Reinsurance in Kazakhstan: How Protection of Large Risks Works

Reinsurance in Kazakhstan

Reinsurance is a mechanism by which an insurance company transfers part of an accepted risk to another insurance or reinsurance organisation. For the client the insurance contract does not change: the company that issued the policy still bears responsibility to the policyholder. Reinsurance helps the insurer maintain financial stability, accept large objects and meet its obligations on time in the event of substantial losses.

This tool is especially important when insuring industrial enterprises, aviation, energy, construction, cargo, liability and other risks where possible damage far exceeds the usual size of a payment. A well-designed programme allows the consequences of a single event to be spread among several professional market participants.

Why an insurance company needs reinsurance

Even a stable insurer should not concentrate too much risk on its own balance sheet. A fire at a large plant, an accident at an infrastructure facility or a series of losses caused by a single natural event can lead to payments under several contracts at once. That is why the insurer determines its own retention - the amount it is prepared to cover itself - and cedes the excess to reinsurers.

• Capital protection: a large loss has less impact on the company's solvency.
• Growth in underwriting capacity: the insurer can accept more expensive and complex objects.
• Stabilisation of results: payments become more predictable across different periods.
• Expertise: international partners help assess engineering, natural and industry risks.
• Diversification: liability is spread among several participants.

The main forms of reinsurance

Facultative reinsurance

Each risk is considered separately. The insurer sends the partner information about the object, the sum insured, the terms of protection and the results of the assessment. The reinsurer may accept the offer in full or in part, or decline. This approach suits unique objects and non-standard risks, but takes more time to agree.

Obligatory (treaty) reinsurance

The parties conclude a contract in advance under which a certain category of risks is ceded automatically within set limits. This speeds up the work and ensures stable capacity of the insurance portfolio. The contract fixes the limits, exclusions, territory, period of validity, and the procedure for settlements and loss adjustment.

Proportional and non-proportional programmes

In a proportional programme the premium and the loss are shared between the parties in an agreed proportion. In non-proportional protection the reinsurer becomes involved when a loss exceeds an established priority (retention). The specific structure depends on the portfolio, the probability of large events and the acceptable burden on capital.

What reinsurance means for the client

The policyholder usually does not deal with the reinsurer directly. He submits the application and documents and receives the payment from the insurance company with which the contract was concluded. Good-quality reinsurance protection is a positive factor, but it does not replace checking the licence, financial stability, policy terms and claims-handling practice.

How a reliable programme is built

Before placing a risk, the insurer collects information about the object and analyses the loss history, safety measures, geography and possible maximum loss. For an enterprise, an engineering survey, a description of technological processes, fire protection plans and business continuity data may be required.

1. The insured value and the probable size of the maximum loss are determined.
2. The insurer's own retention and the required limit of protection are set.
3. The form of contract and the panel of reinsurers are selected.
4. Exclusions, deductibles, clauses and the procedure for notifying a loss are agreed.
5. Ratings, jurisdiction and the financial stability of the partners are checked.
6. The programme is reviewed regularly in light of the portfolio and new threats.

Reinsurance and compulsory insurance

Services in compulsory lines of insurance are provided only by insurance companies holding the relevant licence. A reinsurer does not sell a compulsory policy to an individual in place of a licensed insurer. It takes part in the internal distribution of risk among professional organisations and helps the direct insurer maintain stability.

What businesses should pay attention to

When insuring a large object it is useful to ask whether reinsurance is in place, what the insurer's own retention is and whether there are limits for particular perils. This information is not always disclosed in full, but the client is entitled to ask for a clear explanation of the structure of protection and the payment procedure.

It is necessary to compare the sum insured carefully with the actual value of the property and to check the list of risks, exclusions, deductible, territory and notification requirements. An understated value or incomplete information about the object can complicate claims settlement regardless of the quality of the reinsurance programme.

Digitalisation and new risks

The modern market uses electronic data exchange, automated contract records and analytical models of catastrophic events. At the same time, cyber risks, climate factors, production interruptions and supplier dependence are growing in importance. For such threats, accurate data, uniform contract wording and a transparent chain of participants are especially important.

Brief conclusion

Reinsurance in Kazakhstan is an important part of the financial stability of the insurance market. It increases companies' ability to accept large risks, reduces the concentration of possible losses and opens access to international expertise. For the policyholder, the direct contract remains the main thing: the licensed insurer is responsible for the terms of the policy, the handling of the claim and the payment, while the reinsurance programme strengthens its ability to fulfil those obligations.

Policyholder checklist

• Check the licence and details of the insurance company.
• Read the rules and the contract before paying the premium.
• Clarify the exclusions, deductible and notification deadlines.
• Keep the policy, payment documents and correspondence.
• Report changes in the risk during the insurance period.

Reinsurance is currently a very topical subject both for players in the domestic insurance market and for our foreign partners. In recent years, owing to legislative initiatives of the Kazakhstan regulator, reinsurance has undergone serious changes in terms of prudential regulation. This article deals with how the Kazakhstan reinsurance market has developed over the last 7 years and how the changes will affect its further development.

