"EURASIA.Taking risks and reaping the profits". FORBES, April 10, 2006
On April 27 and 28 the Eurasia Insurance Company, Kazakhstan's leading company in the sector, will host a conference on the subject of risk management in Almaty, the country’s booming business and financial center. It is a subject of particular importance to the 500 top businesses who have been invited to attend. Because 90 percent of Kazakhstan businesses have no insurance against natural disasters – despite the fact that Almaty is situated in an earthquake-prone zone. “The reason for this lack of coverage is not because it is unobtainable, but simply because the people of Kazakhstan are not used to buying insurance,” says Dr. Boris Umanov, the president of Eurasia.
“Yet real estate in the city is more expensive than it is in Beverly Hills.” He says that because of soaring real estate prices, a three-bedroom detached house in Almaty is now valued at $ 1.5 million, whereas a similar one in Los Angeles might cost $700,000. Kazakhstan’s wealth of oil and gas resources has enabled its economy to grow by 75 percent in the past seven years, making it the most economically successful of the former Soviet Union states. This, in turn, has sparked the surge in the value of real estate, but the insurance sector’s market penetration is still estimated to be less than 1 percent. Dr. Umanov says that when the country was part of the Soviet Union, there
was no history of insurance, no literature or data on the subject and no specialists in the field. During that time he was a physicist specializing in mathematical statistics. In the 1990s, however, he worked with several international insurance brokers and underwriters before establishing the Eurasia Insurance Company in 1995. It began with a staff of three and capital of only $200,000. Today it has assets of more than $120 million. “We built up our assets by earning them, not by attracting new capital,” says Dr. Umanov. “We never made a rights issue. We never asked our shareholders to give us additional money.” Insurance was a new concept in Kazakhstan. At one time there were 200
insurance companies but many fell by the wayside and today there are only 36. “Per capita insurance is still less than $34 in Kazakhstan and the art of risk management is almost unknown,” says Dr. Umanov. Risk has been described as a measure of the possibility of deviation from the expected, and risk management as a discipline for dealing with uncertainty. It has a long history. When farmers began letting land lie fallow once every seven years and shippers began dividing their goods between several vessels to reduce the risk of total loss from shipwreck or pirates, they were early practitioners of risk management. Under communism, however, it was a lost art. “Maybe some Kazakhstan banks
have a risk management department, but none of the power plants, mining companies, oil refineries, shipping companies or other big companies have one,” says Dr. Umanov.In the past, he says, the scarcity of risk manangement departments could have been due to lack of money, but now that Kazakhstan’s oil wealth is being realized, it is being ascribed to a lack of awareness. Eurasia Insurance is the only Kazakhstan company that has an enterprise risk management department. “Risk management is integrated into all our business processes. We have a controlled risk-taking environment,” says Dr. Umanov. Kazakh people are receptive to the concept of insurance, but there is a lack of knowledge – hence Eurasia Insurance
Company’s April conference, which will be addressed by leading international experts. This central Asian state, the world’s ninth largest country with a population of only 15 million, has prodigious oil, gas and mineral resources and is developing at a rapid pace. For the moment, the extent of Kazakh companies’ insurance coverage may be slight, but its rate of growth is relatively fast. The aggregate gross premium written by Kazakh insurers in 2000 was $63 million. In 2004 it rose to $307 million and last year it increased to $501 million. “People are becoming more confident in insurance companies,” says Nazym Tulchinsky, the deputy chairman of Eurasia. “People now are not asking: ‘Should I have insurance?’ They are asking:
‘How do I have to be insured?’”Yet, as the capitalization of the country’s insurance companies has increased, their number has decreased. “As insurance is an activity concerned with the concentration of funds which determine the financial strength of the company, the best principle is ‘the fewer the better,” says Mr. Tulchinsky. “It is better if there are only ten insurance companies. These will be big insurers with huge capitalization that can meet their obligations in full.” Opponents of such an approach contend that a reduction in the number of insurance companies in the marketplace leads to less competition and an increase in tariffs. But, says Tulchinsky, insurance rates are not the subjective assessment of risk, but a mathematical, calculable
value. Dumping on the market can lead a company to insolvency and one case of bankruptcy would undermine people’s confidence. Of Kazakhstan’s 36 companies, Eurasia is by far the largest with 85 percent of the market profit. It recorded a profit last year of $27 million. The company’s strength is reflected in terms of its risk retention. Under Kazakhstan’s insurance regulations, a company’s obligations may not exceed 10 percent of the sum of its equity capital and insurance reserves. “Eurasia’s retention is now $11 million, which is ten times more than that of an average insurancecompany in Kazakhstan,” says Dr. Umanov. “Most small insurance companies here have to arrange extensive reinsurance from the West. Sometimes this is impossible because even big insurance companies
in Switzerland, Britain or the United States know little about conditions in Kazakhstan and decline to take the risk. “But Eurasia’s retention rate is huge enough to insure all our obligations to all our clients. It helps us fill a gap between small local insurers and the international market. “We feel pretty strong now because we operate not just in Kazakhstan but in Russia, Ukraine, South Korea, Turkey, Argentina and the Czech Republic. We know how to diversify our risk and how to concentrate on different lines of business,” he says. The company’s four main areas of business are property, cargo, employers’ liability and general third-party liability. The Kazakh insurance industry is strictly regulated by the Financial Supervision Agency of Kazakhstan (FSA), which has established an effective set of regulations.
A tariff system is in place whereby the minimum and maximum rates of premium are approved by the FSA for particular classes of insurance. This has facilitated the financial stability and solvency of the country’s insurance companies and steady growth in the sector. “We have a plan to increase our opportunities and our assets in the years ahead. We are going to make about $500 million in the next four or five years and become the regional market leader,” says Dr. Umanov.