MINISTRY OF EDUCATION AND SCIENCE OF THE REPUBLIC OF

KAZAKHSTAN

UNIVERSITY OF INTERNATIONAL BUSINESS

«FINANCE AND CREDIT» DEPARTMENT

GRADUATE WORK

theme «Economic Basis of Activity of the Insurance Company»

done by NURZHAN AUBAKIROV

A STUDENT OF 4 COURSE
SPECIALTY 050509 «FINANCE»

Scientific adviser Amir Mohammad Sohrabian

(M.Sc. Senior Professor)

Reviewer

Graduate work is admitted to defence

Before the State Certification Commission « » ____________ 2010
_______________

Head of the «Finance and Credit»

Department
Doc. ec. sci.
associate professor G. Abdrakhmanova
 ALMATY 2010
Contents

Introduction………………………………………………………………...………..3

I. Chapter. Insurance as an integral part of the financial industry

I.1 History of insurance…………………………………………………6
I.2 Types and main principles of insurance………………..…………..16
I.3 The classification of the insurance companies………..……………20

II. Chapter. Insurance company operations on the example of JSC «Centras

Insurance» insurance company
II.1 Company overview, organizational structure, management
information…………………………………………………………28
II.2 Global Credit Research. Credit Opinion: Centras Insurance………35
II.3 Business activities and products……………………………………41

III. Chapter. Economic basis of activity of the insurance companies and

Kazakhstani insurance market analysis
III.1 Economic basis of insurance, regulatory
definitions……………….48
III.2 Financial activities of the insurance companies (investment
strategy, portfolio and risk management)
…………………………………....52
III.3 Financial Control Agency’s report on insurance market

Conclusion.................................................................................................................68
List of used literature………………………………………………………………..75

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 Introduction

A graduate work, it’s making your own research, analysis, it is more interesting
and cognitive than just reading the book or listening to the professor, getting the
theory of a subject you have no idea how it is implemented and processing in your
country. I’ve chosen the insurance field which is an integral part of financial system
of a country and worked for an insurance broker on the position of insurance agent
and I found that very interesting and profitable at the same time. Kazakhstan is a
young country, but with a large opportunities, still insurance market is not developed
but it’s on process and I don’t know how long time will it take to change the mindset
or shift the mentality of the average kazakhstani, but I’ve anyway made the
contribution.
You've worked most of your life to give your family a comfortable house to
live in. You want your children to live happily and contented with the business that
you've built through the years. Yet accidents do happen. When it does happen, the
first question will be, are you protected to ensure that what you've built through the
years won't easily be blown with the wind? If your answer is yes, then
congratulations! Yet then again, what if you're not protected to ensure everything that
you've worked for including yourself? You need to think it over. Remember, even the
most careful person needs insurance. They can't prevent accidents from ever
happening. Although, having insurance is not a substitute for risk management, yet
it's designed to help you absorb any responsibility that may occur.
Insurance is one of the most essential financial tools you will need in all
aspects of your life, yet it is a topic that many people overlook. Insurance can be
boring as well as confusing, but it is important that you get the basics right so that
you don't get caught out.
When you are looking at which types of insurance you need, it is easy to
overlook some things that you need insuring. If you can afford to insure something or
be protected against something then it pays to do so. You usually need more
insurance than you think, both in terms of types of insurance and levels of cover.
Although insurance is necessary, you don't want to pay too much for it.
Insurance is only worth it at the right price. Paying too much for insurance will
outweigh the advantages that it gives you. Always shop around for your insurance,
and consult independent financial advice if you are unsure about which insurance
package is right for you.
If you want information about insurance terms, prices, or lenders then the best
place to look is online. Some of the best insurance deals can be had online, and using
one website to compare prices is much more convenient than walking round your

3
high street talking to different lenders. If you want to save time then look online for
your insurance first.
Obviously the type and amount of insurance you need really depends on your
lifestyle and individual needs. However, there are a number of types of insurance that
most people should
have or at least consider having. These include:

