Regional: Financial Sector Development in Central … Financial Sector Development in ... Muslim...

Technical Assistance Consultant’s Report Project Number: 43359 January 2014

Regional: Financial Sector Development in Central and West Asia (Financed by the Asian Development Bank’s Technical Assistance Special Fund)

Making Insurance Work for Central and West Asian Countries

Prepared by the Frankfurt School of Finance & Management This consultant’s report does not necessarily reflect the views of ADB or the government concerned, and ADB and the government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.)

Prepared by the Frankfurt School of Finance and Management

Regional: Finance SectoR Development

in centRal anD WeSt aSiaMaking Insurance Work for Central and West Asian Countries

FINANCE SECTOR DEVELOPMENT

i

Contents

Introduction ...........................................................................................................................................................1

The Contribution of Insurance to Economic Growth and Financial Stability ................................................................ 3

Insurance and Economic Development ............................................................................................................... 3

Insurance and Financial Stability ........................................................................................................................5

Insurance and Financial Sector Development ...................................................................................................... 6

What inluences the development of the insurance sector? ...................................................................................... 8

Economic Factors ............................................................................................................................................. 8

Demographic Factors ........................................................................................................................................ 9

Social and Cultural Factors ............................................................................................................................. 10

Natural Disasters and Climate Change ..............................................................................................................12

Financial Inclusion ......................................................................................................................................... 13

Reduction in Government’s Fiscal Exposure/Contingent Liability ..........................................................................14

What is important for the development of a sound insurance sector? ..................................................................... 16

Regulation and Supervision ............................................................................................................................. 16

Innovative Products ........................................................................................................................................ 16

Alternate Distribution Channels ........................................................................................................................17

Professionally Trained Personnel...................................................................................................................... 18

Consumer Protection and Awareness ............................................................................................................... 18

Insurance in Central and West Asia ...................................................................................................................... 20

Insurance in Armenia ...................................................................................................................................... 20

Overview of the Insurance Sector .............................................................................................................. 20

Key Challenges and Opportunities ..............................................................................................................24

Insurance in Kazakhstan ..................................................................................................................................25


Key Challenges and Opportunities ..............................................................................................................32

Insurance in Turkmenistan ...............................................................................................................................32


Key Challenges and Opportunities ............................................................................................................. 36

Insurance in Uzbekistan .................................................................................................................................. 36


Key Challenges and Opportunities ............................................................................................................. 40

Making Insurance Work in Central and West Asia .................................................................................................. 42

Cross-Country Synthesis ................................................................................................................................. 43

Regulatory and Supervisory Issues ...................................................................................................................44

Cross-Border Insurance ...................................................................................................................................45

Cooperation and Information Sharing ................................................................................................................45

Opportunities and Challenges ..........................................................................................................................45

Policy Recommendations ................................................................................................................................ 48

References .......................................................................................................................................................... 52

ii

Abbreviations

ADB – Asian Development Bank

AMD – dram

€ – euro

GIZ – Deutsche Gesellschaft für Internationale Zusammenarbeit

GWP – gross written premium

IAIS – International Association of Insurance Supervisors

ILO – International Labour Organization

PPP – public–private partnership

SUM – sum

T – tenge

TMM – Turkmen manat

iii

Boxes, Figures, and Tables

Boxes

1: Takaful ...........................................................................................................................................................10

2: Microinsurance ...............................................................................................................................................13

3: Mobile Services Facilitate Access to Insurance ..................................................................................................22

Figures

1: The S-Curve of Insurance Market Development ....................................................................................................4

2: Microinsurance Market Development—Potential Product Evolution Path .................................................................5

3: Investment Portfolio Allocation: Life Insurers (2011, % of total) .............................................................................6

4: Penetration Rate and Density over Time ............................................................................................................21

5: Life and Nonlife Sectors over Time: GWP and Claims Paid ...................................................................................21

6: Market Share of Insurers over Time ..................................................................................................................22

7: Business Lines over Time ................................................................................................................................22

8: Weight of Mandatory versus Voluntary Insurance ................................................................................................23


10: Life and Non-life Market over Time ....................................................................................................................27

11: Market Share of Life Insurers over Time ............................................................................................................28

12: Market Share of Top 10 Non-life Insurers over Time............................................................................................28

13: Mandatory versus Voluntary Insurance by GWP over Time ...................................................................................29

14: Type of Non-life Insurance Sold over Time (T million) ...........................................................................................30

15: Density and Penetration Rate over Time ............................................................................................................34

16: GWP over Time: Voluntary versus Mandatory Insurance ......................................................................................34

17: Types of Insurance over Time: GWP ...................................................................................................................35


19: Insurance Sector over Time: GWP and Claims (SUM million) ................................................................................37

20: State-Owned versus Private Insurers over Time: GWP (SUM million) .....................................................................38

21: Market Share of Top 5 Insurers ........................................................................................................................38

22: Weight of Mandatory versus Voluntary Insurance ................................................................................................39

23: Population Size and per Capita GDP (2012) .......................................................................................................42

24: GDP and GDP Growth Rates .............................................................................................................................42

25: CIS Region: GWP and Density Across (2012, euro million) ..................................................................................43

26: GWP and Penetration over Time ........................................................................................................................43

27: Share of Rural Population and Poverty Rate .......................................................................................................46

28: Mobile Penetration (2012, million) ....................................................................................................................47

29: Muslim Share of Population (2012) ..................................................................................................................48

Tables

1: International Patterns of Pension Provision ..........................................................................................................9

2: Types of Insurances Available at Turkmen Gosstrakh ..........................................................................................35

3: Indicators of Industry Structure (2012) .............................................................................................................44

4: Policy Recommendations across Armenia, Kazakhstan, Turkmenistan, and Uzbekistan ..........................................49

5: Country-speciic Policy Recommendations ..........................................................................................................51

1

Introduction

A functioning and sound insurance market is recognized as a vital contributor to the economic and social development of emerging economies. It enables investment and encourages more efficient economic activities. Through the provision of risk-mitigating tools, insurance protects against uncertainty and severe losses and stabilizes the financial system by transferring risk away from individuals, firms,

and the government and into specialized entities (insurers and reinsurers). Disaster and agricultural insurance support sustainability and growth in many rural economies, with the former contributing to resilience and the latter to food security, the protection of livelihoods, and poverty reduction. By freeing rural communities from some of the more devastating risk events, insurance has increased investment; for example, in higher yielding crops or more productive business ventures.

An understanding of the relevance of insurance requires full knowledge of the economic, demographic, and institutional factors that drive the development of this financial subsector. Per capita income, population size and density, demographic structures, the capacity of the public pension system, state ownership of insurance companies, the availability of private credit, and religion are all variables that determine insurance uptake. Understanding these factors can leverage policy design, regulatory intervention, and technical assistance, with the following insurance sector objectives:

(i) Adequate regulation to ensure prudential and market-conduct supervision; hence, providing client protection

(ii) Innovations in business models, processes, distribution, and product design (often through advanced technology) to promote cost efficiency, meet client needs, and respond to new risk exposures

(iii) Cost-effective distribution through alternative channels, many of which rely on technology and nontraditional partnerships, to provide access for clients and hence scale to the insurer

(iv) Appropriately trained personnel in all organizational functions and regulatory positions to ensure proper risk assessment, pricing, sales, underwriting, claims management, and compliance with regulations to ensure the safety of the insurance and financial system

The insurance market development of four Asian Development Bank (ADB) members from Central and West Asia have been examined to derive policy recommendations to further strengthen the sector. Armenia, Kazakhstan, Uzbekistan, and Turkmenistan are all just beginning to develop their insurance markets, and this is aptly reflected in the small and in some cases nonexistent life insurance segment, as in the case of Armenia. Even though all four markets have shown considerable growth over recent years, comparison within the region shows that Armenia, Turkmenistan, and Uzbekistan are the smallest insurance markets with the smallest per capita premiums. In contrast, Kazakhstan produces gross written premiums more than 10 times those of any of the other three countries. State insurers continue to hold significant market shares in Uzbekistan and Turkmenistan, while ongoing consolidation in Armenia and Kazakhstan may contribute to the development of more competitive markets by removing weaker players.

Throughout these countries, legislation is required to allow for more client-tailored products, such as microinsurance and Takaful insurance (designed in compliance with Sharia law) as well as more appropriate distribution channels such as using mobile phones and mobile-payment mechanisms. Similarly, regulators in these countries should enforce better transparency of statistics from providers to rectify the lack of consistent, timely, and dependable data available to regulators, the industry, and the public. A move away from state-owned

2 Finance Sector Development in Central and West Asia: Making Insurance Work for Central and West Asian Countries

insurers and opening the market to private domestic and foreign companies is needed to enhance competition and bring more innovation to products and distribution. Some countries in this study, notably Armenia and Kazakhstan, have already introduced legislative provisions for domestic and foreign entrants, and markets have been showing more steady development. Key policy recommendations applicable on both a national and cross-border basis to enable this are discussed in more detail later in this study and include the following:

(i) Introducing mandatory insurance lines that can positively impact the market, as has happened with mandatory motor third-party liability in Kazakhstan and health insurance in Armenia

(ii) Implementing international financial and accounting standards, including the International Association of Insurance Supervisors’ (IAIS) Insurance Core Principles; these are vital for adequate regulation and supervision, and for increasing policyholder protection

(iii) Reducing the share of state-owned insurers to foster competition; particularly in Uzbekistan and Turkmenistan, this has provided positive impulses to development

(iv) Introducing microinsurance in combination with promoting financial literacy can offer insurers access to low-income populations

(v) Opening alternate distribution channels to help overcome access barriers such as remoteness (through technology) and lack of trust (through unconventional partnerships), and hence reach scale

(vi) Building capacity to eliminate lack of technical skills; specifically in the actuarial and regulatory fields, the focus should be on training and building cross-country technical hubs for actuarial, product development, sales, and marketing functions

(vii) Facilitating Takaful insurance in markets with large Muslim populations may increase take-up, potentially also among non-Muslims who prefer the mutual concept

(viii) Collecting and sharing statistical data for regulatory and market purposes should be required for insurers. Countries would benefit from region-wide data-sharing to better calculate risks, liabilities, and premiums, and in their overall monitoring of solvency and market conduct

(ix) Encouraging regional cooperation by establishing subsidiary offices or joint ventures in neighboring markets, sharing product and distribution know-how, and facilitating the distribution of products across regions. Similarly, encouraging transnational cooperation for regulatory policy design and facilitating cross-border supervision of insurance groups and financial conglomerates

This study is based on information gathered from ADB and consultant field visits to each of the countries (ADB 2013a, 2013b, 2013c, 2013d), as well as desk research and data analysis. The goal is to provide an understanding of the interrelated nature of economic development and insurance and to outline determining factors for sound insurance market development and how it can be supported through technical assistance and policy and regulatory measures. Availability of data has enabled an analysis of market developments over the past 5 years and for drawing conclusions and policy recommendations to help formulate effective growth strategies.

3

The Contribution of Insurance to Economic Growth and Financial Stability

Insurance and Economic Development

I nsurance plays a critical role in financial, economic, and social development. Insurance activity contributes to economic growth by facilitating investment and promoting efficiency through the provision of risk-mitigating tools. Insurance can protect against uncertainty and severe losses among a population and therefore gives peace of mind in a critical area. Furthermore, higher-risk economic activities that offer

higher returns can be mitigated through insurance and become engines of growth. Agricultural insurance, for example, allows farmers to invest more in production and better seeds because insurance helps them mitigate the potentially devastating consequences of bad weather during crop seasons. Similarly, insurance facilitates lending and commercial transactions by protecting the lender against loss of money and the borrower against bankruptcy (such as life insurance connected to business loans or mortgages). Most life insurance products sold in emerging economies are credit life policies, typically mandatory, and cover the outstanding balance of a loan if a borrower dies. But demand is high for life insurance that provides more substantial coverage in case of the death of a breadwinner. In many African and Asian countries, life insurance that covers funeral costs is popular. Many of these policies are sold by informal, unregulated entities as well as established insurance groups such as Old Mutual in South Africa.

Mandatory products play an important role in establishing an insurance market. However, there is evidence that in some cases they are not necessarily appreciated in low-income markets. When people are dissatisfied with a product that they were forced to buy without necessarily seeing a benefit, they feel “ripped off” and are unlikely to purchase other, voluntary insurance products. Product development therefore needs to focus on linking the recognized demand for better risk management tools with insurance as a solution. In addition, mandatory insurance can reduce the incentive for competition. This is because suppliers in a captive market feel that they have no reason to invest in developing products that better meet client needs, or because the number of suppliers is low.

In Tajikistan, for example, there is only one supplier of mandatory auto insurance—the government. Some studies claim that the voluntary nature of products is especially critical for microinsurance. A recent United States Agency for International Development (USAID) report on microfinance put it like this: “An MFI [microfinance institution] for example, can force clients to purchase a cheap credit life policy, but for a $100 working capital loan, the MFI cannot reasonably require the purchase of a health policy for the borrower’s spouse or children. Yet, the health policy (given good value for money) is dramatically more important for the household than the credit life policy.” (USAID 2008, 7).

International data show over time that insurance penetration is closely connected to economic output and generally follows what is referred to as an S-Curve—insurance penetration is slower early in development, accelerates as growth in the insurance market and the economy gathers pace, and then (as shown in Figure 1)


slows again as the market matures (USAID 2006). For developing countries, the empirical evidence of a causal relationship between insurance sector developments and economic growth has been confirmed for both life and nonlife products. In developed countries, life insurance seems to be the stronger driver (Feyen, Lester, and Rocha 2011).

The development of the insurance market generally follows well-defined patterns and several stages of maturation that usually go hand in hand with a country’s social and economic development. Marketing strategies and distribution infrastructure often have to be built from the ground up to reach clients who are unfamiliar with financial products and institutions. A culture of insurance must be created, particularly among lower-income populations, so that they have opportunities to witness the benefits that insurance brings, understand how insurance works, and know how to access products. Nonlife products are more important early in the market’s development, driven by coverage of transportation, trade risk, and microinsurance products. Simple, embedded, or mandatory products usually also mark early markets, and often take the form of “worker compensation” products.

In the next stage of development, households buy cars and governments make motor third-party liability insurance compulsory. A rising middle class has been fueling the growth and maturation of many emerging insurance markets by demanding cars and modern housing, and hence buying liability and property coverage. As an economy’s manufacturing and services develop, the middle class grows and life insurance becomes attractive for life-cycle planning, including pension products.

Demand for insurance is partly driven by retail credit markets as banks seek insurance as collateral for mortgage and personal loans (Lester and Rodney 2011). Over the course of a maturing insurance market, products become increasingly varied and sophisticated and distribution channels must develop accordingly. Policymakers can play an important role in strengthening private sector incentives by devoting sufficient resources to legal, educational, and regulatory infrastructure. They can also support insurance-specific efforts by permitting private pensions and creating policies that introduce and enforce mandatory lines of business.

The provision of microinsurance can increase social welfare and facilitate social development. This certainly applies to growing middle classes in developing nations, but it holds particularly true for lower-income and poor populations. Low-income people are the most vulnerable to external shocks such as natural disasters or sudden illness because of their limited reserves and lack of access to the financial system. Insurance shields against losses that would otherwise threaten livelihoods and can complement or supplement social safety-net protection. It protects against specific perils, with premiums proportionate to their likelihood of occurring and the cost of the risk involved. The principle of proportionality is important from a regulatory perspective (See Figure 2 for the potential path for microinsurance development).

Figure 1: The S-Curve of Insurance Market Development

Nonlife

pre

miu

m a

s %

of

GD

P

Real GDP per capita in constant 1995 US dollars

1,000 10,000 100,000

GDP = gross domestic product.

