision of compliance with them, that protect the policyholder from the insurer's mistakes and carelessness.

If a company systematically breaches the standards, the regulator applies measures: from orders and action plans to restriction of activity, and suspension or revocation of the licence. In addition, Kazakhstan has the Insurance Payments Guarantee Fund, which, on the liquidation of a participating insurer, ensures payments for the types of insurance defined by legislation. However, the Fund's guarantees have their own conditions and limits, so it is better to choose a stable company in the first place than to rely on them.

How a client can assess the financial stability of an insurance company

  1. Check that the company holds a valid licence for the required class of insurance in the ARDFM register.
  2. Look at the published financial statements: the amount of own capital, the trend in insurance premiums and payments, and the volume of reserves.
  3. Pay attention to the disclosed information on compliance with prudential standards, as well as to any supervisory response measures applied to the company.
  4. Find out whether the company has a rating from a recognized rating agency and with whom it reinsures large risks.
  5. Assess its claims settlement practice: the time taken to consider applications, the share of refusals, and feedback on the payment procedure.

It is easier to compare insurance organizations on these parameters using the summary information in the insurance companies section, and the meaning of unfamiliar terms — margin, reserves, retention — can be clarified in the glossary.

Common misconceptions

  • "The cheapest policy is the most advantageous." Dumping sometimes means that the company underestimates risks or finances payments from new sales.
  • "A large company cannot go bankrupt." Size matters, but the quality of assets, the sufficiency of reserves and discipline in complying with the standards are decisive.
  • "The standards only concern the regulator." Compliance with the standards directly affects whether a client receives a payment in full and on time.

Conclusion

Prudential regulation is a compromise between market freedom and the protection of policyholders. Requirements that are too lenient result in bankruptcies and non-payment, while requirements that are too strict result in reduced competition. It is important for a client to understand the basic indicators of stability and to take them into account when choosing an insurer, alongside price and the contract terms. If you want to work out which company suits your particular risk, you can get a consultation from a broker.