 Life insurance
 Vehicle insurance
 Property insurance
 Liability insurance
 Travel insurance
 Medical insurance

Obviously there are many other types of insurance, and if you have something that
you want to protect then you will probably be able to get insurance for it.
Many people think that insurance is a waste of time because it costs them
money and they never claim. This is a good thing, because you really don't want to
have to claim on your insurance. Good insurance is essential, because it protects the
things that we value most. If anything should happen to these items then we know we
will be compensated for it or be able to replace it.
As well as good insurance there are plenty of types of insurance that you
should avoid. Never pay too much for your insurance or more than you think it is
worth, because this defeats the point of the insurance policy. Also, don't sign
anything that has strict limits on what you can claim for, making the policy almost
worthless. Try and get a good level of cover at the right price, and before agreeing to
anything check that the lender is reputable and that if you need to claim they will be
able to compensate you.
If you have a business, then it is important to get the right level of insurance to
protect your business interests. Without the proper level of insurance your business
could be in serious trouble if anything unexpected should happen. Here are some tips
about how to get the right business insurance for your needs:
There are a number of types of insurance that businesses must have by law.
The main type of insurance that is legally required is employer's liability insurance.
This type of insurance protects you from any claims that your employees might make
for accidents or sickness that they suffer whilst at work or as a result of work. Some
businesses are not legally required to have this insurance, but if you have insurance
then it makes sense. If anything should happen to any employee you could be hit with
a massive compensation bill if you are uninsured.
Another insurance that is often required is motor insurance. If your company
has any vehicles then you are required to get at least third party insurance to cover
any damage to property or other people. It is usually advisable to get comprehensive

4
insurance for your vehicles in case they are damaged or stolen. Although it costs
more, it could save you a lot money in repair bills.
If you are selling products to the public or have a large number of non-
employees using your business premises, then you should consider public liability
insurance. This type of insurance will cover you in the event that anyone is injured by
your product or hurt at your business premises. The cost of this insurance will vary
depending on what products you sell and the size of your premises
If you have dedicated premises for your business, then you need to make sure
that the building and its contents are insured. If you rent the building then the
landlord should be insured for the property, but you need to make sure that the
contents are fully insured. If an accident should occur and you don't have adequate
cover then you could lose money.
A business relies on its key employees to make it successful, so you should
think about insuring yourself and other top employees against health problems or
accidents. Getting health insurance for your main employees will not only make sure
that they can get back to work as soon as possible, it will also give them a sense of
belonging to the company. If the type of work you are involved in has the potential
for accidents to occur, then getting adequate insurance to cover this is important.
Obviously working on a building site is going to lead to higher premiums than sitting
behind a desk.
Reducing your premiums is a good way to save money for your business. The
best way to reduce the risk for the lender and so reduce the price of insurance is to
make your business a safe and secure one. Make sure that security systems are up to
date, and that health and safety procedures are adhered to.
The easiest way to obtain business insurance is by using an insurance broker
who has expertise in your particular business area. They will be able to help you find
the right insurer for your needs and get you a good deal.

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 Chapter I. Insurance as an integral part of the financial industry