Note: Yearly data for 59 countries from 1960–2000.

Source: United States Agency for International Development. 2006. Assessment on How

Strengthening the Insurance Industry in Developing Countries Contributes to Economic Growth.

Washington, DC.

The Contribution of Insurance to Economic Growth and Financial Stability 5

People on low incomes are in the vast majority in many developing countries, and sustainable development cannot take place without improvement in their economic situation. However, they are often excluded from insurance because of cost, remoteness, and other social, cultural, and economic barriers. Insurance can play a critical role in supplementing social protection as public schemes mature and fiscal pressures mount. For example, life insurance, private pension schemes, and retirement annuities can all supplement national insurance coverage. Such schemes can be mandatory and in this case serve to reduce the government’s pay-as-you-go social security systems and provide an alternative for individuals to prepare for retirement.

Similarly, health insurance plays a crucial role in providing social protection because the financial burden associated with medical care can spell economic ruin for families, especially if hospital treatment is needed. The World Health Organization estimates that every year more than 150 million individuals in 44 million households face catastrophic expenses as a direct result of health problems (OECD 2009).

Insurance and Financial Stability

An insurance business model that includes both insurers and reinsurers is a source of stability in the financial system. Insurance is funded by up-front premiums, giving insurers strong operating cash flow without requiring wholesale funding. Furthermore, long-term insurance policies with controlled outflows enable insurers to act as stabilizers to the financial system. Insurers typically invest collected premiums as reserves for paying future claims. By accumulating large pools of capital invested in real and financial assets, insurers foster capital formation and can play an important role in financing infrastructure. In addition, reinsurance allows for the transfer of insurers’ risk to specialized risk management companies. These have larger and more diverse risk pools and therefore can offset the risk exposure of insurance companies and ensure that they can meet their policyholder obligations. Such risk transfers offer insurers capital relief by freeing up assets (funds are available for investment and do not have to be kept available in the short term) that can in turn be invested for infrastructure development. A strong insurance industry can relieve pressure on government budgets, at least to the extent that governments allow private insurance to manage on their behalf. But this can result in efficiency gains and lower administrative costs, and thus reduce the burden on government social security programs.

Insurance also promotes financial stability among households and firms by risk transfer to the insurer, an institution better equipped to withstand a variety of shocks. This mechanism, by extension, stabilizes the whole economy. Trust is a prerequisite for a functioning insurance market because of the particular nature of the transaction. Policyholders pay now but count on receiving a benefit in case of future loss. Insurers, however, follow a consolidated strategy to reduce their own exposure through diversified risk portfolios and avoiding peak-risk exposure. Eventually, international diversification makes it possible to enlarge homogenous risk groups further and to ensure against regional overexposure, as in the case of insurance against natural catastrophes. Weak regulation leads to regulatory arbitrage and compromises on prudential requirements. This can expose the balance sheet of an insurer and result in insolvencies and systemic crisis—and with cross-border ramifications

Figure 2: Microinsurance Market Development—Potential Product Evolution Path

Mandatory

• e.g. credit life

Mandatory

with top-ups

• e.g. additional

bene�ts or people

Simple risks

• e.g. funeral,

hospital, cash,

savings-linked

Complex risks

• e.g. health

(inpatient) /

Ag index

Value-added

services

• e.g. Ag index

with weather

forecasts

Comprehensive

solutions

• e.g. health

with inpatient

and outpatient

cover

Ag = agriculture.

Source: Center for Financial Inclusion. 2013. A Smoother Road to Building Quality Insurance at Scale. Washington, DC. http://ci-blog.org/2013/12/05/a-

smoother-road-to-building-quality-insurance-at-scale/.


for insurers with large operations. While failures cannot be prevented, resultant losses can be minimized by having regulatory mechanisms in place.

Insurance may lower the total risk an economy faces since insurers have incentives to measure, price, and manage their exposure, as well as to promote risk mitigation. Insurers develop expertise in measuring risk because this determines the calculation of premiums and necessary reserves. By charging a premium that reflects underlying risks, insurance provides an important signal to policyholders and the economy at large, thereby offering incentives for risk mitigation. The price acts like an “invisible hand” that provides signals in the form of incentives and disincentives. A concrete example is the bonus malus system in motor insurance. It has a concrete impact on drivers’ behavior because prudent behavior is rewarded and risky behavior comes at a cost to the insured. Nevertheless, motor insurance losses continue to be a problem in many countries where systems are poor or claims processes are not well designed, and where product pricing is not based on risk or revised regularly to match changes in policyholders’ profiles. Insurers also give risk management advice and services to promote prudent behavior among individuals and companies, and therefore to lower their own risks. For example, health insurers engage in health education and preventive measures to create a healthier pool of clients who cost them less in health expenditure.

Insurance and Financial Sector Development

Insurance companies have become more important in global financial markets in their role as investors and financial intermediaries. The insurance sector is now one of the largest institutional investors in the world, with invested financial assets estimated at $24 trillion, representing 12% of global financial assets, at the end of 2011 (TheCityUK Research Center 2012). Life insurers hold almost five times the financial assets of nonlife insurers, and roughly three quarters of insurance investments are held in Europe and the United States. Figure 3 shows that in most countries insurers invest heavily in fixed-income securities—government and private bonds. Among life insurers, the share of bonds is higher than in the nonlife and composite sectors because long-term bonds allow for a better matching of assets and maturities with long-term liabilities.

Figure 3: Investment Portfolio Allocation—Life Insurers (2011, % of total)

0% 25% 50% 75% 100%

Finland

Denmark

Estonia

Switzerland

Netherlands

Ireland

Norway

Greece

Portugal

France

Slovak Republic

Iceland

Turkey

Canada

Bonds Shares Real estate Other

Note: Data exclude assets linked to unit-linked products in which the risk is borne fully by policyholders.

Source: Organisation for Economic Co-operation and Development. Global Insurance Statistics.

The Contribution of Insurance to Economic Growth and Financial Stability 7

Insurers today are not only insuring the financial risks of other market participants, but also increasingly transferring their own risks via the capital markets when investing their assets. Large sums from investment funds have flooded into insurance-linked structures in recent years as an alternative to more traditional investments such as bonds, which currently offer poor yields due to low interest rates. The increasingly popular insurance-linked financial instrument called a catastrophe bond is a good example. It is sold by insurers and reinsurers to share the risk they take on for covering natural disasters and other events that can lead to costly payouts and also to provide institutional investors with greater returns (Vellacott 2013). Such structures, however, undermined the features of insurance products during the 2008 global financial crisis in providing a secure and reliable market for transferring risk. Capital should remain attached to the underlying transaction so that the risk is properly assessed, properly priced, and properly supervised. Insurers must avoid capital becoming detached from risk to avoid systemic problems.

8

What Inluences the Development of the Insurance Sector?

Economic Factors

G iven the importance of a functioning insurance market for economic growth and development, it is important to understand the factors that stimulate the development of the insurance industry. Insurance was originally started by the poor, who formed mutual-like arrangements for protection against unforeseen events. Nevertheless, higher incomes raised demand for insurance in general and

for life insurance in particular. The reasons can be found in greater affordability of products, the stronger need to safeguard potential income and expected consumption of dependents (which increases with incomes) against perils such as the premature death of wage-earners, and the reduced unit price of policies. Some studies suggest that the insurance sector tends to flourish in more equal societies (Feyen, Lester, and Rocha 2011), which may reflect the presence of a broader middle class that drives demand, particularly for life policies. The role of the state is also a major determinant in some of these societies.

Inflation impedes insurance development, particularly for life insurance. The long-term nature of insurance contracts makes pricing, reserving, and investment policies all very sensitive to inflation. High inflation erodes the value of life insurance policies and therefore reduces demand because they become less attractive. Indeed, people often prefer real-estate investment as a better hedge than life insurance. Rising premiums are another result of inflation, but these also have other causes. For example, higher premiums are needed for health insurance as the costs of care increase with advancements in treatment procedures, drugs, and technology.

Insurance companies are sensitive to interest rates because premiums from policyholders need to earn a sufficient return to cover claims. Insurance assets are primarily financial in nature and are composed of bonds and, to a much lesser degree, stocks. Liabilities are the obligations related to the policies sold. Insurers invest their revenues and cash flows and pay their obligations with the returns from these investments. Furthermore, regulated insurers are required to keep offsetting assets as reserves to pay off future liabilities. Therefore, declining interest rates lead to assets being reinvested mostly in bonds with increasingly lower long-term rates, which results in decreasing profits and greater difficulty to meet policy commitments in cases where they were guaranteed. An additional challenge for developing countries can be that longer-term bond issuances may be inadequate, limited, or not existent—resulting in liabilities and durations that often mismatch.

The increasing globalization of the insurance industry provides insurers with opportunities and challenges. New markets with profit potential and diversification possibilities offer additional opportunities for investment and operations. Yet, these markets also increase exposure to fluctuations in foreign exchange rates. Multinational insurers face considerable exchange-rate risk when they repatriate profits from shareholder funds from subsidiaries abroad (Gorvett 2001). A particular challenge for insurers in emerging countries is that they often run out of assets in which to invest at home as local capital markets are underdeveloped, and thus they may be forced to invest abroad (when local regulatory regimes permit). While different mechanisms exist to hedge against exchange-rate risk to preserve the financial soundness of insurers, such mechanisms are costly and must be factored into product prices.

What Inluences the Development of the Insurance Sector? 9

Demographic Factors

Population size and density are both positively correlated with the development of the insurance sector, due to the cost-reducing impacts of scale. A larger population implies a larger clientele for insurance companies and, similarly, larger risk pools. This in turn reduces risks for insurers, allowing them to reduce fees. Similarly, high population density should lead to a reduction in marketing and distribution costs, and hence the price of insurance. This holds especially true for less-saturated markets; otherwise, intense competition can drive up marketing costs to the disadvantage of the consumer. Overall, in places where many people live close together, dissemination of information and distribution procedures can be more efficiently accomplished. High population density is usually found in urban areas and often correlates with the existence of higher-income populations, more developed infrastructures, and education. All have a significant positive impact because they reduce cost and access barriers to insurance.

A high old-age dependency ratio impacts pensions and annuities in several ways.1 Increased life expectancy worldwide and declining birthrates in many countries are putting a tremendous strain on pension systems (Table 1 provides details of pension systems in the region). Public retirement schemes are under pressure because there are too few young people in many countries to meet the challenge of financing the retirement of an increasing number of pensioners. As government pension systems are scaled back, demand increases for private savings and annuity products to protect against loss of income in old age. Some of the financial burden is transferred from the public sector to households and, in turn, they are looking for contractual savings options in the private sector to manage the risk. Surprisingly, the trend toward aging societies can also be observed in developing countries. Armenia, for example, is considered an aging society due to its low fertility rate of 1.39 in 2013 (CIA 2013), the emigration of young people, and gender-selective abortion, which reduces the female share of the population (Tert AM 2013). By contrast, other Central Asian countries are experiencing steady population growth as fertility outpaces the rate of replacement. Nevertheless, aging trends are also affecting these countries. Even though the proportion of the population above the age of 65 is at only 4%–11%, it is expected to increase to 14%–21% by 2050, reaching about that of many Eastern European countries today (World Bank 2014).

According to projections by the United Nations Population Fund, the average number of children per woman in the 50 least developed countries is expected to halve from 5 to 2.6, and life expectancy is expected to increase from 51 to 66.5 years through 2015. The increasing life expectancy poses a challenge for financial institutions. When people live longer than expected, they are eligible for more pension, health, and life insurance payouts than planned, which imply increased liability for insurers. At the same time, the reduction in the number of deaths compared with what was estimated offers extra benefits to life insurers. Similarly, health insurers struggle with increasing expenses caused by older people suffering more illnesses in combination with constantly advancing higher-cost medical treatments. Even in countries where demographic developments are not putting a strain on the provision of pensions and health care, the importance of thinking ahead and protecting offspring is a major incentive to buy more insurance.

1 This is the ratio of people older than 64 to the working-age population (15–64 years old).

Table 1: Patterns of Pension Provision

Armenia Kazakhstan Uzbekistan Turkmenistan

2011 pension spending (% of GDP) 6.7 2.7 … …

Statutory retirement age (f/m) 63/63 58/63 57/62 55/60

2010 old age dependency ration (65+/total

population)11.1 6.9 4.4 4.1

2050 projected old age dependency ration (65+/

total population)21.4 14.4 13.4 13.9

… = not available, f = female, GDP = gross domestic product, m = male.

Source: World Bank. 2012. International Patterns of Pension Provision II: A Worldwide Overview of Facts and Figures. Washington, DC.


Most studies confirm that a large social security system (measured by the contribution rate) impacts life and health insurance negatively. It partly reduces the need for additional insurance and it also reduces the disposable income available for spending on life insurance policies (urak, Daja, and Pepur 2013). Demographic developments, however, have put most social security systems under considerable pressure and governments increasingly fear fiscal exposure from their pension liabilities and in health care and disability benefit provisions.

Social and Cultural Factors

Evidence reveals that, aside from cost, lack of trust is one of the greatest barriers to insurance take-up (Consultative Group on International Agricultural Research 2013, Matul et al. 2013). At the core of this mistrust is usually lack of familiarity with either the concept of insurance itself or with the provider or distributor, concerns over potentially complex products, or previous negative experiences. Building trust is therefore an essential step for insurers, particularly in emerging countries where people are less familiar with insurance. As expected, education has a strong positive impact on insurance demand, especially in the life sector. Education is positively correlated with the demand for any type of insurance product. Clearly, education helps people better understand the benefits of risk management and savings. Education also positively correlates with income. The higher a family’s income, the longer the children will be able to attend school, and hence the longer they will be dependents in need of protection from the economic effects of parental death. Insurance can ensure continuity of education, even when parents are ill or the breadwinner dies.

Religion can play a role in demand for insurance products (Feyen, Lester, and Rocha 2011). Membership in a religious community can provide some of the same benefits as formal insurance. Additionally, formal insurance can be perceived as contradictory to religious faith in that it is considered by some to be a hedge against the will of God. Studies show that Muslim populations tend to be reluctant to embrace the idea of risk mitigation through conventional insurance, which can then hamper the development of both the life and the nonlife sector (Lester and Rodney 2011). Low demand for insurance in many Muslim countries has prompted the emergence of Sharia-compliant insurance (Takaful), a type of mutual insurance based on profit-sharing and interest-free investment, where the risk is shared—collectively and voluntarily—by participants to guarantee mutual protection (Box 1).

Box 1: Takaful

Figure B1.1: Muslim and Non-Muslim Insurance Penetration (premiums, % of GDP)

0.0%

0.5%

1.0%

1.5%

2.0%

1.2 1.5 1.9 2.6 3.9

Real GDP per capita, $'000

Muslim countries, life Non-Muslim emerging markets, life

Muslim countries, nonlife Non-Muslim emerging markets, nonlife


Source: Swiss Re Economic Research & Consulting. 2011. Expertise Publication: Islamic Insurance Revisited. Switzerland.

11

An estimated 1.6 billion Muslims comprise 23% of the world’s population. For some time, conventional insurance

was considered to be incompatible with Islamic law. Sharia law prohibits excessive uncertainty in business and it

bars investment in interest-bearing assets. Both are inherent factors in conventional insurance schemes. The gap

in penetration rates between non-Muslim and Muslim emerging markets may at least be partly attributable to this

incompatibility of conventional insurance with religious beliefs (Figure B1.1).a

The concept of mutual protection, however, is accepted in Islam and in 1985 the Islamic Financial Services Board, the

standards-setting body for Islamic inance, cleared the path for Takaful as a Sharia-compliant tool for risk management.

