Impact Story

CHALLENGE

 

Since 2004, authorities in Kazakhstan have partnered with the World Bank and the FIRST Initiative to reform and improve regulatory supervision of the insurance sector. In 2009–10, the FIRST-financed project called Strengthening Catastrophe Risk Transfer Supervision made possible sound supervision of catastrophe risk insurance in the country*. This led to an important, albeit small, share of homeowners enjoying the protection of such insurance. The insurance market has become more stable; however, with a population of more than 15 million, private insurance barely covered 1 percent of insurable dwellings—thus, the government remained essentially the sole source of recovery and reconstruction funding after natural disasters.

 

In Kazakhstan’s southern, mountainous region, small earthquakes occur regularly and seismologists caution that a big earthquake is long overdue. Such disasters affect the poor disproportionately. When a 5.4 earthquake hit in May 2011, the country was quickly reminded how critical earthquake insurance is. Recognizing the potential risk from future earthquakes, in 2013 the president of Kazakhstan decreed the introduction of the National Mandatory Catastrophe Insurance Scheme. This scheme would require every homeowner in the country to have reliable catastrophe insurance coverage, in case “the big one” strikes.

 

FIRST’S ASSISTANCE

 

The government of Kazakhstan reached out to the World Bank and to FIRST for support in developing the regulatory and financial foundations for a financially sustainable scheme of national mandatory catastrophe insurance.

 

In 2014–2015, the project team worked closely with key stakeholders and authorities to develop a framework technical paper describing the operational design of the insurance scheme, including the assigned roles of government agencies and the private sector. This framework led to a draft law for the introduction of national mandatory catastrophe insurance.

 

The team also provided a pricing model for the insurance product that suggests appropriate technical premiums and coverage rates. This model was based on extensive analysis of the stochastic data set on earthquake losses. Finally, a workshop on the proposed business model was held for the staff of the National Bank and local insurance companies.

 

RESULTS

 

The draft National Catastrophe Insurance Law has been well received, and enactment is planned for early 2017. In the meantime, the FIRST-financed project has had some catalytic impact already. In April 2016, the Global Environment Fund approved a US$5 million grant to further support the launch of affordable, innovative catastrophe insurance products covering extreme weather and natural disasters in Kazakhstan, including floods, landslides, and earthquakes.

 

Building on outputs delivered under the FIRST-financed project, this Global Environment Fund project will focus on establishing the complex insurance infrastructure and systems that will enable the government to begin massive sales of compulsory catastrophe insurance starting in 2017.

 

By launching the scheme with substantial participation by local insurers, the government intends to initiate risk transfer to the global reinsurance market and provide a needed boost to the development of the domestic insurance industry. In addition, the adoption of actuarially sound premium rates and the increase in awareness of international best practices will vastly improve the service and supervision of the domestic insurance market.

 

 

*  A full story on Kazakhstan's reinsurance regulation was featured in FIRST’s Annual Report for FY11 and is available, along with a video, on the FIRST website at https://www.firstinitiative.org.