1.1History of insurance

The finance industry encompasses a broad range of organizations that deal with
the management of money, providing financial services. Among these organizations
are banks, credit card companies, insurance companies, consumer finance companies,
stock brokerages, investment funds and some government sponsored enterprises. As
of 2004, the financial services industry represented 20% of the market capitalization
of the S&P 500 in the United States.
Insurance, in law and economics, is a form of risk management primarily used
to hedge against the risk of a contingent loss. Insurance is defined as the equitable
transfer of the risk of a loss, from one entity to another, in exchange for a premium,
and can be thought of as a guaranteed and known small loss to prevent a large,
possibly devastating loss. An insurer is a company selling the insurance; an insured
or policyholder is the person or entity buying the insurance. The insurance rate is a
factor used to determine the amount to be charged for a certain amount of insurance
coverage, called the premium. Risk management, the practice of appraising and
controlling risk, has evolved as a discrete field of study and practice.
In some sense we can say that insurance appears simultaneously with the
appearance of human society. We know of two types of economies in human
societies: money economies (with markets, money, financial instruments and so on)
and non-money or natural economies (without money, markets, financial instruments
and so on). The second type is a more ancient form than the first. In such an economy
and community, we can see insurance in the form of people helping each other. For
example, if a house burns down, the members of the community help build a new
one. Should the same thing happen to one's neighbour, the other neighbours must
help. Otherwise, neighbours will not receive help in the future. This type of insurance
has survived to the present day in some countries where modern money economy
with its financial instruments is not widespread.
Turning to insurance in the modern sense (i.e., insurance in a modern money
economy, in which insurance is part of the financial sphere), early methods of
transferring or distributing risk were practised by Chinese and Babylonian traders as
long ago as the 3rd and 2nd millennia BC, respectively.[8] Chinese merchants
travelling treacherous river rapids would redistribute their wares across many vessels
to limit the loss due to any single vessel's capsizing. The Babylonians developed a
system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and

6
practised by early Mediterranean sailing merchants. If a merchant received a loan to
fund his shipment, he would pay the lender an additional sum in exchange for the
lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.
Achaemenian monarchs of Ancient Persia were the first to insure their people
and made it official by registering the insuring process in governmental notary
offices. The insurance tradition was performed each year in Norouz (beginning of the
Iranian New Year); the heads of different ethnic groups as well as others willing to
take part, presented gifts to the monarch. The most important gift was presented
during a special ceremony. When a gift was worth more than 10,000 Derrik
(Achaemenian gold coin) the issue was registered in a special office. This was
advantageous to those who presented such special gifts. For others, the presents were
fairly assessed by the confidants of the court. Then the assessment was registered in
special offices.
The purpose of registering was that whenever the person who presented the gift
registered by the court was in trouble, the monarch and the court would help him.
Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever
the owner of the present is in trouble or wants to construct a building, set up a feast,
have his children married, etc. the one in charge of this in the court would check the
registration. If the registered amount exceeded 10,000 Derrik, he or she would
receive an amount of twice as much."
A thousand years later, the inhabitants of Rhodes invented the concept of the
'general average'. Merchants whose goods were being shipped together would pay a
proportionally divided premium which would be used to reimburse any merchant
whose goods were jettisoned during storm or sinkage.
The Greeks and Romans introduced the origins of health and life insurance c.
600 AD when they organized guilds called "benevolent societies" which cared for the
families and paid funeral expenses of members upon death. Guilds in the Middle
Ages served a similar purpose. The Talmud deals with several aspects of insuring
goods. Before insurance was established in the late 17th century, "friendly societies"
existed in England, in which people donated amounts of money to a general sum that
could be used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or
other kinds of contracts) were invented in Genoa in the 14th century, as were
insurance pools backed by pledges of landed estates. These new insurance contracts
allowed insurance to be separated from investment, a separation of roles that first
proved useful in marine insurance. Insurance became far more sophisticated in post-
Renaissance Europe, and specialized varieties developed.
Some forms of insurance had developed in London by the early decades of the
seventeenth century. For example, the will of the English colonist Robert Hayman
mentions two "policies of insurance" taken out with the diocesan Chancellor of
London, Arthur Duck. Of the value of £100 each, one relates to the safe arrival of
Hayman's ship in Guyana and the other is in regard to "one hundred pounds assured
by the said Doctor Arthur Ducke on my life". Hayman's will was signed and sealed
on 17 November 1628 but not proved until 1633.[9] Toward the end of the