The word “takaful” derives from a combination of “ta’awan” (which means to help each other on a mutual basis) and

“kafalah” (which means “guaranteeing each other”). Takaful is based on the cooperative principle and on the principle

of separation between the funds and operations of shareholders, thus passing ownership to the policyholders. A

positive return on policies is not legally guaranteed, as any ixed-income guarantee would be akin to receiving interest,

which is not Sharia-compliant.

Takaful has grown strongly in the past 20 years and more than 200 providers worldwide offer Sharia-compliant

products (Figures B1.2 and B1.3). Such growth has helped Takaful reinsurance companies and Sharia-compliant bond

markets emerge. Furthermore, the need for legislation to support transparent and sound market development has

been widely acknowledged. According to a Swiss Re study, Takaful is expected to outpace conventional insurance over

the next decade, particularly where it is already well established. Another estimate puts Takaful premium volumes

at as much as $25 billion by 2015 and considers Takaful to be a tool to unlock demand in emerging countries with

predominately Muslim populations.b

Figure B1.2: Global Gross Takaful Contributions by Region ($ million)

2,2892,911

3,8964,370

4,9345,645992

1,234

1,531

1,936

2,246

2,721

558

842

1,077

1,314

1,462

1,703

276

295

378

432

472

527

76

123

193

202

214

227

22

33

34

74

86

135

0

2,000

4,000

6,000

8,000

10,000

12,000

2007 2008 2009 2010 2011 2012

Saudi Arabia ASEAN GCC Africa South Asia Levant

ASEAN = Association of Southeast Asian Nations, GCC = Gulf Cooperation Council.

Source: Ernst & Young. 2013. Global Takaful Insights. Finding Growth Markets. United Kingdom.


Figure B1.3: Share of Global Gross Takaful Contributions by Region (2012)

Saudi Arabia 0.51

ASEAN 0.25

GCC 0.16 Africa 0.05

South Asia 0.02

Levant 0.01

ASEAN = Association of Southeast Asian Nations, GCC = Gulf Cooperation Council.

Source: Ernst & Young. 2013. Global Takaful Insights: Finding Growth Markets. London, United Kingdom.

a Swiss Re Economic Research & Consulting. 2011. Expertise publication: Islamic Insurance Revisited. Zurich, Switzerland.b Ernst & Young. 2013. Global Takaful Insights 2013: Finding Growth Markets. London, United Kingdom.

Source: Frankfurt School of Finance & Management.

Natural Disasters and Climate Change

The cost to insurers of weather-related natural disasters has been rising over the past few decades. Socioeconomic and demographic trends play important roles in the increasing losses. Migration of populations to flood-prone areas such as coastal cities, increasing reliance on vulnerable electric power grids, and rising material wealth are among the many drivers of these trends. These are accompanied by changes in the incidence and impacts of extreme weather events and sea-level rise, both attributed to climate change. When a natural disaster strikes, the dense population and concentration of assets leads to losses, which can severely impact a country’s economy and population. Disaster risk mitigation and climate adaptation are keys to strengthening the resilience of communities around the world. Reinsurance plays an important role in achieving this goal. The difficulty in assessing possible losses caused by the growing effects of climate change can make insurance less affordable and reduce its availability, potentially slowing growth of the industry and shifting more of the burden to governments and individuals. Manufacturers, including small and medium-sized enterprises involved in the global supply chain, face a particularly high risk from natural catastrophes due to their small market shares, weak bargaining power, and poor disaster preparedness. The increase in risks, particularly in some developing countries, may hamper competitiveness because of the perception that they are weak links in the global supply chain, raising concerns among foreign investors.

Insurance operations in developing and transition economies are the most markedly affected by climate change and most forms of insurance are vulnerable to its detrimental effects, including property, liability, health, and life. According to Evan Mills, a scientist at the University of California, Berkeley, reasons for this can be found in a “… combination of inferior disaster preparedness and recovery, more vulnerable infrastructure due to the lack or non-enforcement of building codes, high dependency on coastal and agricultural economic activities, and lack of funds to invest in disaster resilient adaptation projects. Insurers also experience rising losses under political risk policies in these regions, as civil unrest and conflicts over food, water resources, and refugees manifest in the wake of natural disasters. [By extension,] insurers from industrialized countries share these losses through their growing expansion into these emerging markets” (Mills 2005, 1042).


Financial Inclusion

Financial inclusion is the delivery of affordable financial services such as savings, loans, remittances, and insurance to the disadvantaged and low-income segment of society. Within this segment, subgroups face additional reasons for exclusion, including gender, disability, and health conditions such as HIV. A frequent reason for financial exclusion is seasonal employment, which forces people to rely on income from periods of work to cover 12 months of expenses. Often people on low incomes do not qualify for formal financial services due to a lack of collateral, fluctuating wages, and banks’ limited experience with low-income populations. These individuals then become part of the so-called non-bankable population. Affected people tend to live in remote areas; to reach a financial service provider, they must pay for transportation and forego daily wages. Furthermore, most excluded consumers are not aware of financial products and find it easier to borrow from a local moneylender or take part in a traditional savings pool than to enter the unfamiliar terrain of a bank or other financial institution.

Since the 1980s, microfinance institutions have bridged the gap between banks and low-income clients. More recently, they are succeeding in introducing insurance products such as credit life policies in partnership with insurance companies. Because low-income people are highly vulnerable to financial shock, insurance can reduce the economic and social impact of extreme events, particularly in the aftermath of natural calamities and the loss of a breadwinner. Insurance can serve as collateral to allow access to credit and reduce a bank or microfinance institution’s portfolio at risk.

Box 2: Microinsurance

Microinsurance is a tool to protect poor people against risk (such as accident, illness, death in the family, and natural

disasters) in exchange for payments tailored to their needs, income, and risk proiles. Microinance has been deined

by the International Association of Insurance Supervisors as “… insurance that is accessed by low-income populations,

provided by a variety of different entities, but [follow] generally accepted insurance practices …”a Microinsurance is

aimed predominantly at the developing world’s low-income workers, especially those in the informal economy who tend

to be underserved by mainstream inancial services. It allows policyholders to recover and rebuild after a crisis, and it

can mean avoiding dificult, often devastating risk coping measures such as putting children to work, eating less food,

or selling productive assets.

Figure B2.1: 10 Biggest Microinsurance Countries in Asia (by coverage)

111.1

19.9

11.9 9.4 9.35.3 2.5 1.3 1.1 0.3

0

20

40

60

80

100

120

Cove

rage,

$ m

illi

on

India

Phili

ppin

es

PR

C

Bangl

ades

h

Thaila

nd

Paki

stan

Mongo

lia

Indones

ia

Mala

ysia

Nep

al

PRC = People’s Republic of China.

Source: Munich Re. 2013. The Landscape of Microinsurance in Asia and Oceania 2013: Brieing Note. Munich: Munich Re Foundation.


The number of microinsurance schemes worldwide has increased substantially over the past 5 years, rising from 78

million people covered in 2007 to 135 million in 2009 and reaching nearly 500 million in 2013. This is largely a result

of collaboration with national governments and because commercial insurers have stepped in. In 2011, 33 of the

world’s 50 largest insurance companies offered microinsurance. Among the leading microinsurance countries are the

People’s Republic of China and India, which account for nearly 80% of the worldwide market, followed by Latin America

(15%) and Africa (5%) (Figure B2.1). The estimated purchasing power of the poorest in the People’s Republic of China

is $161 billion and India’s at $93 billion. India’s greater coverage has been driven by a supportive environment for

microinsurance. The Government of India passed legislation in 2002 mandating insurance companies to insure a

certain percentage of the low-income population as a condition for getting or holding an insurance license. Thus,

mandatory coverage has driven the growth of microinsurance in India.b

As the purchasing power of these densely populated, low-income countries continues to increase, so does the need

to insure that income. Take-up in many other developing countries remains inadequate. Growth is partly attributed to

the emergence of alternative delivery channels—including retailers, utility and cell phone companies, cooperatives,

and labor unions—which provide new access points to the low-income market. Microinsurance can be proitable under

certain circumstances. Group insurance schemes are generally viable, as are products bundled with other services

(such as loans, mobile phone minutes, and fertilizers). It is more dificult for voluntary insurance to generate a surplus,

particularly when covering health and agricultural risks.c

a International Association of Insurance Supervisors. 2012. Application Paper on Regulation and Supervision Supporting Inclusive Insurance Markets.

Basel. p. 11.b Consultative Group to Assist the Poor. 2005. Microinsurance and Microfinance Institutions: Evidence from India. Washington, DC.c Munich Re. 2013. The Landscape of Microinsurance in Asia and Oceania 2013: Briefing Note. Switzerland.

Source: Frankfurt School of Finance & Management consultant.

Reduction in Government’s Fiscal Exposure and Contingent Liability

The insurance market is dependent on the fiscal and economic stability of a national government. In many developing countries, insurance companies are not able to invest internationally and rely on the national government and corporate bond market to provide important sources of long-term returns for policyholders. Global insurance companies can magnify this advantage by diversifying investment among a basket of international bonds and take advantage of a variety of returns. Of course, risks are associated with government bonds, particularly when governmental policies place these bonds at risk of default. However, investing in local debt offers ease of transaction, helps diversify against systemic risks, and supports the local financial market.

A public–private partnership (PPP) is a joint venture between the government and one or more private sector entities to link public financing and private insurance to the provision of social goods. In the case of health and social care, joint financing PPPs may help organize funding streams and present an opportunity for consumer-protective regulation of the insurance industry. For this to work, private insurers must see clear benefits to the partnership, government actors must be motivated to protect the state’s financial stake, and government interests must align with those of consumers (Boni-Saenz 2008). In many developing countries, governments have included microinsurance products into social protection bills that can be offered by private insurance providers. One of the largest PPPs is Rashtriya Swasthya Bima Yojana, India’s national inpatient insurance program for low-income households, which is managed by public and private insurance companies. Similarly, Waseela-e-Sehet, an offshoot of the Benazir Income Support Programme in Pakistan, provides health insurance to the poor and underprivileged by improving access to health services and reducing income lost from catastrophic health shocks (Center for Health Market Innovations 2009). In Colombia, the government subsidizes microinsurance premiums to provide incentives for commercial insurers to enter the low-income market and create an insurance culture among the low-income population (Microinsurance Network 2011).

Pension reforms can influence the business model of an insurance company when the government supports private pension schemes, as with Riester, a voluntary and subsidized private pension plan in Germany. In this case, government support of a whole new line of business promoted growth among insurance companies. In many emerging markets, for example, in Eastern Europe in the 1980s and 1990s, countries adopted a three-


pillar model,2 similar to an earlier scheme introduced in Chile.3 This model aims to facilitate an increase in private pension schemes, thereby lowering the pension obligations of the state. Such models motivate insurance companies, local and international, to enter these markets as pension schemes are thought to be more solid and long-term. Clients for such schemes are often large companies, with a fixed customer base (such as employees). Such a model can be very attractive to an insurance company as this business is easier to acquire (e.g., one client, the institution, as opposed to hunting down mass retail clients). Furthermore, the possibility of providing pension and life insurance payouts on an annuitized basis—as opposed to a single endowment payment through a life policy—can be very attractive to insurance companies. Annuitization allows the insurer to continue to manage funds in the decumulation phase of a client’s investment life cycle and to continue to earn fees on assets managed. However, challenges are present: for one thing, the insurance company has to ensure that funds are available and that its calculations are as accurate as possible.

2 The model features a state pension system (first pillar), occupational pension provision (second pillar), and private pension provision (third pillar).

3 Chile reformed its old pay-as-you-go pension structure in 1981 and switched to a system that consists of four main tiers. All pension savings are managed by

external funds and providers. It is a fully funded, defined contribution system, in which pensions are based on savings accumulated during a working life.

It is compulsory for all waged and salaried workers and involves the mandatory payment of a percentage of gross earnings into private pension funds. The

administration of the funds is highly regulated to protect the interests of members. Numerous other countries followed Chile in embracing funded individual-

account pensions, and the Chilean model has received substantial attention worldwide.

16

What Is Important for the Development of a Sound Insurance Sector?

Regulation and Supervision

A dequate regulation and supervision are prerequisites for a sound insurance sector and strong policyholder protection. According to the IAIS, this is the ultimate objective of insurance supervision and regulation. Insurance regulators look at prudential market conduct and governance aspects for safeguarding the interests of policyholders. They define licensing requirements for insurers, reinsurers,

and insurance intermediaries. Regulators provide guidance and caps on the amount and mix of assets that an insurance company can have to ensure financial solvency (the ability to meet the expectations of a policyholder in case of a claim). Appropriate post-licensing supervision implies off-site monitoring and on-site control to ensure that the conditions of licensing are met at all times.

The IAIS represents insurance regulators and supervisors of more than 140 countries, covering 97% of the world’s insurance premiums. It is creating international standards and guidelines on supervision and implementing these standards in member jurisdictions. The IAIS objectives are to promote effective and globally consistent supervision of the insurance industry and to contribute to global financial stability. In 2011, the IAIS adopted 26 revised Insurance Core Principles, creating a new set of expectations for the insurance supervisory systems at the heart of regulatory frameworks. The Insurance Core Principles provide a globally accepted framework for the regulation and supervision of insurance markets and are used by the World Bank and International Monetary Fund. The Access to Insurance Initiative was founded by the IAIS in 2009 and provides a means for emerging markets to give their inputs to the standard-setting process of the IAIS. It facilitates close collaboration between international development agencies and insurance supervisors to support regulation and supervision that is consistent with international standards.

In many developing countries, regulators also carry out a developmental role for putting in place an efficient market. Regulators also require insurers to properly inform policyholders about the benefits and limits of insurance products. Similarly, the supervisory authority ensures proper claims handling and puts in place mechanisms to meet policyholders’ liabilities when insurers are threatened by insolvency. In addition, regulators are important for guiding companies on how to approach clients on some issues, including product development, distribution, and financial literacy. To monitor financial soundness and proper business practices, the regulator mandates insurers to participate in standardized reporting and hence promotes market transparency. Regulators also control mechanisms to address complaints from policyholders.

Innovative Products

Global competition and technological progress spur insurance companies to develop products that promote cost efficiency and meet the evolving demands of clients. This in turn fuels the need for innovation, which

What Is Important for the Development of a Sound Insurance Sector? 17

involves developing ideas into marketable products and changing processes so that value is created. The emergence of new risk exposures, new businesses, and new business models—all contained in quickly advancing technologies—are opening up opportunities that insurance companies must be ready, willing, and able to capture.

Studies have demonstrated that health insurance is one of the most demanded products. Yet, due to its complexity and high cost, it is often the least offered. Innovation is therefore critical. Dread diseases in South Africa are a prime example of how product innovation led to new products in other markets. India also provides examples of products tied to innovative services, such as dial-a-doctor, which provide clients with real added value. As individuals live longer and governments can no longer afford to cover all retirement liabilities, product innovation for private pensions becomes increasingly important to ensure that current and new generations of pensioners are covered.

Unit-linked products were an innovation in Europe and sought ways to increase returns by allowing clients to invest more in mutual funds (and so increase risk-and-return exposure) but at the same time provide them with an insurance “tax-wrapper”. However, in the case of unit-linked products, insurance companies do not bear the investment risk but transfer it to the customer. This mechanism, however, resulted in mis-selling and eventual loss of trust in a significant number of cases. Guaranteed-income products were another innovation providing clients with better planning options. Index-based agricultural insurance was yet another innovation, with the insurance contract responding to an objective parameter (such as measurement of rainfall or temperature) at a defined weather station over an agreed duration. The parameters of the contract are set to correlate with the loss of a specific crop. All policyholders within a defined area receive payouts based on the same contract and measurement, eliminating the need for in-field assessment and building trust through objectivity.

