Assessment of sectoral and country risks of the insurance sector: General insurance sector of the Republic of Uzbekistan
Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings assesses the industry and country risks of the general insurance sector in the Republic of Uzbekistan as high - as in Russia, Azerbaijan, India, Kenya and Turkey.
In opinion of S&P Global Ratings, country risks in Uzbekistan will continue to put pressure on our overall assessment of the industry and country risks of the insurance sector (Insurance Industry and Country Risk Assessement - IICRA). S&
P Global Ratings believes that the economic situation will remain unfavorable for Uzbek insurance companies in the next two years. Economic risks remain high given the low levels of well-being of the population, as measured by GDP per capita (US$1,585), and the underdeveloped institutional system. In our opinion, the Uzbek economy will absorb the current instability, and its growth may resume by an average of 5% in 2021-2022.
Our IICRA assessment reflects the still weak but gradually developing institutional system in Uzbekistan. We expect insurance companies to be profitable in the coming year, despite the economic impact of the pandemic on the general insurance sector.
This market is likely to see slight growth in 2020 due to a slowdown in economic activity. In 2021-2022. growth rates will pick up and will largely depend on regulatory measures aimed at further developing the insurance sector, the supply of new products and the dynamics of macroeconomic indicators. In our opinion, the institutional system will gradually improve, including in connection with the creation in the second half of 2019 of a separate body responsible for the regulation and development of the insurance sector.
We believe that a significant improvement or deterioration in our IICRA estimate is unlikely in the next 12-18 months, given the current economic developments and expected regulatory measures to improve the sector’s profitability, improve the outlook for premium growth, and improve the effectiveness of the regulatory regime.
Our country risk assessment reflects our views on country risks to the economy, politics, financial system, payment culture and the rule of law in the Republic of Uzbekistan.
We view the operating environment for Uzbek insurers as unfavorable given restrictive measures in 2020, low penetration of insurance services and only moderate economic growth prospects in 2020, although they are better than some other developed and emerging markets. We expect economic growth in Uzbekistan to be only 1.0% (up from 5.6% previously), reflecting the negative impact of measures to contain the COVID-19 pandemic on domestic and external demand.
At the same time, the risks of deterioration in our baseline scenario forecasts remain. The impact of the COVID-19 pandemic on Uzbekistan’s economic performance remains difficult to assess, and the impact of the current situation could be worse than we currently anticipate. The pace of economic recovery will also depend on policy measures to limit stressors and support the economy and households.
The well-being of the population in Uzbekistan remains low in real terms: GDP per capita was around USD 1,585 at the end of 2019.The population purchases mainly basic necessities rather than insurance services, so they do not always buy adequate insurance coverage or do not buy her at all. This circumstance, as well as low financial literacy of the population, impede the development of the general insurance sector in Uzbekistan. As a result, simple insurance products prevail in the portfolios of Uzbekistani companies engaged in general insurance. We note that the country’s insurance sector is still characterized by a relatively low level of maturity and penetration of insurance services. The ratio of general insurance premiums to GDP was 0.34% at the end of 2019. We expect this indicator to remain low in the future.
The low level of financial literacy also hinders the development of the insurance sector in Uzbekistan. The volume of household spending on insurance services averages US$5 per capita, which is significantly lower than the indicators of developed insurance markets (over US$2,000) and even such developing countries as Kazakhstan, Angola, Kenya and India (less than US$50).
The credit quality indicators of the banking sector in Uzbekistan have a negative impact on the asset quality indicators of insurance companies. The baseline rating of commercial banks operating only in Uzbekistan (‘b +’) is low in the international context. Insurance companies are exposed to credit and market risks associated with the banking sector in which they invest the bulk of their assets.
Our industry risk assessment for the Uzbek general insurance sector is in line with those for Kenya, Angola and India. However, the general insurance markets in these countries are at very different stages of development. Our view of the Uzbek general insurance sector takes into account the still evolving institutional system, as well as the dynamics of the industry and the characteristics of insurance products.
The regulatory regime for the Uzbek insurance sector does not restrict entry of new companies to the market. Over the past five years, the number of general insurance companies has increased from 23 to 28. We note a high concentration of the country’s insurance sector: the five largest companies control 56% of the general insurance market. In our opinion, major players have more recognizable brands and benefit from greater customer awareness of their insurance products, as well as the presence of sales networks that these companies effectively manage. We note that state insurers account for 40% of the gross premiums signed in the general insurance segment, although this share is gradually decreasing. The regulator announced the gradual privatization of the insurance sector in Uzbekistan, putting up for sale a 25% stake in the state-owned KAFOLAT Insurance Company in August 2019.