7
seventeenth century, London's growing importance as a centre for trade increased
demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house
that became a popular haunt of ship owners, merchants, and ships’ captains, and
thereby a reliable source of the latest shipping news. It became the meeting place for
parties wishing to insure cargoes and ships, and those willing to underwrite such
ventures. Today, Lloyd's of London remains the leading market (note that it is not an
insurance company) for marine and other specialist types of insurance, but it works
rather differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of London, which
in 1666 devoured more than 13,000 houses. The devastating effects of the fire
converted the development of insurance "from a matter of convenience into one of
urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site
for 'the Insurance Office' in his new plan for London in 1667."[10] A number of
attempted fire insurance schemes came to nothing, but in 1681 Nicholas Barbon, and
eleven associates, established England's first fire insurance company, the 'Insurance
Office for Houses', at the back of the Royal Exchange. Initially, 5,000 homes were
insured by Barbon's Insurance Office.
The first insurance company in the United States underwrote fire insurance and
was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.
Benjamin Franklin helped to popularize and make standard the practice of insurance,
particularly against fire in the form of perpetual insurance. In 1752, he founded the
Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.
Franklin's company was the first to make contributions toward fire prevention. Not
only did his company warn against certain fire hazards, it refused to insure certain
buildings where the risk of fire was too great, such as all wooden houses. In the
United States, regulation of the insurance industry is highly Balkanized, with primary
responsibility assumed by individual state insurance departments. Whereas insurance
markets have become centralized nationally and internationally, state insurance
commissioners operate individually, though at times in concert through a national
insurance commissioners' organization. In recent years, some have called for a dual
state and federal regulatory system (commonly referred to as the Optional federal
charter (OFC)) for insurance similar to that which oversees state banks and national
banks.
Any risk that can be quantified can potentially be insured. Specific kinds of
risk that may give rise to claims are known as "perils". An insurance policy will set
out in detail which perils are covered by the policy and which are not. Below are
(non-exhaustive) lists of the many different types of insurance that exist. A single
policy may cover risks in one or more of the categories set out below. For example,
auto insurance would typically cover both property risk (covering the risk of theft or
damage to the car) and liability risk (covering legal claims from causing an accident).
A homeowner's insurance policy in the U.S. typically includes property insurance
covering damage to the home and the owner's belongings, liability insurance covering
certain legal claims against the owner, and even a small amount of coverage for
medical expenses of guests who are injured on the owner's property.

8
 Business insurance can be any kind of insurance that protects businesses
against risks. Some principal subtypes of business insurance are (a) the various kinds
of professional liability insurance, also called professional indemnity insurance,
which are discussed below under that name; and (b) the business owner's policy
(BOP), which bundles into one policy many of the kinds of coverage that a business
owner needs, in a way analogous to how homeowners insurance bundles the
coverages that a homeowner needs.
A wrecked vehicleAuto insurance protects you against financial loss if you
have an accident. It is a contract between you and the insurance company. You agree
to pay the premium and the insurance company agrees to pay your losses as defined
in your policy. Auto insurance provides property, liability and medical coverage:
1. Property coverage pays for damage to or theft of your car.
2. Liability coverage pays for your legal responsibility to others for bodily
injury or property damage.
3. Medical coverage pays for the cost of treating injuries, rehabilitation and
sometimes lost wages and funeral expenses.
An auto insurance policy comprises six kinds of coverage. Most countries
require you to buy some, but not all, of these coverages. If you're financing a car,
your lender may also have requirements. Most auto policies are for six months to a
year. In the United States, your insurance company should notify you by mail when
it’s time to renew the policy and to pay your premium.
Home insurance provides compensation for damage or destruction of a home
from disasters. In some geographical areas, the standard insurances exclude certain
types of disasters, such as flood and earthquakes, that require additional coverage.
Maintenance-related problems are the homeowners' responsibility. The policy may
include inventory, or this can be bought as a separate policy, especially for people
who rent housing. In some countries, insurers offer a package which may include
liability and legal responsibility for injuries and property damage caused by members
of the household, including pets.
NHS FacilityHealth insurance policies by the National Health Service in the
United Kingdom (NHS) or other publicly-funded health programs will cover the cost
of medical treatments. Dental insurance, like medical insurance, is coverage for
individuals to protect them against dental costs. In the U.S., dental insurance is often
part of an employer's benefits package, along with health insurance.
Disability insurance policies provide financial support in the event the
policyholder is unable to work because of disabling illness or injury. It provides
monthly support to help pay such obligations as mortgages and credit cards.
Disability overhead insurance allows business owners to cover the overhead
expenses of their business while they are unable to work.
Total permanent disability insurance provides benefits when a person is
permanently disabled and can no longer work in their profession, often taken as an
adjunct to life insurance.
Workers' compensation insurance replaces all or part of a worker's wages lost
and accompanying medical expenses incurred because of a job-related injury.