Alternate Distribution Channels

Distribution plays a large role in an insurance company’s operations and accounts for most of its costs. Typically, consumers are reached through a variety of channels, including agents, brokers, banks, and direct sales by phone and internet, as well as workplace and employer-based programs. Achieving scale through cost-effective distribution is one of the biggest challenges insurers face in the low-premium environments of emerging economies. For microinsurance, the emphasis is increasingly falling on innovative distribution models as alternatives to traditional microfinance institutions. Here, face-to-face advice delivered by independent producers remains vital, especially when it comes to building trust and meeting consumer needs with increasingly sophisticated products. All types of insurance can benefit from greater access to banks, which have broad retail and institutional client bases. Here, post offices are important as they are already an established service provider with a broad reach in geography and client segments.

Alternative channels, many of which rely on technology such as scanners, short messaging service reminders, and mobile payments, have allowed insurance companies to collect premiums, pay claims, and enroll and retain clients more easily (See Box 3 for more on mobile services). Alternative distribution channels can be particularly useful in rural areas to overcome remoteness and the lack of infrastructure. Some new distribution models have evolved, particularly in microinsurance, which rely on partnerships with organizations outside the traditional insurance space. These partnerships can take different forms, including joint-venture agreements whereby partners share profits or by treating the partner as an intermediary who receives a fixed percentage of the commission. It should be noted, however, that the risks of using alternate channels are still not completely understood and that issues of consumer protection, particularly in microinsurance, are a concern.

According to a recent study, the following categories emerge when looking at new distribution models in microinsurance (Smith, Smit, and Chamberlain 2011):

(i) Cash-based retailers; for example, supermarkets and clothing retailers offering simplified personal accident and life (funeral) insurance products

(ii) Credit-based retailers; for example, furniture and electronic goods stores offering credit life, extended warranties, personal accident, and life insurance products


(iii) Utility and telecommunications companies; for example, electricity, gas, fixed-line and mobile phone companies offering disability, unemployment, personal accident, and, in some cases, household structure insurance

(iv) Third-party bill payment providers offering personal accident and life insurance products

Professionally Trained Personnel

Insurance is a highly complex product, requiring trained personnel in all organizational functions. The same holds true for supervisory and regulatory positions in oversight functions. To meet market demand, insurance companies must have trained actuaries and product, claim, underwriting, risk, and investment managers—or at least have access to these resources on an outsourced basis. Trained and competent people are necessary to develop a sound insurance sector because risks need to be properly identified and measured to develop appropriate products.

Consumer Protection and Awareness

Consumer protection is essential for any financial system to function effectively. It protects consumers and encourages new business by instilling confidence. For consumers to protect themselves and make conscious product choices, however, they need to have some understanding of financial matters. The absence of financial literacy can lead to poor decisions that can hurt a person’s financial health. A lack of understanding of the concept of insurance can furthermore lead to wrong expectations and hence a loss of trust.

Weaknesses in consumer protection and financial literacy affect both developed and developing countries. Emerging countries worldwide have seen their financial sectors rapidly develop over the past 10 years, with fast income growth providing consumers with more resources to invest. Increased competition among financial firms, combined with improvements in financial techniques and information technology, can result in complex insurance products. The public in many developed and emerging markets, however, have lacked experience and understanding of such sophisticated products and their introduction proved too early. In South Africa, for example, Old Mutual faced slack sales at first when it introduced a funeral insurance product called Pay

Box 3: Mobile Services Facilitate Access to Insurance

The growth of mobile phone penetration in some emerging economies has been accompanied by the appearance of

mobile-money applications. The availability of mobile network capability even to low-income communities and in remote

areas has heightened the hopes for application in insurance sectors, particularly those early in development. The

assumption is that anyone who has a mobile phone can make mobile payments, including for insurance premiums;

thus facilitating access. For the insurer, it can be a tool to reduce costs and grow in scale. Insurers can leverage the

mobile network operator’s communication channels, retail distribution networks, and payment mechanisms in the

following ways:a

(i) Mobile money agents can be tasked with collecting premium payments from customers.

(ii) Customers can pay for their policies using pre- or post-paid mobile accounts.

(iii) Insurers can opt not to collect premiums from customers at all, instead using mobile network operators to cover

the cost of insurance on behalf of their customers.

In Pakistan, a mobile network operator and a microinance bank are making new microinsurance as simple as the

widely used mobile wallet. Customers with an average monthly balance of $21 in their wallet receive accidental death

insurance coverage of $1,039. These products therefore provide not only mobile-money, but also protection.

a Leatherman S., L. J. Christensen and J. Holtz. 2010. Innovations and Barriers in Health Microinsurance. Geneva: International Labour Organization.


What Is Important for the Development of a Sound Insurance Sector? 19

While You Can. The product was not successful, mainly because it was too complex and clients had difficulty understanding the waiting times associated with top-up options (Center for Financial Inclusion 2013). Consumer protection measures introduced by regulators and supervisors can increase trust on insurance issues and raise awareness among insurance companies about how to position a product among low- and middle-income clients.

An adequate system of consumer protection fosters public confidence in financial institutions, the inflow of deposits, and the growth of the finance sector. Consumer protection challenges can be found in several areas; for example, education and information, product and process design, regulation and financial soundness of providers and programs, and capacities and responsibilities of stakeholders (Zimmerman, Magnoni, and Camargo 2013). Insurers and intermediaries should offer appropriate and valuable risk management products and adhere to the promises of cover and service that they make. It needs to be ensured that consumers have access to the information and services required to understand those products and use them effectively. Policies and advertisements should be in plain language so that consumers can make informed decisions. This requires them to be financially literate (that is, to know and understand the concept of insurance as a risk management option and to understand how to access information on products and providers). Policymakers, regulators, and supervisors should create conducive environments, including proper monitoring and enforcement. The insurance supervisor is the keeper of last resort and as such is in charge of protecting the consumer. Supervisors need to monitor the operations of providers and agents to ensure that commitments made to consumers are kept (GIZ 2013).

20

Insurance in Central and West Asia

Insurance in Armenia

A rmenia is the smallest country in the Central and West Asia region with 3 million inhabitants (2013), 64% of them living in urban areas and about one-third in the capital (National Statistical Service of the Republic of Armenia 2013a). Nearly a third (32.4%) of the population was living under the national poverty line in 2010, 17.4% more than in 2008 (National Statistical Service of the Republic of

Armenia 2013b). Agriculture makes up 19.1% of GDP (2012) in Armenia and is an important source of exports. Inflation in 2013 rose to 5.8% (ARKA News Agency 2014), from 2.6% in 2012.

Armenia has a high dependency on remittances, which accounted for 11.2% of GDP in 2011 and are mostly earned in the Russian Federation. Armenia’s Human Development Index was 0.729 in 2012, close to the average for Europe and Central Asia of 0.766; the literacy rate is 99.6% and children get an average 10.8 years of schooling. The penetration rate of mobile phones is high at 125%, which means that on average every Armenian has at least one mobile phone. Internet access, however, is still quite low at 34.5% of households (National Statistical Service of the Republic of Armenia 2013c). Financial market development in Armenia is relatively strong in comparison to other countries in Central and West Asia; however, financial access is still limited to certain fragments of the population. According to the World Bank’s Global Financial Inclusion Index (Global Findex) in 2011, only 17.5% of people above the age of 15 had an account at a formal financial institution. Further, only two commercial banks provide electronic banking services and only 26.5% of people own plastic cards for payments and withdrawals (ADB 2013b). On the other hand, the microfinance market has developed quickly in the past decade, indicating great demand for loan and deposit services in rural areas.

Overview of the Insurance Sector

Trend in the Past 5 Years

Armenia’s insurance market is still early in its development, with insurance penetration (the ratio of total written premiums to GDP per year) at just 0.9% in 2012 (Figure 4). Insurance density (the value of insurance premiums in US dollars per person), however, has grown from less than $2 in 2003 to $32 in 2012. Gross written premiums reached AMD35 billion ($87 million) in 2012, growing 75% on the previous year and attributable to the government making motor third-party liability insurance compulsory in 2011 and introducing mandatory health insurance for 120,000 government employees in 2012. However, under a decision approved in December 2013, the government took over mandatory health insurance for public servants from private companies. Voluntary purchases by the private sector remain limited.

The insurance market in Armenia is limited to nonlife policies (Figure 5). In the past, comprehensive social cover guaranteed universal access to health care, retirement benefits, and survivors’ pensions. Consumers are therefore still unfamiliar with savings products or buying precautionary cover. Since 2007, Armenian legislation does not allow for composite insurers, and three companies underwriting life insurance business had to surrender their

Insurance in Central and West Asia 21

licenses.4 To sell life insurance, it is necessary to establish a new insurance company with new charter capital. However, demand for life insurance is insufficient to trigger investments and, as mentioned, Armenia does not have a life insurance sector.

As of December 2013, nine insurers were licensed by the Central Bank of Armenia, of which seven operated in the country. Insurance is no longer state-owned and foreign ownership of insurance companies is permitted. Foreign equity participation has taken place in five insurance companies, with foreign ownership of 50% and above. The Russian Federation insurers Rosgosstrakh Armenia and INGO Armenia now own roughly half of

4 The 2007 Law on Insurance and Insurance Activities covers licensing, registration, the organization of information, and restricted composite insurance

licenses.

Figure 4: Penetration Rate and Density (2009–2012)

$0

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2009 2010 2011 2012

Density (GWP/population) in US$ Penetration (GWP/GDP)

GDP = gross domestic product, GWP = gross written premium.

Source: Based on Xprimm data converted into US dollars, exchange rates according to European Central Bank, and GDP

data from World Bank.

Figure 5: Life and Nonlife Sectors (2009–2012): GWP and Claims Paid

0

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Source: Xprimm website. http://www.xprimm.com/.


the market. Significant market consolidation has taken place recently (Figure 6). In 2011, ISG merged with RASCO and was renamed Armenia Insurance. In 2012, INGO Armenia took over Cascade Insurance and in 2013 Rosgosstrakh bought Garant Limence Insurance (Xprimm 2013a).

During 2007–2011, legislative reforms of the financial system built the foundation for the implementation of insurance and capital market reforms. Insurance supervision had been transferred to the Central Bank of Armenia in 2006. The Association of Insurance Market Participants of Armenia is a union of legal entities consisting of representatives of insurers and others. Membership is voluntary. The association cooperates with the central bank in drafting regulations and will ultimately work as a self-regulatory organization.

Types of Insurance Products

As Figure 7 shows, the number of insurance products is limited and the main types are motor, health, property, cargo, general third-party liability insurance, and accident insurance. With the development of markets for

Figure 6: Market Share of Insurers (2009–2012)

0%

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35%

2009 2010 2011 2012

Rosgosstrakh Armenia

INGO Armenia (merged in 2012 with Cascade Insurance)

NAIRI Insurance

RESO

Cascade Insurance

Garant-Limence (bought by Rosgosstrakh in 2013)

Armenia Insurance (in 2011 ISG+RASCO merged)

SIL Insurance

ISG

RESO = Russian-European Insurance Company.


Figure 7: Business Lines (2009–2012)

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AMD = dram, GTPL = general third-party liability, GWP = gross written premium.



mortgages and consumer loans, the volume of property insurance has recently increased as most banks seek this as collateral for loans. Export credit insurance is a recent addition and protects Armenian exporters in the event that foreign counterparts fail to pay. In November 2013, however, the Central Bank of Armenia registered a government-owned insurance company, CJSC Export Insuring Agency, to focus on insurance for exporters or their financing banks against the risk of nonpayment by the borrower and/or buyer. The new government body will have capital of about AMD2 billion. The agency’s shares, which are fully owned by the government, are managed by the ministries of economy, finance, foreign affairs, agriculture, and energy and natural resources (Armenian Banks 2013a).

Little innovation has occurred in designing insurance products to meet consumer needs. The introduction of the two mandatory lines of business—compulsory motor third-party liability insurance in 2011 and the mandatory health plan for civil and public servants in 2012—has given an enormous boost to the insurance market. The share of mandatory insurance reached over 80% of total gross premiums in 2012 (Figure 8). Furthermore, in 2013, a bonus malus system was introduced for motor third-party liability insurance. Based on an amendment to the car insurance law, car owners had to pay penalties if they did not sign the insurance agreement within 10 days from 1 January 2014 (Armenian Banks 2014).

Armenia’s pension system covers little more than 16% of the population and the average pension is less than two-thirds of the minimal consumption basket.5 The total number of contributors is less than that of pensioners, and fiscal pressure on the system is being intensified by a constantly increasing number of pensioners, low wages, and high tax evasion. The government in 2011 started implementing pension reforms based on a multi-pillar system (European Commission 2011). A funded pension system introduced on 1 January 2014 is obligatory for all those born after 1 January 1974. The Central Bank of Armenia has registered two asset managers to manage the funds (Armenian Banks 2013b).

Distribution Channels

Four brokerage firms take part in the insurance market in Armenia. The pioneer (and so far the only company) to have introduced online distribution is Rosgosstrakh, which started selling travel insurance via the internet in 2013. However, low internet access (37% of households) means it may take years for online distribution to become a viable alternative.

5 According to the Economic Development and Research Center in Armenia (2011), the minimum livelihood basket or, as it is often referred to, the minimum

consumption basket contains nonfood products and services and the minimal staple food basket, which consists of products necessary for a normal life.

Figure 8: Weight of Mandatory versus Voluntary Insurance

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ion)

Compulsory MTPL Compulsory health Voluntary insurance lines

AMD = dram, MTPL = motor third-party liability.

Note: According to Xprimm, compulsory health comprised 90% of all health insurance premiums in 2012 and 2013. Health data for

2012 were estimated based on this statement.

Source: Xprimm.com. http://www.xprimm.com/.


Availability of Training in Insurance

Armenia generally lacks training in insurance science. Capacity development will need to cover accountants, distribution, information technology, and supervisory staff.

Availability of Actuaries

Armenia has very few actuaries, and it was only in 2010 that a professional certification program was established through a joint program of the Academy for Educational Development, USAID, and the Central Bank of Armenia. Yerevan State University now also offers a master of arts in actuarial mathematics, and in 2010 the Armenian Association of Actuaries was founded to contribute to the development of the profession and the science. Demand for actuaries is high, however, and will increase further with the growth of nonlife insurance and upcoming health insurance and pension reforms. In addition, any introduction of life insurance products will necessitate the further availability of actuarial skills.

Key Challenges and Opportunities

Market Development Challenges

A limited product range, limited skills and capacity, and the absence of a life insurance market are the main challenges in expanding insurance operations. The number of insurance products is limited and little innovation has occurred in designing products to match consumer needs. One major impediment to product design is the lack of capacity, particularly for actuaries. Furthermore, licensing issues in combination with a lack of experience mean that a life insurance market does not exist. Development of actuarial guidance needs to be a priority to attract life insurers, and such guidance should be a major area for technical assistance by international donors.

Regulatory and Policy Challenges

Lack of policy coordination among insurers. Developing the supply side of the insurance market requires building an integrated industry database of all financial performance and risk indicators and underwriting skills. Reliable current and historical data are critical for insurance companies to be able to conduct proper underwriting, pricing, financial analysis, claims handling, marketing, product development, and strategic planning. As the insurance sector in Armenia is still small, an integrated database would help reliable calculations and predictions to be made and result in economies of scale in the collection of data. Together with supporting regulations, this will also contribute toward increased risk retention and limiting the reliance of local insurers on reinsurance to manage small and medium risks.

