Compulsory employee insurance

The work of life insurance companies (LICs) is currently being actively discussed in Kazakhstan's financial market, as are the consequences of transferring the class of compulsory insurance of employees against accidents in the performance of their labour (official) duties (CEAI) to the exclusive competence of life insurers.

Since 1 January 2012, employee accident insurance has been carried out exclusively by life insurance companies (LICs). The purpose of transferring this class was to accelerate the development of the industry through the capitalisation of companies and the development of distribution, which, unfortunately, was not achieved. In many respects the opposite results were achieved, and negative trends have also emerged that need to be corrected. This conclusion can be drawn on the basis of specific facts and analysis.

Reduced market coverage. The number of insurance contracts in force in this class has decreased by 8.2%, from 50,631 as of 01.09.2011 to 46,483 on the same date in 2012. A significant reduction in market coverage is observed in the SME sector, in particular among individual entrepreneurs acting as employers, by 42.4% (from 7,979 in 8 months of 2011 to 4,594 in 2012). Moreover, even the current number of contracts concluded in 2012 is greatly overstated due to double counting in reinsurance. Meanwhile, it is precisely the SME sector that employs a large number of people who, as a result of the weak performance of LICs, are left without appropriate insurance protection. Payouts in this type of insurance are substantial, and in the absence of insurance protection the SME itself is, as a rule, unable to compensate the injured employee, and a person who has suffered a serious injury is forced to go to court to obtain payment.

The level of insurance coverage in this sector has declined significantly. LICs currently lack sufficient capacity to work with clients because they have no agency network of their own, no offices and no necessary experience. After all, it is necessary to generate an incoming flow of clients independently, rather than waiting for the client to come on their own, relying on the compulsory nature of the insurance.

This circumstance affects the interests of socially vulnerable groups of the population, since an employer in the SME sector has low capitalisation and will not be able to cover the losses on its own without the participation of an insurer

Monopolisation of the insurance market in a single class. There are 7 life insurance companies on the market in total, but only 4 of them are active. As a result, about 68% of the CEAI market is concentrated in one company. As recently as 2011 the situation was quite different: there was fierce competition among more than 30 general insurance companies. No single GIC accounted for more than 15% of the market. The current situation has all the signs of monopolisation and creates unfavourable conditions for policyholders by restricting their right to choose a high-quality insurance company, and it reduces interest in this type of insurance as an important tool for the social protection of employees.

Dumping. In an effort to maximise premium inflows, LICs have significantly reduced the average insurance premium per insurance (reinsurance) contract concluded, by 43% (from 477,000 tenge in 2011 to 271,000 tenge in 2012).

Use of the distribution channels of general insurance companies (GICs). The share of insurance premiums received by GICs under reinsurance contracts from LICs over 8 months of 2012 was 27%, meaning that this volume passes through the distribution channels of general insurance companies (GICs), for which LICs, of course, pay a commission. In addition, LICs are forced to cede to reinsurance CEAI contracts that initially do not need it. A detailed analysis of insurance in this class within insurance groups suggests that other schemes of paying for services may also exist. LICs actively use the branch networks of general insurance companies and, as a result, incur additional costs by paying unnecessary commission.

Reinsurance. The volume of funds ceded to foreign reinsurance companies increased from 2.48 billion tenge in 8 months of 2011 to 3.12 billion tenge in the same period of 2012. At the same time, more liability remains retained by the LICs themselves. Thus, there is a massive outflow of money from Kazakhstan.

It is obvious that the current situation with the reinsurance of CEAI risks contradicts the original concept of Resolution No. 131 of the Board of the FSA dated 22 August 2008, which regulates the methodology for calculating prudential standards and the adequacy of the solvency margin of insurance companies. Moreover, it indicates a failure to fulfil the tasks set by the President of the country in his address to the people of Kazakhstan "Through the Crisis to Renewal and Development" regarding increasing Kazakhstani content in services.

Social burden. Recently, LICs have increasingly been proposing, under various pretexts, to raise the minimum level of the insurance premium. As a result, this may affect the employer's budget: the employer will have to allocate more funds to insure its employees in the CEAI class than, say, it budgeted last year, when it was served by general insurance companies.

Statistically, SMEs are the most profitable sector for insurance companies, and the premiums received are redistributed in the form of payouts, including to other categories of enterprises. Thus, life insurance companies clearly seek to monetise their presence in this segment as much as possible not through the economic expediency of insurance but by increasing the minimum insurance premium.

In addition, this class is a risk class, and transferring it to the annuity insurance of LICs contradicted the goals of the life insurance industry from the outset and has now led to an imbalance in the industry.

The above analysis of the activities of LICs in the CEAI class shows that the time has come to take measures to correct the situation. One of the key issues for NSK JSC, and I think for other major players in the general insurance industry as well, is granting general insurance companies the right to carry out insurance activities in the CEAI class in parallel with LICs. This will be the first step towards resolving a large set of issues that require urgent solutions.