Baku, Azerbaijan, April 5
By Elena Kosolapova - Trend:
Standard & Poor's Ratings Services said that its insurance industry country risk assessment (IICRA) for Kazakhstan's property/casualty (P/C) insurance industry remained moderate, despite its now negative view of market growth prospects, S&P said.
"In our view, insurance companies in Kazakhstan will likely face further challenges in 2016, owing to the constrained economic prospects in Kazakhstan, GDP stagnation due to the pronounced drop in international oil prices; a sharp devaluation of the Kazakh tenge; and increased risks related to Kazakhstan's banking sector," the statement said.
"We now consider market growth prospects to be negative rather than neutral, owing to the slowing demand for voluntary types of insurance," the statement said. "This erodes growth prospects in real terms."
In 2015, growth slowed to six percent for Kazakhstan's P/C insurance sector (based on gross premium written), compared with the same period in 2014.
However, in real terms, the market dropped by 7.6 percent, owing to the high 13.6 percent inflation in 2015. The key lines that experienced the drop include voluntary corporate insurance, such as cargo and liability, given overall decreased business activity. At the same time, decelerating demand for retail lending has prompted a lower demand for personal accident insurance and voluntary motor insurance.
"We now expect that the market will grow at best by about three percent-five percent in nominal terms in 2016-2017," the statement said. "We think obligatory lines of business could be a key element in supporting growth in 2016-2017. In real terms, however, growth will likely be negative over this period, due to Standard & Poor's expectation of inflation rates of 10 percent in 2016 and eight percent in 2017."
Insurers are particularly exposed to credit and market risks associated with the banking sector. In our view, the business prospects for the Kazakh banks will be constrained in 2016, due to deterioration in asset quality, increased credit costs, and low earnings amid the contracting GDP growth and tenge depreciation.
"We still consider profitability as a positive factor for our assessment of industry and country risk, which we measure by return on equity (ROE)," the statement said. "However, ROE is distorted by the impact of the government's currency devaluation, which has had a short-term positive affect on investment results, but will have a prolonged negative influence on insurers' underwriting performance."
Future ROE trends are very unclear. However, we conservatively estimate that it will be around 10 percent in 2016.
The agency's outlook on the Kazakhstan sovereign rating is negative, reflecting risks to Kazakhstan's external and monetary profiles over the next 24 months in the current weak and volatile global commodity environment. Slowing market growth and insurance companies' weakening underwriting performance are exacerbating industry risk in Kazakhstan.
"We may revise our IICRA assessment to high risk if we see that country risks continue to deteriorate, evidenced for example by a downgrade of the sovereign," the statement said. "A similar change in IICRA could follow if we see consistently weak profitability of the sector, reflected in an ROE below 10 percent."
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