Collaboration with international institutions is recommended on workshops for training supervisory and regulatory staff and to achieve international accreditation in insurance and actuarial sciences. Similarly, the German-based Access to Insurance Initiative serves as a facilitator for studies and training to improve the regulatory regime, particularly in developing market economies and consumer protection. On the demand side, a consumer rights protection framework should be developed to ensure proper practice and build trust. To this end, Armenia in 2012 developed an Action Plan on Financial Consumer Protection in cooperation with the World Bank to improve the country’s legislation on consumer protection.6

Societal and Cultural Challenges

The lack of an insurance culture, limited knowledge about how insurance works, and a general lack of trust in the insurance concept and its products are major obstacles that need to be addressed to increase penetration and operate on a larger scale. Insurance is prevalent among the urban middle class. Affluent people are not represented. Low-income and rural populations often lack access because of prohibitive pricing, remoteness, lack of appropriate products, and lack of information.

Opportunities

Expansion of the product range to cover different types of risk, including life insurance, and the increasing introduction of mandatory insurance offer opportunities for the Armenian insurance market to grow.

6 Similarly, Kazakhstan has drafted a proposal on harmonizing insurance legislation for Eurasian Economic Community member states, based on IAIS

principles for the protection of consumer rights.


Life insurance. A regulatory framework with a sequential road map needs to be put in place to help life insurers enter the market and to supervise their operations. A more developed life insurance market would see savings-linked insurance products introduced, which would reduce precautionary savings, encourage asset diversification, and allow institutional investors and pension funds to become the engine for widening and deepening domestic capital markets. Death and disability cover, retirement annuities, and asset management services offer significant potential for this and need to be integrated with pension reforms.

Health insurance. Discussions about implementing mandatory health insurance nationwide are under way, but have been postponed from the original starting date in 2013 and are now considered for 2015 (Azatutyun Radio 2013). In 2012, the government implemented a social benefits system for civil servants, with benefits including mandatory health insurance and coverage for families. Other mandatory classes, including public liability and worker compensation, could be considered.

Agriculture and disaster insurance. Natural hazards have caused substantial social and economic damage in Armenia over the past few decades. In fact, 80% of Armenians face a high risk of disaster caused by natural hazards and catastrophes. Floods and earthquakes cost the country over $33 million a year (United Nations Development Programme 2012). Given the agriculture sector’s exposure to production and price shocks for major export crops, agricultural insurance would be beneficial and have stabilizing effects on the economy. Due to low farm incomes, however, the government is not planning to introduce a mandatory policy at this time. Nevertheless, commercial insurance coverage for major export crops should be explored to boost trade. Since natural disasters will continue to absorb scarce resources, Armenia’s citizens would benefit from competitively priced disaster insurance to protect their houses and crops.

Microinsurance. Despite recent declines in poverty, over half of the Armenian population can be classified as vulnerable. As such, microinsurance can be a viable option for low-income households to increase their risk management capacities. Products expected to aid significantly in reducing vulnerability are life, disability, accident, health, and agricultural insurance. According to a study from 2009, microinsurance in Armenia is 60%–75% of the total insurance market in terms of policies issued (Pytkowska and Collier 2009). Microinsurance products can be bundled along with other financial services; for example, microfinance institutions can secure their lending portfolios by offering credit life insurance and thereby improve the uptake of credit for productive purposes by people on low incomes. Because of generally low incomes, microinsurance has much potential to achieve greater financial inclusion and contribute to fostering an insurance culture. As indicated, 36% of the population lives below the poverty line and could, for the first time, benefit from risk reduction products.

Developing additional distribution channels. The introduction of new technology can enable access to insurance using alternative distribution channels. Examples include tying coverage to utility or mobile phone contracts or distribution through retail store outlets or post offices. A benefit of these challenges is a reduction in administration and operational costs.

Insurance in Kazakhstan

Kazakhstan, geographically the largest of the former Soviet republics, excluding the Russian Federation, possesses enormous fossil-fuel reserves and supplies of other minerals and metals, such as uranium, copper, and zinc. It has a large agriculture sector consisting of livestock and grain. In 2002, Kazakhstan became the first country in the former Soviet Union to receive an investment-grade credit rating. After a recession in 2008, Kazakhstan has rebounded and GDP increased 7.5% in 2011 and 5.0% in 2012 (GDP per capita is estimated at $14,100). Kazakhstan has embarked on an ambitious diversification program, aimed at developing sectors including transport, pharmaceuticals, telecommunications, petrochemicals, and food processing to limit dependency on the energy sector.

In 2012, the population was estimated at 16.9 million, of which more than 70% were Muslim and over 55% lived in urban areas. Rich, modern, and fast-growing major cities contrast with sparsely populated and much less developed rural areas. The elderly dependency ratio is 9.9% and life expectancy 70 years (CIA 2013). As


a result of economic growth since 2010, inequality is less pronounced than in other Central and West Asian countries, and unemployment is low by regional standards. The poverty headcount rate declined from 46.7% in 2001 to 5.3% in 2012. According to the Global Findex in 2011, 42.1% of the population had an account at a formal financial institution. Telecommunications are improving, but require considerable investment, as does the information technology base. Mobile phone penetration has increased rapidly and is considered to be at 140%.


Trend for the Past 5 Years

Kazakhstan is the third-largest insurance market in the Commonwealth of Independent States after the Russian Federation and Ukraine. It ranks 68th in the world on premium rankings and its share of the world market is 0.02%. The insurance sector was hurt by the global financial crisis, but has enjoyed a strong recovery since 2010. Its total asset size in 2012 amounted to T442.6 billion ($2.84 billion) and reached T521.1 billion by 1 December 2013.7 Significant growth of 17% continued and aggregate gross premiums amounted to T237 billion in 2012 compared to almost T200 billion in 2011. The industry is projected to increase at a compound annual growth rate of 16% to T402.3 billion in 2017 (Post Online 2011).

The insurance market’s main growth drivers are government-initiated health and pension reforms and sound economic development, supported by the country’s relative stability and booming energy sector. Growing per capita incomes are raising demand for property, automobiles, and other nonfood categories, and this will likely be followed by a natural need for insurance. Mandatory policies like motor liability and workers’ accident policies further support the market. Kazakhstan still has a quite low insurance penetration of 0.67% (Figure 9),8 which is concentrated in the large cities of Astana and Almaty. Insurance density was the equivalent of about $100 in 2012.

7 See website of the Committee for the Control and Supervision of the Financial Market and Financial Organisations of the National Bank of the Republic

Kazakhstan (http://www.afn.kz).

8 See Committee for the Control and Supervision of the Financial Market and Financial Organisations of the National Bank of the Republic Kazakhstan (2013).

Values vary depending on source and calculation. If the premium sum contains reinsurance premiums, the penetration rate is about 1 percentage point

higher. See Xprimm rates in comparison.


$53

$62

$79

$93

$108

0.65%

0.73%

0.64%

0.67%

$0

$20

$40

$60

$80

$100

$120

0.6%

0.7%

0.8%

2009 2010 2011 2012 2013

Density (GWP/population) in US$ Overall penetration rate

GWP = gross written premium.

Source: Xprimm publications on insurance and pensions; National Bank of Kazakhstan for penetration rate (not available for 2013 yet).


At the start of 2014, 34 insurance companies were licensed in Kazakhstan, including 7 life insurers and 14 registered insurance brokers.9 In addition, there were 108 mutual insurance associations, mainly involved in crop and agricultural insurance. The associations are not subject to licensing, regulatory, or supervisory requirements, but operate under the country’s Mutual and Cooperative Insurance Law. Kazakhstan’s insurance market is dominated by domestic companies and in recent years has consolidated, reducing the number of insurers from 42 in 2000. The five largest insurance companies account for 37.5% of total premiums.10 Kazakhstan is considered as having a strong and concise regulatory system,11 with key norms in place that are crucial for further development.

AIG Uzbekinvest, formerly Chartis, is the only foreign insurer after two major players—Allianz in 2011 and Generali Life in 2013—left the market.12 Seven insurance companies are nonresident participants (Xprimm 2013b), and there are two state-owned insurers: State Annuity Company and KazExportGarant. Most life insurers offer annuity insurance and mandatory workers’ accident insurance; only two insurers practice classical life insurance (BTA Life, Kazkommerz Life). Most life insurers in Kazakhstan were established as subsidiaries of banks as a requirement for loan disbursement to reduce the risk on loan portfolios in case of client default. The three market leaders have a combined market share of over 65% (Figure 11).

The nonlife market is dominated by a small number of local insurers that are tiny by international standards and primarily involved in underwriting property (Figure 12). The three market leaders have a combined market share of 45%.

9 See website of the Committee for the Control and Supervision of the Financial Market and Financial Organisations of the National Bank of the Republic

Kazakhstan (http://www.afn.kz).

10 See Committee for the Control and Supervision of the Financial Market and Financial Organisations of the National Bank of the Republic Kazakhstan (2013).

11 The Eurasian Model for Development of Ex-USSR Insurance Markets, Sergey Sarkisov; Euro-Asian International Insurance Society, 48th Annual Seminar.

12 Chartis was renamed as AIG Uzbekinvest in December 2013.

Figure 10: Life and Nonlife Market (2009–2013)

all life0

50,000

100,000

150,000

200,000

250,000

300,000

2009 2010 2011 2012 2013

T m

illi

on

Paid claims, nonlife

Paid claims, life

GWP nonlife

GWP annuity (v)

GWP life insurance (v)

GWP = gross written premium, T = tenge, v = voluntary insurance.

Note: No 2009 data exist for the distinction between annuities and life products.

Source: Xprimm publications on insurance and pensions.



Voluntary versus mandatory insurance. Kazakhstan has two mandatory insurance lines—motor third-party liability and workers’ accident insurance. Nevertheless, voluntary insurance policies make up the largest part of the national portfolio (at over 75%) (Figure 13). Kazakhstan is a unique case of an underdeveloped nonlife market in which voluntary property insurance is dominant over mandatory motor insurance. Each of the mandatory insurance lines accounted for only 11% of the national portfolio in 2012. However, a discussion is under way on introducing mandatory property insurance against catastrophic risks.

Figure 11: Market Share of Life Insurers (2009–2013)

0%

5%

10%

15%

20%

25%

30%

35%

2009 2010 2011 2012 2013

PPF (formerly Generali Life)

Kazkommerts-Life

Nomad Life (formerly Astana-Finance Life)

Halyk-Life

BTA Life

Alliance-Life Ins.


Figure 12: Market Share of Top 10 Nonlife Insurers (2009–2013)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2009 2010 2011 2012 2013

Kaspi Insurance (formerly Almaty)

Eurasia

Halyk-Kazakhinstrakh

Tsesna Garant

Nomad Insurance

Oil Ins. Company

Nomad Life (formerly Astana Finance)

BTA Insurance

Amanat Insurance

Kazkommerts-Policy

Note: Where data are missing, they were not available.



Life sector. Life and annuity classes of insurance in Kazakhstan are sold exclusively by life insurers. Accident and health insurance are the only business lines in which both life and nonlife providers may operate, with all other insurance types sold by nonlife insurers. Life insurance makes up the smaller portion of the market by far and remains underdeveloped. In spite of strong recent growth, life insurance still accounts for only 22% of gross written premiums. In 2013, over two-thirds of life insurance contracts were annuities,13 consisting mostly of pension plans and mandatory employers’ accident insurance plans. A strong growth driver for annuities has been the transfer of pension savings from pension funds to life insurance companies.

Nonlife sector. The main nonlife business lines in Kazakhstan are accident, health, property, general third-party liability, and motor insurance (Figure 14). Opportunities for nonlife insurers are to a large extent linked to Kazakhstan’s energy and manufacturing industry.

Health insurance. Health insurance premiums accounted for only about 8% of total premiums as of the third quarter of 2013.14 Only about 200,000 people are covered by a voluntary health insurance that covers dental services, outpatient and inpatient treatment, and medicine. The average annual premium is $250 and average coverage is $5,000. These policies are not popular due to their high cost. Moreover, when severe diseases are detected, the coverage is often cancelled. Insurance companies are working together to develop a universal concept of mandatory health insurance that will reach all consumers, including the socially vulnerable, such as unemployed mothers and pensioners in remote villages.

Disaster insurance. Seven regions of Kazakhstan are situated in earthquake zones, and others are frequently hit by floods. Insurance companies regularly register an increase in sales of voluntary property insurance after earthquakes (Post Online 2011). Nevertheless, catastrophe insurance coverage of the assets of individuals and small businesses is virtually nonexistent. Residential property is not usually insured against natural disasters (property might be insured against fire but not earthquakes), and the government compensates rehabilitation and recovery-related expenses. Corporations usually buy insurance and reinsure from abroad due to the significant disaster risks involved. Most insurers have no reliable quantitative estimates of their peak risk exposures (the probable maximal loss for given return periods), leaving them financially vulnerable to catastrophic events. Given the insufficient demand for catastrophic risk coverage, the government is now discussing mandatory property insurance against all natural and human-made catastrophes, and proposals for a draft law. Once instituted, it is expected that mandatory property insurance will be supervised by the state real-estate insurance fund, a joint-stock company with the government as its founder and sole shareholder (Kazakh TV 2013).

Mandatory motor third-party liability insurance. This makes up 11% of total premiums and is sold through insurers. A lack of consumer literacy and confidence means that the claims ratio is low, with accidents still

13 See National Bank of Kazakhstan. http://www.nationalbank.kz/?docid=684 (in Kazakh).

14 See National Bank of Kazakhstan. http://www.nationalbank.kz/?docid=684 (in Kazakh).

Figure 13: Mandatory versus Voluntary Insurance by Gross Written Premium (2009–2013)

-

50,000

100,000

150,000

200,000

250,000

300,000

2009 2010 2011 2012 2013

Worker against accidents (c) MTPL (c) Total voluntary

GW

T, T

mil

lion

c = compulsory insurance, MTPL = motor third-party liability, T = tenge.



settled on the road with no recourse to insurance. The reasons for the low take-up are that (i) large segments of the population are unaware of the importance of this insurance and view it as a tax, (ii) poor claim-settlement and validation procedures deter drivers from filing claims, (iii) understatement of loss provisions and claim costs combined with price controls results in inadequate pricing, and (iv) predatory pricing.

Cross-border insurance. An interstate insurers’ union—the Eurasian Insurance Organizations Congress—was created in 2012 throughout the customs union of Belarus, Kazakhstan, and the Russian Federation. Its main objective is to harmonize insurance legislation and facilitate further unification of insurance markets in the union. For motor third-party liability insurance, a unique database to provide information for the entire economic region is planned. The unique economic market for Belarus, Kazakhstan, and the Russian Federation must be functional by 2020 under the union.

Workers’ accident insurance. Market size is estimated at $100 billion and accounts for 11% of total premiums. Since life insurers were mandated in 2012 to underwrite workers’ accident insurance, retail sales of traditional life insurance products have declined and the shift in focus has taken up time and resources. However, life insurers have taken steps to expand their networks by recruiting and training more agents. Previously, nonlife insurers offered coverage for up to 1 year for occupational diseases. Under the new regime, lifelong compensation is required.

Islamic insurance. Takaful is emerging, with a draft law and schemes under discussion to allow for its introduction. However, first offers seem to be already available, judging from the internet sites of some Islamic finance providers who are adding Islamic insurance to their portfolios (such as Istisna Corporation and Takaful Halal Insurance).15

Agriculture insurance. Subsidized insurance is offered against damage to crops from weather risks. The government compensates 50% of losses reported by participating insurance companies. The program is administered by the state-owned joint-stock company Kazagrofinance, the Fund for Financial Support of Agriculture, which distributes government-allocated funds to promote agricultural insurance. In addition, some private insurers and mutual assistance companies offer agricultural insurance under this subsidized program.

15 See the websites of Istisna Corporation (http://www.istisna.kz/eng/?page_id=150) and Takaful Halal Insurance (http://www.takaful.kz/index.

php?option=com_content&view=category&layout=blog&id=7&Itemid=17&lang=en).