The number of participants in the insurance market has practically not changed over the last 7 years. As of 1 January 2012, 38 insurance organisations hold licences in the insurance market of Kazakhstan, of which 31 are general insurance companies and 7 are life insurance companies, along with 14 insurance brokers and 85 actuaries. It should be noted that in recent years the number of licensed actuaries has been growing; compared with 2005 it has almost tripled.

The dynamics of insurance premiums (176 billion tenge in 2011 against 67 billion in 2005, an increase of 2.63 times) and insurance payments (11 billion tenge in 2005 and 43 billion tenge in 2011) point to quantitative and qualitative growth of the market.

Over the last two years, after a decline in volumes during the financial crisis, the insurance market has seen an increase in premium income, which is primarily linked to the stepping up of lending to the population by the banking sector and to increased business activity in the corporate sector.

It should be noted that the impact of the financial and economic crisis on the insurance market proved insignificant. Insurance organisations maintain a high level of profitability thanks to low loss ratios, and the growth of insurers' equity capital points to a significant increase in the capacity of the Kazakhstan insurance market.

Reinsurance premiums grew from 27 billion tenge in 2005 (share of insurance premiums - 40.30%) to 65 billion tenge in 2011 (share of insurance premiums - 36.93%). As for reinsurance payments, the main trend unfortunately remains a very low level of recoveries from non-resident reinsurers. In 2011 more than 64 billion tenge was ceded to reinsurance, while the return of reinsurance payments amounted to about 8 billion tenge (about 13%). In addition, a significant part of reinsurance premiums is ceded abroad. In the period from 2005 to 2010, within the structure of ceded premiums the percentage ceded to non-residents hardly changes. Only in 2011 is there a decrease in premiums ceded to non-residents in relative terms, from 89% (2010) to 78% in 2011. Reinsurance premiums accepted from non-residents are growing, with the peak in 2009, when more than 11 billion tenge was accepted into reinsurance.

Foreign risks are mainly placed on the Kazakhstan market, both directly by cedents and with the participation of both local and foreign insurance (reinsurance) brokers.

Over the last two years there has been a significant decline in premium collection from abroad. Previously, property, aviation, space risks, various kinds of liability were generally offered to the local market for reinsurance, as were proportional placements of the priorities of treaty contracts that were placed in the West, or exclusions from cover under treaty programmes.

Recently, local insurance companies have begun to accept foreign risks more cautiously and selectively, taking into account the high loss ratios on such projects. The geographical structure of reinsurance has also changed. In 2011 there was a redistribution among countries: first place - the Republic of Kazakhstan (22%) (in 2010 - the Russian Federation), the Russian Federation in second place - 20% (in 2010 - the United Kingdom, 22%), followed by the United Kingdom - 14% (in 2010 - the Republic of Kazakhstan, 11%), and so on.

The Kazakhstan content rose from 11% in 2010 to 22% in 2011. This change occurred in connection with amendments to legislative acts. The adoption of new legislative measures gave fresh impetus to the further development of the insurance market.

In accordance with the adopted regulatory legal acts, the minimum amount of the solvency margin or guarantee fund of an insurance organisation is now increased by the amount of the obligations on ceded reinsurance premiums under reinsurance contracts in force, depending on the rating of the reinsurer. Previously, the minimum amount of the solvency margin or guarantee fund of an insurance organisation was increased by the amount of ceded reinsurance premiums. A comparison of the reinsurance conditions is given in the table:

Obviously, the reduction in the percentage load on the minimum solvency margin, combined with the change in the base of application from the volume of reinsurance premiums to the volume of premium obligations, significantly increases the burden on the insurer's capital in the case of low-rated reinsurance.

In addition, serious changes have affected the requirements for the maximum amount of own retention (OR) per individual insurance risk depending on the actual solvency margin (ASM). For clarity, the changes are presented in a table for comparison.

In addition, further requirements have been introduced for reinsuring a risk with a reinsurer that is a non-resident of the Republic of Kazakhstan and is rated below "A-". The cedent must:

- offer part of the risk for reinsurance to insurance companies resident in the Republic of Kazakhstan;

- the terms of reinsurance must be identical to the terms offered to the reinsurance organisations (RO) that are non-residents of the Republic of Kazakhstan;

- offer the risk for reinsurance to local insurance companies, no fewer than 5 for general insurance companies and no fewer than 3 for life insurance companies. The acceptance period is at least 3 business days.

- if a resident RO of the Republic of Kazakhstan declines, send the offer to other ROs of the Republic of Kazakhstan until the total number of ROs reaches 10 for general insurance companies and 5 for life insurance companies

In my opinion, the regulator's legislative initiatives will lead to:

1. An increase in the Kazakhstan content in reinsurance transactions
2. An increase in the capitalisation of the local insurance market by reducing the outflow of funds abroad.
3. Greater transparency of reinsurance transactions.
4. A review of the underwriting/reinsurance policies of local insurance companies.

5. Greater concentration of risks in the local insurance market.

Finally, it should be noted that Kazakhstan insurers are quite capable of improving their balance sheet indicators and their ability to retain the risks they accept if they give up rivalry and mutual distrust, which will allow them in future to keep for themselves the highest-quality and most profitable parts of the insurance business available in Kazakhstan.

All of these measures, however they are adopted - individually or all together - can ensure the long-term development and profitability of the Kazakhstan insurance market.