A significant portion of the gross premiums signed in the general insurance segment (83%) comes from three main lines of business: property insurance (35%), financial risk insurance (31%) and auto insurance (17%), and we expect that such the structure of insurance portfolios will not undergo significant changes in the next two to three years. Corporate clients account for 55% of the gross premiums signed. In the segment of insurance of individuals, compulsory insurance prevails, in particular, auto insurance. At the same time, we expect that the situation may gradually change. We positively assess the measures taken by the regulatory authorities aimed at conducting educational programs to raise public awareness of insurance services, which can contribute to the development of the insurance sector in Uzbekistan in the medium term.
Factors that have a positive impact on profitability indicators
-We expect that the growth rate of insurance premiums in the Uzbek general insurance sector will depend mainly on the measures of the regulator aimed at developing new business areas and increasing the level of market transparency, as well as on the dynamics of macroeconomic indicators. We project premiums growth in the general insurance sector at more than 15% in 2021-2022. as the economy recovers. For many years, the economy was largely state-owned and still depends on state-owned enterprises, which make a significant contribution to the country’s GDP. At the same time, successful reforms in the state-owned enterprise sector, including the modernization of operating activities and bringing them to a break-even level, may lead to greater growth potential for the economy of Uzbekistan, in particular, the insurance sector. It is our understanding that the implementation of reforms may require some time and additional efforts on the part of the regulator, especially in the current economic situation. We forecast low growth in the insurance sector in 2020 in the current environment, and note that the impact of the pandemic is the only factor affecting insurance premium growth rates in 2020. We note that the volume of gross insurance premiums signed in the general insurance sector decreased by 8% in the first half of 2020
- Uzbekistan companies operating in the general insurance sector have small portfolios in the areas of business most affected by the COVID-19 pandemic, such as business interruption insurance, accident insurance, event cancellation insurance, mortgage and trade insurance credits. This may vary from company to company, with government ties and economies of scale having a positive impact on large companies.
- A built-up sales network plays an important role in the successful penetration of insurance services into the Uzbek market, and insurance agents have a significant impact on it. Insurance agents are important to the market, especially in remote regions where not everyone has access to the internet. The market is gradually developing, but digital channels are still underdeveloped, which also had a significant impact on the dynamics of the signed gross insurance premium in 2020 due to measures to contain the pandemic. In our opinion, large companies with the corresponding scale of business will be able to introduce new digital products faster than small insurance companies, but, in our opinion, this will take some time. We expect insurance companies to try to optimize costs by reducing acquisition and administrative costs.
- We assume that part of the assets of insurance companies are invested in instruments denominated in foreign currency. We forecast further devaluation of the soum, which may have a positive impact on the final results of the insurance market participants. At the same time, devaluation may lead to distortion of loss ratios, in particular, in the auto insurance segment, since the cost of some spare parts can be denominated in foreign currency.
- Despite the growth of the insurance market in 2017-2019, we note that the level of penetration of insurance services in Uzbekistan remains very low. During this period, the volume of insurance premiums in the general insurance segment averaged about 0.3% of GDP. In our opinion, the market is unlikely to demonstrate significant enough growth for the penetration rate of insurance services to rise to over 1%.
- From our point of view, the Uzbek institutional system is gradually developing, but its quality is still lower than in a number of countries with developing economies and in most developed countries. We remain negative about the quality and standardization of financial statements and disclosures, noting the limited comparability of the data. At the same time, we expect that the new regulatory system will lead to more efficient regulation and, possibly, increased supervision of the insurance sector in the medium term. Insurance companies submit quarterly reports in accordance with national accounting standards. The regulator plans to translate the reporting of all insurance companies to International Financial Reporting Standards from 2020.
- As far as we understand, Uzbekistan belongs to the regions where the risks of natural disasters (such as earthquakes) are quite high, but insurance models for assessing the scale and significance of these risks are not developed in the country. In addition, most of these risks are currently not insured, so the corresponding insured event will cause significant losses for the economy, but will have only a limited impact on the general insurance sector. We note a number of initiatives by the regulator, in particular related to the introduction of property insurance against catastrophic risks. In our opinion, it will take time to introduce such insurance, but this may contribute to growth in the general insurance segment in the medium term.
- The structure of assets of the Uzbek insurance sector is estimated by us as rather conservative (it is dominated by cash and fixed income instruments), and we expect this structure to remain. At the same time, we note the pressure on the average credit quality of investment portfolios, as a significant part of the invested assets are non-investment grade instruments placed in the Uzbek banking sector.