Figure 14: Type of Nonlife Insurance Sold (2009–2013) (T million)

0

50,000

100,000

150,000

200,000

250,000

2009 2010 2011 2012 2013

Motor hull (v)

MTPL (c)

Others (c)+(v)

Workers against accidents (c)

Financial losses (v)

GTPL (v)

Cargo (v)

Property insurance (v)

Sickness (v)

Accidents (v)

c = compulsory insurance, GTPL = general third-party liability, MTPL = motor third-party liability, v = voluntary insurance.



Access to international reinsurance is a major constraint, which means that insurance companies in Kazakhstan retain all agricultural risks. Livestock insurance is voluntary and public information is not available.

Reinsurance. No large local reinsurance companies operate nationally and insurers instead cooperate with companies in the Russian Federation and Europe. Given the lack of domestic capacity to underwrite, putting in place insurance pools for disaster and aircraft risks is a priority. Recent regulations for reinsurers, including overseas-based companies, have become more restrictive, requiring 60% of reinsurance to be retained in Kazakhstan. To transfer risk to a foreign reinsurer with a low rating, a local insurance company first has to offer the risk to 10 local reinsurers. If local reinsurers decline or if the risk is not fully placed, the insurance company has the right to transfer the risk to a foreign reinsurance company with a rating lower than A. The new requirements encourage insurance companies to work with large reinsurers to increase the capital and domestic share in reinsurance (Xprimm 2013c).


The market is strongly dependent on the banking sales channel. Banks act as agents through subsidiary insurance companies. Low losses make bancassurance products attractive to insurers. Banks continue to mandate clients to insure with their affiliates when offering a loan so that they do not have to share the profit. The post office can also act as an agent for distributing insurance products. Legislative barriers exist for transacting insurance business on the internet. Multilevel marketing of insurance policies is prevalent but is associated with the risk of mis-selling to clients.

Kazakhstan has 12 insurance brokers, of which six have foreign participation. No licensing requirement or regulation is in place to monitor their activities, although annual on-site inspections of two or three insurance brokers are planned (ADB 2013c). One of the primary stumbling blocks to expanding insurance is the high transaction cost associated with distributing and managing large volumes of small policies. Alternate distribution channels (such as mobile phones, ATMs, kiosks, service points, utility providers, the internet, microfinance institutions, and mutual organizations) need to be explored alongside recommendations for potential amendments to the regulatory framework. To allow for mobile payments for insurance premiums or enrollment via short messaging service, legal amendments often have to be made. Using partners such as mobile-network providers or distributing through supermarket counters may also require changes in the regulatory framework to permit such channels.


Insurance agents are not regulated, and insurers are responsible for training and maintaining a registry of agents. With the modernization of insurance laws and supervisory regimes, the insurance industry in Kazakhstan has begun to realize the benefits of professionally qualified staff. However, the number of personnel with professional skills and qualifications in insurance remains low. Numerous small insurers are “key man” dependent. Insurers are reluctant to invest in training due to high attrition rates for trained and qualified staff. The International Business School offers a Master of Business Administration program in Insurance Science in cooperation with the Malaysian Insurance Institute.16 Further investment in human capital through training is recommended to strengthen the professional skills and expertise of supervisors, industry participants, and local professionals (ADB 2013e ).


The market has a strong actuarial institute and the National Bank of Kazakhstan listed 73 actuaries as of January 2014. Licensing requirements (renewable every 3 years) include participation in training at six levels and related tests by the Actuarial Society of Kazakhstan.17 The society’s role is complemented by the Kazakhstan Actuarial Center, a consulting company which the central bank established in 2001 to promote the profession’s development and to build up actuarial research and consulting capacity.

16 See Youth Educational Portal. 2013. Postgraduate Education and MBA. Astana. http://www.ya-student.kz/en/postgraduate_education_and_an_mba/mba_

in_kazakhstan/36313/#content.

17 The society was legally registered in 2001 and is an observing member in the International Actuarial Association. If candidates pass their exams, the National

Bank of Kazakhstan grants a license for carrying out actuarial work.




Slow growth of the voluntary insurance sector remains a concern given its potential to contribute to financial and economic development. Constraining factors include

(i) fragmented market structures where many insurers are not big enough to build adequate risk pools, underwrite contracts, and innovate;

(ii) the small number of life insurers, reflecting the sector’s low development; (iii) products that tend to be traditional, bundled structures such as whole life and endowment, reflecting

underdeveloped capital markets and limited actuarial resources;(iv) unsupportive tax regimes and social and human development factors; and(v) a lack of qualified staff in insurance companies.


Local insurers are generally undercapitalized, overly reliant on corporate contracts from local companies, and heavily exposed to the market for local corporate and government bonds. The regulatory environment has become more challenging because it restricts the list of reinsurance companies with which Kazakhstan’s insurance companies can do business. For foreign insurers, legislation provides for the possibility for nonresidents to become founders and shareholders of insurance companies. No limits have been set on foreign ownership of the share capital of insurance and reinsurance companies; however, foreign interest seems to be limited and two foreign players, as noted, have recently withdrawn from the market. Three main changes to the regulatory framework for insurance have recently been announced:

(i) improving the effectiveness of the mandatory insurance system, including the establishment of clear criteria for its introduction and optimization;

(ii) developing Islamic finance, including thorough legislative regulation of Islamic insurance companies and the establishment of the principles of Islamic insurance; and

(iii) implementing the IAIS Insurance Core Principles.18


The absence of products with cultural or religious preferences, especially in the life insurance segment, is a barrier to increased take-up in Kazakhstan. Products generally are not designed to meet the specific characteristics of the low-income market, particularly the irregular cash flows of workers in the informal economy. A lack of trust in insurance is prevalent.

Insurance in Turkmenistan

Turkmenistan became independent in 1991 as a result of the dissolution of the Soviet Union. The country has 5.2 million people (2012),19 of which 72% are Turkmen, 12% Russian, and 9% Uzbek. About 93% of the population is Muslim, and roughly half the population lives in urban areas. Given rapid economic growth between 2005 and 2010, estimates suggest that absolute poverty rates may have halved over that time and are now among the lowest in Asia. Life expectancy is 70.6 years and GDP per capita is estimated at $6,798.20

Turkmenistan is largely a desert country with intensive agriculture in irrigated oases and sizable gas and oil resources. The two predominant crops are cotton and wheat. In overall terms, agriculture accounts for about 12% of GDP and employs about 39% of the workforce. Extensive hydrocarbon and natural gas reserves, which have yet to be fully exploited, have begun to transform the country. Turkmenistan is moving to expand its extraction and delivery projects and additional pipelines will help diversify hydrocarbon export routes. The

18 See Xprimm (2013b).

19 See World Bank country database on Turkmenistan (http://data.worldbank.org/country/turkmenistan).

20 See World Bank database on GDP per capita indicators.


Trans-Afghanistan Pipeline is a proposed natural gas pipeline that will transport gas from Turkmenistan to India and is expected to be completed in 2017.

Most of Turkmenistan’s economic statistics are not publicly available and most of the data are based on estimates.21 Turkmenistan held its first multicandidate presidential election in February 2007 and Gurbanguly Berdimuhamedov was reelected as president in 2012. According to the Global Findex, financial access is low and in 2011 only 0.4% of the population over the age of 15 had an account at a formal financial institution.22 The literacy rate is high at 99% and the old-age dependency ratio is 6.1%. Legislation on microfinance institutes and microfinance was passed only recently, in 2011. By the end of 2012, there were reportedly about 4 million mobile-phone subscribers, a penetration rate of around 80% (Research and Markets 2013a). Access to the internet is gradually expanding, though it remains somewhat unreliable and expensive.


Trends in the Past 5 Years

The insurance industry in Turkmenistan is small, both in size and significance. Insurance penetration was 0.2% in 2012, compared to a global average of 6.7%. The industry has achieved significant growth in written premiums, recording a 20.2% compound annual growth rate from 2008 to $70.4 million in 2012 (Research and Markets 2013b). That was spurred partly by rapid economic development, enhanced demand for nonlife insurance, and a positive regulatory policy. Nonlife insurance accounted for 97% of the domestic industry and voluntary insurance accounted for 95%. The insurance industry in Turkmenistan is forecast to grow at a 15.5% compound annual growth rate to exceed $144.5 million by 2017. Life insurance is forecast to remain the smallest segment; personal accident and health is likely to increase to almost 3% of the market.

In 2012, Turkmenistan’s parliament approved a new insurance law that is coupled with a government program to develop private insurance companies. This addresses the conditions necessary for developing the insurance market and the challenges for regulation and supervision of insurance and reinsurance. The focus is on licensing, regulation, and the winding up of insurance and reinsurance companies. It also allows foreign companies to enter the market by establishing joint ventures with Turkmen entities (with a maximum 49% foreign ownership). The authorities have also adopted a new state pension insurance law and established a state pension fund.

Approval of the new law on insurance follows recent economic reform in Turkmenistan, which has given an impetus to rethinking the role of insurance as one of the main financial instruments of a market economy. President Berdimuhamedov has further emphasized the role of insurance to help Turkmenistan transition to a market economy by promoting economic and business activity, opening new avenues for long-term domestic investment, protecting physical and legal entities from risks, and restricting the diversion of a significant proportion of working capital for compensation to ensure continuity of the production cycle.

There are two providers of insurance services and products: Turkmengosstrah (State Insurance Organization of Turkmenistan) and Atiyaclandyrys Hyzmatlary (Insurance Service). After the collapse of the Soviet Union, the insurance market was partially opened to competition between both state and private companies. However, in 2000, the government effectively renationalized the industry by cancelling the licenses of all private insurers.

This monopoly situation might have halted the development of Turkmenistan’s insurance industry and contributed to a decline in market penetration (Figure 15). In recent years, however, the insurance market has rebounded. Turkmengosstrah has an extensive network with more than 40 offices offering a wide range of products that include for example insurance of property, agricultural crops and property, employers’ liability, and so on. A considerable part of the reinsurance of Turkmengosstrah is implemented through leading international reinsurance brokers, including Marsh, AON, Colemont, HSBC, and Willis. In 2012, Atiyaclandyrys Hyzmatlary entered the market with local entities as key shareholders: Turkmengas (with a 25% stake), Turkmenistan Airlines (15%), and the State Insurance Organization of Turkmenistan (10%).

21 Confirmed by Xprimm.

22 See World Bank’s World DataBank.


In 2013, the World Bank and the Ministry of Finance of Turkmenistan signed the Reimbursable Advisory Services Agreement, which is an integral part of the World Bank’s interim strategy for Turkmenistan. The agreement indicates the strong commitment of the government to reform the financial, banking, and private sectors. Activities under the agreement are part of a 2-year program of cooperation and focus on macroeconomic statistics, financial services, and private sector development. The entire program will be arranged, managed, delivered, and supervised by the World Bank. It is envisaged that the World Bank will deliver a series of training sessions on insurance for representatives of key national and local stakeholders on policy making, regulatory bodies, insurance businesses, and so on. Turkmengosstrah recently moved to a modern automation system to integrate information technology processes in cooperation with Diasoft. All the data required for reporting, operations analysis, maintenance, management, and protection of information have been consolidated in a single database (Diasoft 2013).


More than 28 types of voluntary and 4 types of mandatory insurance services are provided to private persons and legal entities, including life and nonlife policies (Figures 16 and 17). In 2012, mandatory policies made

Figure 15: Density and Penetration Rate 2009–2012

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0

2

4

6

8

10

12

14

16

2009 2010 2011 2012

GW

P/

GD

P

US

doll

ar

Density in $ Penetration rate



Figure 16: GWP 2009–2012: Voluntary versus Mandatory Insurance

0

50

100

150

200

250

2009 2010 2011 2012

GW

P,

T m

illi

on

Voluntary insurance Mandatory insurance

GWP = gross written premium, TMM = Turkmen manat.


35

up only 5% of Turkmenistan’s total insurance market. In March 2013, mandatory environmental insurance was introduced for enterprises conducting activities hazardous to the ecology. The coverage is sold by the state insurance company of Turkmenistan and the insurance contracts are controlled by the Ministry of Nature Protection.


Turkmengosstrah (State Insurance Organization of Turkmenistan) has an extensive network of more than 40 offices with over 400 agents (Table 2).


The United Kingdom-based Chartered Insurance Institute has delivered training for the staff of the State Insurance Organization of Turkmenistan. Topics covered have included life and nonlife insurance, reinsurance, actuarial methods and mathematics, risk management, and so on. Property insurance has also featured (Turkmenistan.ru 2014).


In-house units provide actuarial services. Local consultancies are also present.

Figure 17: Types of Insurance 2010–2013: GWP

0

50

100

150

200

250

2010 2011 2012 2013

GW

P,

TMT

mil

lion

Property insurance

Liability insurance

Personal insurance

Mandatory insurance

GWP = gross written premium, TMT = Turkmen manat.

Note: The numbers for 2012 are estimates derived from xprimm.com.


Table 2: Types of Insurances Available at Turkmengosstrah

Obligatory types of insurance Voluntary private insurance Voluntary corporate insurance

• Motor third-party liability

• Obligatory insurance of passengers

of all types of transport, light

crews, and employees of railway,

seaway, inland waterway, and

automobile transportation

• Obligatory (life) insurance for

accidents and occupational

diseases of workers employed in

high-risk manufacture

• Voluntary home property insurance

• Building

• Accident

• Motor vehicle

• Health insurance for citizens abroad

• Schoolchildren accident

• Domestic animals

• Life

• Apartments

• Agricultural crops

• Agricultural property

• Cargo

• Enterprise property

• Civil law liability

• Drilling

• Building and assembly jobs

• Employee group accident

• Environment

Source: Listed on the web site of the State Insurance Organization of Turkmenistan. http://www.insurance.gov.tm/eng_structure.html.



Turkmenistan’s insurance sector needs to undergo comprehensive institutional and organizational transformation to realize its full potential for mobilizing and investing long-term funds and facilitating prudent risk management practices. Opportunities exist to expand the market on the demand and supply sides, and for the authorities to put in place streamlined legal, regulatory, and supervisory frameworks conducive to insurance sector development.


The restrictive environment for competition poses constraints to the development of Turkmenistan’s insurance market.


The legal base has progressed somewhat since January 2013, when the new insurance law came into force. The favorable impact of this law on new market entrants and partners should be tracked in coming years. Furthermore, the recent introduction of mandatory environmental insurance supports the continued development of the market.


Part of the explanation for the limited role insurance plays in Turkmenistan may lie in prejudice and misgivings about insurance which need to be overcome through comprehensive financial literacy programs. These could be coordinated with microfinance institutions.

Insurance in Uzbekistan

Uzbekistan’s population is estimated at 29.8 million (in 2012) with 36% of people living in urban areas. The country’s real GDP growth is among the highest in Central Asia, at more than 7% a year since 2004 despite the global financial and economic crisis. Remittances account for 12%–15% of GDP. Growth was driven mainly by industry (including construction) and services. Per capita gross national income was $1,720 in 2012.23 Financial sector infrastructure remains underdeveloped and, according to the Global Findex, in 2011 only 22.5% of the population aged over 15 had an account at a formal financial institution.24 No reliable numbers have been collected on Uzbekistan’s poverty rate. The rate of mobile phone penetration is estimated at 76% and internet access at 20% of the population (World Bank and International Telecommunication Union 2012).


Trends in the Past 5 Years

Strong recent growth of GDP is reflected in a surge of insurance premiums, although Uzbekistan remains among the world’s smallest markets for such products, with a market penetration of 0.3% of GDP, one-tenth that of the 3.0% average for emerging markets (Figure 18). Insurance spending per capita is also among the lowest in the Commonwealth of Independent States, with Uzbekistan’s insurance density equaling $5.30 per capita in 2012. Nevertheless, the market is steadily getting bigger and growth rates for insurance premiums and payments in the first 6 months of 2013 reached the highest in 3 years (Figure 19). According to the Ministry of Finance, insurance premiums in 2013 surged 18% compared to last year and amounted to SUM338.483 billion ($152.197 million). Almost 60% of gross written premiums were paid by customers based in the capital, Tashkent (Xprimm 2012).

