"Undermining Risk at Eurasia Insurance". Business Week. March 26, 2007
Boris Umanov heads a Kazakh insurance company that manages risk with brainy creativity. His review of the industry’s axioms has earned Eurasia Insurance top ratings from S&P.
“I believe in a free and transparent economy. We have nothing to hide and a lot of things to show,” says Boris Umanov, CEO of Eurasia, the leading insurance company in Kazakhstan. Part of the strategy at his firm in Almaty is to change the mindset of the average Kazakh. In the meantime, government can play a key role by establishing a clear regulatory framework. As for the shift in mentality, there is nothing like a real-life situation. “If someone buys insurance today and gets the money back when his house burns down, that’s the best way to win a customer,” says Umanov.
Brainy creativity is the key. That is why Umanov has earned a reputation as enfant terrible of Kazakhstan’s staid insurance industry: his unorthodox approach gives the company a cutting-edge. As a statistician, he constantly reviews axioms and tenets while the rest of the playing field, is idling in a humdrum Soviet-era mindset. Eurasia Insurance was just an ordinary provider of motor vehicle and employer liability when it was established in 1995. Six years later, the company moved into more complex industrial lines where profits were higher. “Right now, we are the first insurance company in Kazakhstan in terms of rating standards. And we are second in the CIS,” says Umanov. Industrial insurance now generates 78% of revenue. Property, liability and cargo are Eurasia’s strongest business lines. The firm uses sophisticated statistical tools to undermine risk for its clients, with a special emphasis on prompt payment of claims. It has also reorganized itself according to business type as opposed to region. As of 01 July 2006, shareholders’ equity reached $104,000,000.
As any good salesman, Umanov knows how to play up the risk factors. Despite Kazakhstan’s oil bonanza and GDP growth of 9.2% in 2006, unforeseeable dangers lurk on the horizon. Oil wealth does not come without a cost. Unlike Venezuela and Libya, Kazakhstan is positioning itself as a contented and balanced country which attracts foreign investment and foreign people from all over the world. Umanov thinks Dutch disease could stunt Kazakhstan’s long-term development. The country cannot make a hallmark of political stability and simply sit on its laurels. It needs to assume new risks in order to maintain growth. Diversification into logistics, manufacturing, financial services and tourism is a good hedge.
“Our attitude as an insurance company is to be out there and take the risk for the corporation we are insuring. That’s why we’re respected,” adds Julian Sharpe, an insurance expert advisor to Eurasia. Nevertheless, the market is in a relative infancy, with average per capita spending at $36 per person. Compared to Canada, driver’s insurance in Kazakhstan is one-twentieth as cheap. The gross premium average written by Kazakh insurers as of 1st of May was $256 million, representing an insurance penetration of 1%.
Umanov thinks the industry is currently worth $500 million. In the 5-10 years to come, there will be new opportunities as people secure additional assets. The most profitable line so far is cargo because it is a short-tail business and creates profit within 2 months. Besides logistics, the major clients are in mining, metallurgy, oil & gas, coal, petrochemicals, engineering, tourism and construction.
In segments like property, Umanov thinks turnover could soon double. As people invest in residential buildings, real estate will come to dominate the insurance portfolio. This market segment is located in Astana, the new administrative capital, as well as in the eastern oil-producing regions. Meanwhile, prices for a luxury apartment in Almaty have skyrocketed as the city transforms itself into a financial hub. In some neighborhoods, prices are at the level of southern California. The 8-floor building where Eurasia Insurance is based in Almaty was worth $1.5 million in 2002. Today its market value is $8 million. “As people get richer, there will be growth in the insurance sector because they will need to secure their assets,” says Sharpe.
Despite the positive trends, Asian mentality continues to work against the insurance industry. For Umanov, the word Inshallah, or God-willing, is a sign that people here are more accepting of destiny here than in other places. As a result, they worry less about their health and future financial security. The melting pot nature of Kazakhstan may eventually do away with this anachronism. “In Kazakhstan, property is going to be increasingly protected and people are going to believe they can do it themselves,” he says. On the other hand, because there are elements of different cultures in the Kazakh ethos, this can prove a powerful competitive tool. “We all speak the same language,” he says.
So far, the macroeconomic outlook is stable and China is serving to anchor trade policy. The dragon has an unquenchable thirst for raw materials like copper and steel. At Eurasia Insurance, most of the turnover is currently derived from cargo shipments. Despite its landlocked status, Kazakhstan is in a prime geographic position to exploit East-West trade. New seaports, railroads and airports have turned the country into a virtual conveyor belt of goods. Temir Zholy, the state-owned rail company, has restructured itself to serve the China-Europe route. A new standard-gauge railroad known as the Trans-Kazakhstan Trunk Railway (TKTR) will put the company at the center of European-bound traffic. Goods will travel seamlessly from the Pearl River Delta to the French port of Calais. That is good news for Umanov, who is looking to expand into other transit nations such as Ukraine.
High oil prices, meanwhile, have inflated the value of Kazakhstan’s currency. Eurasia Insurance made the right choice four years ago by investing in the tenge. The company is now in a position to advise the private sector on improving safety standards and re-investing working capital.
Policyholders are protected against property damage, business interruption and machinery breakdown, as well as regular plant-related accidents. Defective equipment and operator error are often the root causes. “I’m talking about a chain of events in which people have died just because of poor safety standards at their enterprises,” says Umanov.
Whether it is a steel mill in Temirtau or a large supermarket chain in Almaty, Eurasia Insurance examines the situation to determine the risk factors. The approach is client-based. Umanov is not interested in sitting on money derived from premiums. He is especially concerned about employee safety. The goal is to protect a company’s assets and to teach people to avoid working with companies that do not comply. To illustrate the hazards involved with liability compensation, he cites the Sago Mine disaster in West Virginia last January. By hiring experts in mining, agriculture, retail and metallurgical plants, Eurasia Insurance has managed to import global SHE (Safety, Health & Environment) standards. “Sometimes we do it for free if the companies are likely to become clients,” says Umanov.
In April 2007, Umanov will host an international investment conference to examine macroeconomic risk. This is the third annual conference sponsored by Eurasia Insurance. The point is to instill the importance of mitigating risk at industrial works in order to build competitiveness. Topping the agenda will be risk abatement at mining operations and industrial complexes. Analysts from the Russian Federation will also be present at the conference. One topic affecting transnational companies is foreign currency risk. “The US dollar used to be at 164.5 tenge in 2003. Now it’s down to 119,” says Umanov. The medium-term appreciation of Kazakhstan’s tenge has both upsides and downsides. Domestic SMEs can now import technology at lower costs, which boosts their competitiveness. But in the export phase, they have a harder time placing products in the international market. Finding answers together for everyday business problems will be part of the fun.