Kazakhstan: Reinsurance Regulation

FIRST Initiative helped Kazakhstan’s insurance regulator develop an appropriate earthquake risk model that allowed the authority to issue provision regulations consistent with that risk. As a result of a US$ 240,000 project, an estimated 250,000 people today, and many more in generations to come, benefited from having sound earthquake insurance coverage.

Kazakhstan, in particular the southern part of the country including the area around the main city Almaty, is highly vulnerable to earthquakes. The city was nearly completely leveled by the 1911 earthquake and since no new tremor of such magnitude has occurred to date, many regard another serious shock as "statistically overdue". So when the magnitude 5.4 earthquake hit in the southeastern part of Kazakhstan on May 1, 2011, the news reports reminded the readers about the grave dangers of possible devastation.

Over the last few years the country's Financial Supervisory Agency (FSA) was observing a gradual reduction in the ratio of outward reinsurance to the gross volume of insurance premiums written in the country. Despite the rapid growth of the property segment of the non-life insurance market, and the recognized vulnerability of Kazakhstan to the risk of earthquakes, few insurance companies would buy catastrophe excess-of-loss reinsurance protection. As a result, they were at risk of incurring substantial losses in case of a default by a single reinsurer and failing to pay on their own policies in case of an earthquake of any serious magnitude.

At the same time the FSA staff neither had the technical capacity to adequately assess companies’ risk exposures to earthquake risk nor were they able to evaluate the adequacy and credit quality of their reinsurance programs. So in this context, the FSA was interested in receiving world-class technical assistance in the assessment of underlying catastrophe risk exposures of the Kazakh insurers as well as in the consequent risk-based supervision of their catastrophe risk transfer practices. Such assistance became possible as a result of the financial support from the FIRST Initiative and the technical inputs of the World Bank staff and international consultants.

The Reinsurance Regulation project was implemented over the course of 2010 by a team of three consultants (one responsible for the probabilistic modeling of earthquake losses, one for the actuarial modeling and one for the evaluation of the companies' reinsurance programs) under the leadership of the technical expert from the World Bank. Among the key results of the project were the development of a risk-based supervision tool that enables the FSA to quickly and adequately assess companies’ reinsurance protection for catastrophe risk and the advice on the reinsurance regulation and development of methodological recommendations on the regulation of companies’ reinsurance purchases. This will help the FSA to improve the quality of reinsurance supervision and move it in the direction of risk-based supervision of the insurance companies' solvency.

It is also notable that the supervision tool produced under this project comes at a price which is significantly lower than a comparable tool the FSA could purchase by hiring a specialist firm. This is achieved through the engagement of the individual consultants under the auspices of the FIRST-funded project and with the technical leadership of a World Bank expert. As such, this project model is attractive for replication in other similar environments and indeed has already served as a template for the project in Morocco which assists the local insurance supervisor with the implementation of the new law on catastrophe risk insurance.

Population:Average household:Insurable dwellings, KZ:Insured dwellings with EQ cover, KZ:Insured dwellings with EQ cover, Almaty:Exposed dwellings, KZ:Exposed dwellings, Almaty:
15,522,4003.44,565,41282,17765,74276,42561,140

Note: Exposure estimated based on available market statistics and project results.