According to information-rating agency SAIPRO, as of 1 January 2014, there were 31 insurance companies licensed to sell insurance: 2 life insurers and 29 nonlife insurers. Compared to 2012, the number of insurance companies has decreased by two after the licenses of Transinsurance Plus and Total Insurance Group were

23 See World Bank country database on Uzbekistan (http://data.worldbank.org/country/uzbekistan).

24 See World Bank’s Databank.


terminated. Four insurance brokers operate in Uzbekistan: TAT-Reinsure Brok LLC, GrECo JLT, Serious Aspect in Insurance, and Insurance Broker Consulting (Uz Report Insurance 2014b).

Uzbekistan’s insurance market is led by three state-owned insurers: Uzbekinvest (which had an 18.2% market share in 2013) (Figure 20), Uzagrosugurta (13%), and Kafolat (9.2%). Four new companies entered the market in 2011: Hamkor Sugurta, Halq Sugurta, DD-General Insurance, and Gross Insurance (Figure 21). The founders of the first two companies are commercial banks and Gross Insurance was started by a pharmaceutical company.

The Association of Professional Participants of the Uzbekistan Insurance Market is the independent industry association. However, membership is not mandatory, and this has resulted in poor stakeholder participation. The association aims to develop into a self-regulating organization to assist the State Insurance Supervision Board in carrying out market oversight. Achieving this will involve training and licensing of insurance agents, brokers, adjusters, and other industry participants; it also assumes that the association will enforce its own code


$0

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2009 2010 2011 2012 2013

Density (GWP/population) in $ Penetration (GWP/GDP)


Note: Exchange rates according to the European Central Bank and GDP data from World Bank. Penetration rates not yet available for 2013.


Figure 19: Insurance Sector over Time: GWP and Claims (SUM billion)

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Total market claims paid Total market GWP




of conduct. The association is looking at the possibility of setting up an insurance training arm and collaborating with reputable international training bodies in insurance and risk management overseas.25


The major lines of insurance business are mandatory motor vehicle and employers’ liability cover, contractors’ all-risk insurance, export credit insurance, and property insurance, including coverage against all types of catastrophe. More than 800 insurance products are on offer but they do not correspond to specific product categories or business lines. Moreover, public information and data on product performance are not available.

Mandatory and voluntary insurance. Voluntary insurance accounted for 68% of total underwritings in 2012, with growth of 17% that year (Figure 22). The introduction of mandatory motor vehicle third-party liability insurance in 2008 has been powering Uzbekistan’s insurance market since then, with premiums totaling SUM57.9 billion in 2013, an increase of 27.6% from the previous year (Uz Report Insurance 2014a). Six types of mandatory insurance are available and competition for commission is driving sales. However, despite a low claims ratio,

25 ADB. TA-7709 (REG) Financial Sector Development in Central and West Asia. Project Report. ADB: Manila.

Figure 20: State-Owned versus Private Insurers (2009–2013): GWP (SUM billion)

0

50

100

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2009 2010 2011 2012 2013

State owned Privately owned



Figure 21: Market Share of Top Five Insurers

0%

2%

4%

6%

8%

10%

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14%

16%

18%

20%

2009 2010 2011 2012 2013

Uzagro Insurance (state owned)

Uzbekinvest (state owned)

Asia Insurance

Alfa Invest

Kafolat (state owned)

Source: Xprimm Publications on insurance and pensions.


many insurance companies are not generating profits from these products due to high administration and enforcement costs and the low premiums collected. The generally positive dynamics of mandatory insurance could be enhanced by business lines such as employers’ liability, health, and environment insurance and mandatory construction insurance.

Property insurance. Revenues from property insurance reportedly increased significantly in the first 9 months of 2013, rising 30.7% to SUM118.8 billion from the previous year. That period also saw a decline in the number of contracts, suggesting that insurers are increasingly selling complex insurance contracts that cover several insurance types. The share of property insurance in total insurance contracts was 15.9% in the first 9 months of 2013 (Uz Report Insurance 2013a).

Pensions. Uzbekistan has a two-pillar pension system, consisting of a pay-as-you-go social security fund and a mandatory pension fund. The state social security fund is financed from government revenues and includes a range of programs such as disability insurance. Voluntary private plans for retirement savings have not been introduced, but there is an option for contributing to the Accumulation Pension Fund on a voluntary basis. Deposits are invested in a state-owned pension fund, with assets under management equivalent to 0.1% of GDP (ADB 2010).

Life insurance. Group endowment and group term life policies, renewed on an annual basis, are the main types of products sold in Uzbekistan. A guaranteed fixed bonus of 1% is paid to policyholders and insurance commission is set at 3.5% of the premium per policy year. Mortgage insurance is purchased on a voluntary basis. Annuity products are also sold, and are mandatory under employers’ liability insurance in which employers contribute premiums and, in the event of the death of an employee, purchase annuities in the name of the beneficiary. The State Insurance Supervision Board stipulates investment restrictions on bank deposits (70%), shares (10%), and bonds (20%) for life insurance (ADB 2010).

Health care insurance. The Welfare Improvement Strategy Document of Uzbekistan for 2013–2015 highlights the importance of improving the effectiveness of the existing health care system, which aims to achieve universal access to primary services (Country Planning Cycle Database 2013). Introducing a financing system through health insurance is an important mechanism for achieving reform. Health insurance is voluntary and exact numbers for premiums are not available.

Microinsurance. This is still in an early stage of development in Uzbekistan. In 2008, a technical assistance initiative by the United Nations Development Programme reviewed the insurance industry’s legal and regulatory frameworks to help extend insurance to low-income households (the review also highlighted the

Figure 22: Weight of Mandatory versus Voluntary Insurance

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Mandatory insurance Voluntary insurance




potential for agriculture and crop insurance). In 2011, a dedicated microinsurance company, Xalq Sugurta (People’s Insurance) promoted by Xalq Bank, with technical assistance from the Savings Banks Foundation for International Cooperation, launched two microinsurance products featuring credit life (covering borrowers’ liability of unpaid loans in the event of death) and accident and property insurance for small and medium-sized enterprises. The average monthly premium is the equivalent of €0.67 and the average sum assured is €640.


Insurance agents. As of mid-2013, 6,541 agents operated in Uzbekistan’s insurance market: 6,541 individuals and 1,827 legal entities (Country Planning Cycle Database 2013). About half are in rural areas. Insurance agents procure the largest portion of premiums through mass-marketed products such as insurance against accidents, and voluntary and mandatory motor vehicle insurance. They are paid through commissions from the insurance company, with the maximum rate set at 25%. Distribution costs are high, making insurance products unpopular and unaffordable among the wider population. No licensing requirements exist for insurance agents and many possess inadequate knowledge of the products they sell.


The Tashkent Financial Institute offers degrees in finance, with course work in insurance sciences. However, training in insurance as well as actuarial capacity building is insufficient even as it is a prerequisite for the market’s continued growth. In 2013, the state-owned insurer UzAgroSug’urta held interregional training seminars in several regions, focusing on the development and introduction of new products, and insuring export contracts against political and commercial risks (Uz Report Insurance 2013b). In 2013, government officials visited the Republic of Korea to take part in seminars and field studies on insurance industry supervision. The visit was a result of a memorandum signed between the Republic of Korea and Uzbekistan to strengthen partnerships between each other’s financial authorities (Korea.net 2013).The World Bank has also organized insurance training.


In 2013, two firms in Uzbekistan offered actuarial services:26 Actuarial Service Bureau, established in 2008, was the country’s first actuarial firm; and Actuarial Advisers, about which no information is publicly available.



The development of mobile financial services in rural areas could be pursued to ensure people have access to affordable and effective financial services using mobile phones. Necessary measures include a further review of the regulatory framework for e-payment supervision, e-signatures, and branchless banking, as well as further facilitation of mobile payment options, internet banking, point-of-sale payments, and the use of unified plastic cards. Beeline, a mobile-phone service provider, already offers mobile financial services in Uzbekistan which could bridge the access barrier of remoteness. The insurance supervisor needs to provide a regulatory framework so that people can use it to pay insurance premiums.


Regulations governing the insurance market came into effect in 2008. Insurers are required to report, among other things, premiums, technical reserves, solvency, and insurance investments on a quarterly basis to the State Insurance Supervision Board. Insurers submit these returns manually. Monitoring the solvency of insurance companies is difficult, and there is no separation between shareholder and policyholder funds. Off-site inspection is mostly confined to checking documents for legal compliance and only about 10–12 on-site inspections are carried out each year. Shortfalls in solvency can lead to fines and operating suspensions of up to 10 days. Under legislative changes for amending requirements on minimum share capital, insurers have to increase their share capital by July 2014.27

26 “There were also three licensed brokerage companies at the end of 2011, 15 adjusters and surveyors, 2 actuaries (licensed by the Ministry of Finance), and

two assistance companies (or third-party administrators).” (ADB 2013d).

27 For general insurance activity, this rises to SUM3.51 billion ($1.95 million), for life insurance to SUM4.68 billion ($2.60 million), for mandatory insurance to

SUM7.03 billion ($3.90 million), and for exclusive reinsurance to SUM14.05 billion ($7.80 million).


In 2013, the Legislative Chamber of the Republic of Uzbekistan considered a draft law to amend Article 26 of the insurance law to give the authorities more effective control over the implementation of statutory requirements on compulsory products. The proposed amendments will allow insurers to pass on to the Supervision Board information regarding the insured persons and beneficiaries as well as the insured property and insured sum.


Slow growth in the insurance penetration rate and negligible growth of life insurance in Uzbekistan can be attributed to regulatory, social, human development, and cultural factors, as well as the state-dominated market structure. The social and cultural reasons for low take-up are similar to the other three case study countries—an insurance culture is virtually nonexistent, available products are not what people need, financial literacy is low, and large rural–urban gaps in income and access are barriers to insurance. Microinsurance and Takaful should be the first steps toward a more client-oriented product design.

42

Making Insurance Work in Central and West Asia

C entral and West Asia has experienced robust average economic growth since the start of the 2000s. Even though Kazakhstan has the highest GDP, Uzbekistan and Turkmenistan are the most rapidly developing countries. Nevertheless, the countries in this study still have large, socially vulnerable populations, particularly Armenia and Uzbekistan, where per capita income remains low (Figures 23

and 24). All four case countries exhibit strong income and infrastructural discrepancies between their urban centers and often remote rural areas, where on average half of the population lives. Uzbekistan, Kazakhstan, and Turkmenistan together have a Muslim population of over 45 million.

Figure 23: Population Size and per Capita GDP (2012)

7.1%

5.1%

11.1%

8.2%

$0

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Source: World Bank. Data. Countries and Economies.

Figure 24: GDP and GDP Growth Rates

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Making Insurance Work in Central and West Asia 43

Cross-Country Synthesis

The Commonwealth of Independent States is generally at the beginning phase of developing an insurance market, with Kazakhstan and the Ukraine being the region’s most advanced (Figure 25). The region as a whole shows many similarities to other emerging economies where a legacy of state ownership, relatively low GDP, high income inequality, and less developed capital markets prevail, such as the Middle East, North Africa, Central and Eastern Europe, Indonesia, and Pakistan. This is not homogenous however—some countries are less developed than others based on regulatory regimes, the degree of market liberalization, fossil resources, and GDP.

Even though all four insurance markets in this study have shown considerable growth over the recent years, comparison within the region shows that per capita insurance density of), Armenia (€20.30), Turkmenistan (at €9.80) and Uzbekistan (€3.70) are the smallest insurance markets, also when per capita premiums are considered. By contrast, Kazakhstan has a much higher per capita insurance density of €70, which compares well to an average €62 in Eastern Europe and €115 in the Russian Federation (UNIQA Group 2012).

Penetration rates have been miniscule until very recently, although Armenia (0.9%) is approaching the 1.0% mark. Uzbekistan has low penetration and Turkmenistan has been stifled until recently by a monopolistic market

Figure 25: CIS Region: GWP and Density Across (2012, € million)

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Turkmenistan Armenia Moldova Uzbekistan Georgia Azerbaijan Belarus Kazakhstan Ukraine

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Figure 26: GWP and Penetration 2009–2012

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with a rate of just 0.2% (Figure 26). In comparison, the average penetration rate is 2.1% in Eastern Europe and 1.2% in the Russian Federation.

The small number of life insurers reflects the low development of the insurance sector in the region and correlates with the low share of life premiums. Kazakhstan, however, stands out with a somewhat more developed life market and a higher share of life premiums and insurers. Armenia, on the other hand, has no life market. In the four countries, the average market share of the three top insurance companies is between 30% and 100%, and is extremely concentrated in Armenia and Turkmenistan (Table 3). State insurers still hold a significant share of the market in Uzbekistan, and Turkmenistan has until very recently held a state monopoly. Armenia and Uzbekistan generate a relatively high share of mandatory premiums, while the opposite is true for Kazakhstan and Turkmenistan. The low share of mandatory versus voluntary insurance in Kazakhstan can be attributed to the low acceptance and enforcement of motor third-party liability insurance as a main mandatory driver.

Table 3: Indicators of Industry Structure (2012)

CountriesNumber of insurers % of market held by the top

three insurers

% of mandatory insurance

GWPTotal Life Nonlife

Armenia 7 0 7 62.8 85.0

Kazakhstan 35 6 29 30.0 27.0

Turkmenistan 1 100.0 5.0

Uzbekistan 33 2 31 38.3 68.0


Source: National central banks; Xprimm publications on insurance and pensions.

Regulatory and Supervisory Issues

Market entrants

Licensing rules need to be rigorous in examining the adequate status of existing insurers and market entrants. Supervisors need to consider the impact of issuing new licenses on the stability and development of the market. There are no limits on foreign participation in the share capital of insurance and reinsurance companies. Consolidation of market structure, as observed in Armenia and Kazakhstan, is positive and should be supported by supervisors as it removes weaker players who generate losses and do not contribute to market development.

Under the pressure of too many and often too small competitors, insurers tend to underprice and potentially undermine the financial position of the whole sector. Insurance supervisors need to identify imprudent insurers and enforce regulatory guidelines. In some countries, supervisors have the authority to encourage the exit of weak market players by requiring all insurers to satisfy certain minimum efficiency and legitimacy conditions. In addition to the enforcement of prudential requirements, and especially adequate provisions and reserves, these conditions can include a requirement to maintain a certain market share in mandatory lines such as motor third-party liability and health, and that a minimum rate of premium retention is maintained. Further down the line, the insurance sector can be required to publish efficiency benchmarks, such as premiums per employee, the combined ratio, and net expense ratio. However, another challenge in the four insurance markets covered in this study is that a lack of credible data means that neither regulators nor insurers will know the real cost of their products for years to come.

Legislation is required to allow for more innovative products, particularly for microinsurance and Takaful, as well as alternate distribution channels such as mobile distribution and payment mechanisms. Regulatory guidelines that ensure consumer protection imbue trust in the insurance concept and avoid the pitfalls of a ruined reputation through inappropriate insurance practices and outright fraud. Development of the insurance market requires a shift away from state-owned companies and a clearing of the path for private domestic companies and foreign companies to operate, thus enlivening competition and enhancing innovation. Armenia


and Kazakhstan have had legislative provisions for new and foreign entrants for some time now and their markets are developing.