9
 Casualty insurance insures against accidents, not necessarily tied to any
specific property.
• Crime insurance is a form of casualty insurance that covers the
policyholder against losses arising from the criminal acts of third parties.
For example, a company can obtain crime insurance to cover losses
arising from theft or embezzlement.
• Political risk insurance is a form of casualty insurance that can be taken
out by businesses with operations in countries in which there is a risk
that revolution or other political conditions will result in a loss.
Life insurance provides a monetary benefit to a decedent's family or other
designated beneficiary, and may specifically provide for income to an insured
person's family, burial, funeral and other final expenses. Life insurance policies often
allow the option of having the proceeds paid to the beneficiary either in a lump sum
cash payment or an annuity.
Annuities provide a stream of payments and are generally classified as
insurance because they are issued by insurance companies and regulated as insurance
and require the same kinds of actuarial and investment management expertise that life
insurance requires. Annuities and pensions that pay a benefit for life are sometimes
regarded as insurance against the possibility that a retiree will outlive his or her
financial resources. In that sense, they are the complement of life insurance and, from
an underwriting perspective, are the mirror image of life insurance.
Certain life insurance contracts accumulate cash values, which may be taken by
the insured if the policy is surrendered or which may be borrowed against. Some
policies, such as annuities and endowment policies, are financial instruments to
accumulate or liquidate wealth when it is needed.
In many countries, such as the U.S. and the UK, the tax law provides that the
interest on this cash value is not taxable under certain circumstances. This leads to
widespread use of life insurance as a tax-efficient method of saving as well as
protection in the event of early death.
In U.S., the tax on interest income on life insurance policies and annuities is
generally deferred. However, in some cases the benefit derived from tax deferral may
be offset by a low return. This depends upon the insuring company, the type of policy
and other variables (mortality, market return, etc.). Moreover, other income tax
saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for
value accumulation.
This tornado damage to an Illinois home would be considered an "Act of God"
for insurance purposes. Property insurance provides protection against risks to
property, such as fire, theft or weather damage. This includes specialized forms of
insurance such as fire insurance, flood insurance, earthquake insurance, home
insurance, inland marine insurance or boiler insurance.
 Automobile insurance, known in the UK as motor insurance, is probably
the most common form of insurance and may cover both legal liability claims
against the driver and loss of or damage to the insured's vehicle itself. Throughout
the United States an auto insurance policy is required to legally operate a motor

10
vehicle on public roads. In some jurisdictions, bodily injury compensation for
automobile accident victims has been changed to a no-fault system, which reduces
or eliminates the ability to sue for compensation but provides automatic eligibility
for benefits. Credit card companies insure against damage on rented cars.

 Driving School Insurance provides cover for any authorized driver

whilst undergoing tuition, cover also unlike other motor policies provides cover
for instructor liability where both the pupil and driving instructor are equally
liable in the event of a claim.
 Aviation insurance insures against hull, spares, deductibles, hull wear
and liability risks.
 Boiler insurance (also known as boiler and machinery insurance or
equipment breakdown insurance) insures against accidental physical damage to
equipment or machinery.
 Builder's risk insurance insures against the risk of physical loss or
damage to property during construction. Builder's risk insurance is typically
written on an "all risk" basis covering damage due to any cause (including the
negligence of the insured) not otherwise expressly excluded. Builder's risk
insurance is coverage that protects a person's or organization's insurable interest in
materials, fixtures and/or equipment being used in the construction or renovation
of a building or structure should those items sustain physical loss or damage from
a covered cause.
 Crop insurance "Farmers use crop insurance to reduce or manage various
risks associated with growing crops. Such risks include crop loss or damage
caused by weather, hail, drought, frost damage, insects, or disease, for instance."
 Earthquake insurance is a form of property insurance that pays the
policyholder in the event of an earthquake that causes damage to the property.
Most ordinary homeowners insurance policies do not cover earthquake damage.
Most earthquake insurance policies feature a high deductible. Rates depend on
location and the probability of an earthquake, as well as the construction of the
home.
 A fidelity bond is a form of casualty insurance that covers policyholders
for losses that they incur as a result of fraudulent acts by specified individuals. It
usually insures a business for losses caused by the dishonest acts of its employees.
 Flood insurance protects against property loss due to flooding. Many
insurers in the U.S. do not provide flood insurance in some portions of the
country. In response to this, the federal government created the National Flood
Insurance Program which serves as the insurer of last resort.
 Home insurance or homeowners' insurance: See "Property insurance".
 Landlord insurance is specifically designed for people who own
properties which they rent out. Most house insurance cover in the UK will not be
valid if the property is rented out therefore landlords must take out this specialist
form of home insurance.

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  Marine insurance and marine cargo insurance cover the loss or damage
of ships at sea or on inland waterways, and of cargo in transit, regardless of the
method of transit. When the owner of the cargo and the carrier are separate
corporations, marine cargo insurance typically compensates the owner of cargo for
losses sustained from fire, shipwreck, etc., but excludes losses that can be
recovered from the carrier or the carrier's insurance. Many marine insurance
underwriters will include "time element" coverage in such policies, which extends
the indemnity to cover loss of profit and other business expenses attributable to
the delay caused by a covered loss.
 Surety bond insurance is a three party insurance guaranteeing the
performance of the principal.
 Terrorism insurance provides protection against any loss or damage
caused by terrorist activities.
 Volcano insurance is an insurance that covers volcano damage in
Hawaii.
 Windstorm insurance is an insurance covering the damage that can be
caused by hurricanes and tropical cyclones.
Liability insurance is a very broad superset that covers legal claims against the
insured. Many types of insurance include an aspect of liability coverage. For
example, a homeowner's insurance policy will normally include liability coverage
which protects the insured in the event of a claim brought by someone who slips and
falls on the property; automobile insurance also includes an aspect of liability
insurance that indemnifies against the harm that a crashing car can cause to others'
lives, health, or property. The protection offered by a liability insurance policy is
twofold: a legal defense in the event of a lawsuit commenced against the policyholder
and indemnification (payment on behalf of the insured) with respect to a settlement or
court verdict. Liability policies typically cover only the negligence of the insured, and
will not apply to results of wilful or intentional acts by the insured.
 Public liability insurance covers a business against claims should its operations
injure a member of the public or damage their property in some way.
 Directors and officers liability insurance protects an organization (usually a
corporation) from costs associated with litigation resulting from mistakes made by
directors and officers for which they are liable. In the industry, it is usually called
"D&O" for short.
 Environmental liability insurance protects the insured from bodily injury, property
damage and cleanup costs as a result of the dispersal, release or escape of
pollutants.
 Errors and omissions insurance: See "Professional liability insurance" under
"Liability insurance".
 Prize indemnity insurance protects the insured from giving away a large prize at a
specific event. Examples would include offering prizes to contestants who can
make a half-court shot at a basketball game, or a hole-in-one at a golf tournament.