Cross-Border Insurance

In many markets, cross-border synergies are being sought to promote cost efficiencies, leverage economies of scale, and provide for a homogeneous and transparent regulatory environment. One example is the attempt to unify insurance legislation within the customs union of the Eurasian Economic Community through establishment of the Eurasian Insurance Organizations Congress. This integration is planned to be fully implemented by 1 January 2020 and will complete a harmonization process that includes mutual recognition of insurance licenses. An alternative is the regionalization of some of the larger insurance players, following the example of Russian insurers Rosgosstrakh, which operates in Armenia and the Ukraine, and Ingosstrakh in Azerbaijan, Kazakhstan, Ukraine, and Armenia. Kazakh insurers in particular could invest in neighboring insurance markets by establishing subsidiary offices or joint ventures to leverage product and distribution know-how across the region and provide products at lower costs. Workshops or discussion forums would encourage such ventures. To facilitate cross-border insurance, a regulatory framework would need to include cross-border supervision of insurance groups and regional cooperation. In addition, information-sharing agreements would be needed for disseminating confidential material. Right now, however, policy coordination among regulators and reliable data collection from insurers is already a challenge nationally, let alone regionally.

Cooperation and Information Sharing

Reporting Standards

Consistent, timely, and high-quality data for supervisors, the public, and the industry are lacking. This partly reflects the newness of some insurance markets and supervisory entities. All insurers should be required to submit financial and statistical information to supervisors. Furthermore, all countries would benefit from region-wide data sharing to be better equipped to calculate risks, liabilities, and prices, and hence lend stability to the entire financial system.

Opportunities and Challenges

Adding Mandatory Lines and Enforcement

Mandatory insurance lines usually have a positive impact on the insurance market. Good examples are the introduction of mandatory motor third-party liability insurance in Kazakhstan and mandatory health insurance in Armenia. Additional classes such as catastrophe insurance are being made mandatory in some countries at a similar stage of insurance sector development, particularly where this is associated with the exposure of credit grantors (such as mortgage lenders) to natural disasters. Catastrophe insurance should be made mandatory in those countries at high risk to such threats, such as Armenia, as this would also help to avoid unfavorable selection.

The introduction of general health insurance, as planned in Armenia, is an option as fiscal pressures on health care systems rise. A desirable side effect of this would be increasing consumer awareness of insurance, which could be supported by joint industry–government programs to educate the public and complemented by effective consumer protection mechanisms.

Reducing the Share of State-Owned Insurers

Research shows that reducing the participation of state insurers usually spurs market development. Turkmenistan in particular is still dealing with the legacy of heavy state involvement in the insurance sector. A prerequisite for effective liberalization is the establishment of an actual prudential regime and adequate


consumer-protection and education infrastructure. Nevertheless, transforming insurance from a state-owned concern into a free market may take years, depending on the liberalization already achieved.

Promoting Microinsurance

The large share of low-income populations in all four countries suggests that microinsurance could play an important role in facilitating sustainable development through financial inclusion measures. Low penetration rates indicate large shares of the population do not have insurance experience and knowledge. Appropriate risk management, however, can improve basic living conditions and prevent catastrophic consequences in case of loss. The introduction of the insurance concept needs to be an integral element of financial literacy campaigns. Furthermore, access barriers such as complicated product descriptions, rigid payment schedules, and cumbersome payment procedures need to be avoided. Trust building is of preeminent concern and leveraging networks, such as mobile providers, microfinance institutions, and cooperative structures including microtakaful, may be suitable channels for distribution (Leatherman, Jones Christensen, and Holtz. 2010). Microinsurance in the four countries is virtually nonexistent. According to the Munich Re Foundation, microinsurance coverage in Uzbekistan reaches just 0.05% of the population. Turkmenistan has no available data, and Kazakhstan and Armenia have no microinsurance coverage at all (Munich Re 2013).

A good example of a successful microinsurance product in the health sector comes from Pakistan. Naya Jeevan is a Karachi-based not-for-profit initiative started in 2009. It targets low-income families for providing affordable access to quality health care through a unique micro health insurance model that, unlike other such ventures, does not try to lower insurance premiums to meet the ability of a low-income person to pay. Instead, it seeks well-resourced sponsors who have a defined relationship with beneficiaries (e.g., employer, contractor, or supply-chain partner) and therefore have a sustainable motive and ability to pay all or part of the premiums.

Naya Jeevan cooperates with multinational corporations and cascades its health policy up and down their value chains, targeting low-income stakeholders such as suppliers, distributors, micro-retailers, and domestic workers. It negotiates commercial group health insurance from established and highly reputable insurers such as Allianz, Saudi Pak, Jubilee Insurance, IGI, and Pak-Qatar Takaful at below-market rates. In addition to health insurance, Naya Jeevan also provides value-added services such as health education to reduce infant, child, and maternal mortality. By 2013, it had over 25,000 beneficiaries (Microinsurance Innovation Facility 2014).

Alternate Distribution Channels

Because of a pronounced rural–urban income and infrastructure disparity, about half the population in the four countries examined in this study face the dual impediments of low incomes and remoteness of location (Figure 27). Accordingly, most insurance business takes place in just a few major urban centers and embraces at

Figure 27: Rural–Urban Populations and Poverty Rate

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most a growing middle class. Given the vast size of countries such as Kazakhstan, accessing information about insurance, paying premiums, and making claims can be very difficult. However, the increasing proliferation of mobile phones and internet connections can provide a valuable technology—provided there is sufficient network coverage—to overcome these obstacles and promote financial inclusion, as well as to facilitate procedures and processes for client enrollment, premium collection, and after-sales services (Figure 28).

A good example of a successful mobile payment service is Paynet in Uzbekistan. It started operating in 2005 and supports payments to online services, allowing users to make purchases through their mobile phones. Paynet is authorized by the Central Bank of Uzbekistan to process cash and card payments on behalf of providers such as public utilities and mobile phone companies. Paynet is web- and desktop-linked, can be accessed by mobile phones through short messaging service, and has numerous customer agents. The company has 5,000 agents in Tashkent alone and over 25,000 agents countrywide.28 It is easy to see the potential of such a service as a distribution outlet for insurance when it has in place a network of agents who only need additional training. Furthermore, premium payments can be made easily via mobile phone, even in remote areas.

Capacity Building

Lack of technical skills, in particular in the actuarial field, is widely apparent throughout Central and West Asia. With technical underwriting becoming more important in an uncertain investment climate, there seems to be little regional cooperation, although it is clearly needed. Kazakhstan has the potential to become a regional center of excellence for insurance skills and actuarial knowledge. Donor assistance could focus on capacity building and training to leverage know-how on establishing cross-country technical hubs for actuarial, product development, sales, and marketing functions. The need to strengthen local and regional insurers in risk-retention capacity is also an area on which to concentrate technical assistance and introduce regional reinsurance pools. In addition, human resources need to be developed in accounting, investment, underwriting, Takaful, and claims assessment.

Developing Takaful Insurance

Countries in the Commonwealth of Independent States have great potential for Takaful insurance because of the size of their Muslim populations and the growth in their economies (Figure 29). Takaful either has not been permitted or facilitated in these markets until recently (Ernst & Young 2013). To develop Takaful insurance, regulatory changes and supervisory competence need to pave the way. Even though governments in Central and West Asia are aware of Sharia-compliant financial products, only Kazakhstan has taken concrete steps to develop Takaful insurance products, through BTA Life Insurance Group (New Horizon 2008). However,

28 Asian Development Bank (ADB). 2010. Financial Sector Development in Central and West Asia. Project Report. Manila.

Figure 28: Mobile Penetration (2012, million)

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regulatory hurdles and legislative changes have still to be made before the first Takaful product can be launched. Although Islamic finance was introduced some years ago, Kazakhstan has only one Islamic bank, Al Hilal Bank (Vizcaino 2013). So, putting the principles of Takaful insurance into practice and harmonizing them remains a challenge—and licensing more Takaful insurers in Kazakhstan will add to the supervisory load given the complexity of Takaful’s hybrid structure. Even so, smaller countries like Bangladesh, Sri Lanka, and Pakistan already successfully regulate such entities. For Central and West Asia, regional cooperation for a coordinated approach to introduce Takaful should be encouraged.

Policy Recommendations

As previously outlined, the insurance markets of Armenia, Kazakhstan, Turkmenistan, and Uzbekistan have much in common given their developmental stages and the socioeconomic backdrops. The vital role of the insurance market for financial stability and economic development, however, requires policy support to ensure sound growth. Regulators and policymakers play an important part in enabling market development while protecting consumer interests and building trust. An adequate regulatory and legal framework needs to be put in place to promote a safe, sound, competitive, and accessible sector. In this way insurers can become major financial institutions, alongside banks. The diversification of financial markets enhances competition and encourages innovation. Policies should enforce data collection and sharing to allow for appropriate risk calculation, market transparency, and consumer confidence. The introduction of a trade association will further help coordinate this effort from an industry perspective. Other important roles for policymakers are found in pension reforms, introducing more mandatory insurance lines, and further liberalizing previously state-dominated markets.

Cross-country analysis shows the importance of reaching the population at large—including low-income segments. Alternate distribution channels are instrumental in providing access, for example to remote population segments. Insurers are faced with the challenge of low margins due to small policies in offering mass retail insurance to low- and middle-income clients. Only by lowering distribution and administrative costs through innovative processes and alternate channels such as mobile distribution and payments can they meet the challenge of reaching scale. Regulatory amendments have to be made to permit expedient implementation of such innovations; for example, allowing short-message-service enrollment in absence of a signature. Furthermore, lessons learned from similar markets could be introduced as models for how alternate channels can advance insurance development.

Figure 29: Muslim Share of Population (2012, million)

12mio

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Muslims Other

Source: World Bank. Data: Countries and Economies.


Capacity building for prudential issues and the implementation and monitoring of norms for corporate governance is necessary to equip regulators and policymakers with the skills to execute their important roles responsibly. In addition to supervision, strengthening the role of actuarial services for insurers needs to be an area of focus. Improved actuarial reporting and analysis is fundamental to the development of a sound insurance regime. The pool of well-trained personnel, however, is very small in all four countries. International cooperation in training and technical assistance programs can be helpful. Furthermore, it would be useful to learn from international experience, as many emerging insurance markets have had similar obstacles in their early development and sometimes pooled resources in an actuarial hub. All of the above recommended steps need to be based on an advanced information technology system. This also applies to data collection, analysis, and reporting, as it does for the development of alternate distribution channels, new products, and cost-efficient administration.

Tables 4 and 5 summarize the most important goals with recommended actions. Table 4 focuses on region-wide measures that apply to all four countries analyzed in this study. Country-specific recommendations are summarized in Table 5.

Table 4: Policy Recommendations across Armenia, Kazakhstan, Turkmenistan, and Uzbekistan

Goal Recommendation Steps

Increased insurance penetration,

the beginning of an insurance

culture

Further introduction/expansion of

mandatory insurance lines, such

as health, employer liability, and

property

• Policy advice to the regulators/supervisors on the

relevance and beneits of mandatory insurance

• Provision of technical assistance and training

Increased competition to create

impulses for innovation

Continued reduction of the share of

state-owned insurers and support

for further development of a

regulatory environment to facilitate

a competitive insurance market

• Policy advice to the regulators/supervisors on

existing insurance regulatory frameworks

• Comparative studies on how regulatory changes

and modiications have advanced insurance in

comparable markets

Reach scale at low cost and with

small policies, provide access to

population at large

Development of technological

infrastructure that promotes the

introduction of alternate distribution

channels and electronic payment

modalities

• Technical assistance to enhance cooperation

between potential providers of mobile inancial

services and insurance providers

• Consideration of introduction of mobile platform

providers, such as Bima and MicroEnsure

• Gap analysis on missing distribution infrastructure in

individual countries and proposed action plan

Pool of well-trained and qualiied

experts in insurance

Provision of capacity building for

actuarial and insurance sciences;

distribution, customer services,

and IT

Support for development of

trade associations to encourage

participation in sector development

• Identiication of actuarial talent in individual

countries

• Access to ongoing training and certiication programs

to develop skills also of supervisory and regulatory

staff

• Provision of training in all ields of insurance

• Advice for supervisors on the important role of

industry associations and how to promote them

• Provision of technical assistance to insurance

associations

• Promote cooperation between regional and

international educational facilities that can share

know-how

Client-centric insurance solutions

meet demand and increase take-up

Development and introduction of

innovative products such as Takaful

and microinsurance, accompanied

by inancial literacy and insurance

education programs

• Evaluation of client needs in individual countries

• Provision of technical assistance on gaps and

enhancement of portfolios

• Support for policymakers on how to adapt regulatory

framework to facilitate new products

• Sponsorship of product roundtables between

insurance providers, regulators, and product experts

• Technical assistance to key stakeholders on the

development and launch of innovative products, such

as microinsurance and Takaful products


Goal Recommendation Steps

Transparency to enhance tracking

of market development and to

ensure introduction of most needed

products

Collection and sharing of reliable

statistical data from both the

regulator and provider

Introduction of IFRS uniform

accounting standards for

supervisory and corporate reporting

purposes

• Provision of recommendations on mortality tables,

loss reserve and guidelines, pricing, etc.

• Technical assistance to improve methodology and

assist with selection of most appropriate data

collection systems

• Advice on IFRS standards related to improving

corporate reporting and data quality

Promotion of inancial literacy and

inclusion

Introduction of consumer protection

measures, explanation of the

beneits of insurance, and the

need for an insurance culture,

with reference to Insurance Core

Principles

• Provision of cross-country studies on the

development of consumer protection measures

in comparable markets, focusing on sales and

distribution, and product development

• Support for development of PPPs in the area of

inancial literacy

• Technical assistance to providers on client needs

analysis, marketing, and inancial literacy

Sustainable life insurance market Promotion of a regulatory

environment conducive to life

insurance and private pension

development

• Facilitation of pension reform

• Amendment to regulatory framework to facilitate life

products

• Enabling of entry of foreign insurers to facilitate

know-how transfer

Effective supervisory structures with

uniform standards

Development of regulatory

framework according to IAIS

Insurance Core Principles

• Technical assistance on implementing core principles

with the relevant stakeholders, such as central bank,

and supervisor

IAIS = International Association of Insurance Supervisors, IFRS = International Financial Reporting Standard, IT = information technology, PPP = public–private partnership.



Table 5: Country-Speciic Policy Recommendations

Country Recommendations

Armenia • Advise on further regulatory amendments and tax incentives to support the development of the

life insurance sector from both the demand and supply side perspectives.

• Extend the range of products to meet client needs and support the regulator to develop a

framework conducive to innovation, such as more lexible product requirements, and greater

range of distribution channels.

• Introduce further mandatory lines, such as workers’ compensation and public liability

insurance, to support greater integration of insurance in population’s private and business

routines.

Kazakhstan • Support design, introduction, and supervision of additional mandatory line for property

insurance against disaster.

• Advise on development of universal and mandatory health insurance models that will include

the socially vulnerable and introduce to existing practices in peer markets.

• Provide technical assistance to the harmonization efforts of insurance legislation under way to

facilitate upcoming market uniication under EIOC.

Turkmenistan • Advise and support government to streamline further the legal, regulatory, and supervisory

framework to foster the development of a competitive market environment.

• Study the effects (costs and beneits) and lessons learned from the recent introduction of

mandatory environmental insurance and consider introducing more mandatory lines.

• Encourage further market entry of insurers—both foreign and national—by advising on the

necessary setup, ownership, and capital requirements.

Uzbekistan • Support the development of a third-pillar pension fund and build on initial efforts with the

option for contributing to the Accumulation Pension Fund.

• Advise on the development of health insurance schemes, both public and private, which extend

coverage and reveal beneits of both voluntary and mandatory systems.

EIOC = Eurasian Insurance Organizations Congress.


52

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