12
 Professional liability insurance, also called professional indemnity insurance,
protects insured professionals such as architectural corporation and medical
practice against potential negligence claims made by their patients/clients.
Professional liability insurance may take on different names depending on the
profession. For example, professional liability insurance in reference to the
medical profession may be called malpractice insurance. Notaries public may take
out errors and omissions insurance (E&O). Other potential E&O policyholders
include, for example, real estate brokers, Insurance agents, home inspectors,
appraisers, and website developers.

Credit insurance repays some or all of a loan when certain things happen to the
borrower such as unemployment, disability, or death.
 Mortgage insurance insures the lender against default by the borrower.
Mortgage insurance is a form of credit insurance, although the name
credit insurance more often is used to refer to policies that cover other
kinds of debt.
 Many credit cards offer payment protection plans which are a form of
credit insurance.
 Collateral protection insurance or CPI, insures property (primarily vehicles) held
as collateral for loans made by lending institutions.
 Defense Base Act Workers' compensation or DBA Insurance provides coverage
for civilian workers hired by the government to perform contracts outside the U.S.
and Canada. DBA is required for all U.S. citizens, U.S. residents, U.S. Green Card
holders, and all employees or subcontractors hired on overseas government
contracts. Depending on the country, Foreign Nationals must also be covered
under DBA. This coverage typically includes expenses related to medical
treatment and loss of wages, as well as disability and death benefits.
 Expatriate insurance provides individuals and organizations operating outside of
their home country with protection for automobiles, property, health, liability and
business pursuits.
 Financial loss insurance or Business Interruption Insurance protects individuals
and companies against various financial risks. For example, a business might
purchase coverage to protect it from loss of sales if a fire in a factory prevented it
from carrying out its business for a time. Insurance might also cover the failure of
a creditor to pay money it owes to the insured. This type of insurance is frequently
referred to as "business interruption insurance." Fidelity bonds and surety bonds
are included in this category, although these products provide a benefit to a third
party (the "obligee") in the event the insured party (usually referred to as the
"obligor") fails to perform its obligations under a contract with the obligee.
 Kidnap and ransom insurance
 Legal Expenses Insurance covers policyholders against the potential costs of legal
action against an institution or an individual.

13
 Locked funds insurance is a little-known hybrid insurance policy jointly issued by
governments and banks. It is used to protect public funds from tamper by
unauthorized parties. In special cases, a government may authorize its use in
protecting semi-private funds which are liable to tamper. The terms of this type of
insurance are usually very strict. Therefore it is used only in extreme cases where
maximum security of funds is required.
 Media Insurance is designed to cover professionals that engage in film, video and
TV production.
 Nuclear incident insurance covers damages resulting from an incident involving
radioactive materials and is generally arranged at the national level. See the
Nuclear exclusion clause and for the United States the Price-Anderson Nuclear
Industries Indemnity Act)

 Pet insurance insures pets against accidents and illnesses - some companies cover
routine/wellness care and burial, as well.
 Pollution Insurance which consists of first-party coverage for contamination of
insured property either by external or on-site sources. Coverage for liability to
third parties arising from contamination of air, water, or land due to the sudden
and accidental release of hazardous materials from the insured site. The policy
usually covers the costs of cleanup and may include coverage for releases from
underground storage tanks. Intentional acts are specifically excluded.
 Purchase insurance is aimed at providing protection on the products people
purchase. Purchase insurance can cover individual purchase protection,
warranties, guarantees, care plans and even mobile phone insurance. Such
insurance is normally very limited in the scope of problems that are covered by
the policy.
 Title insurance provides a guarantee that title to real property is vested in the
purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually
issued in conjunction with a search of the public records performed at the time of
a real estate transaction.
 Travel insurance is an insurance cover taken by those who travel abroad, which
covers certain losses such as medical expenses, loss of personal belongings, travel
delay, personal liabilities, etc.
 Fraternal insurance is provided on a cooperative basis by fraternal benefit societies
or other social organizations.
 No-fault insurance is a type of insurance policy (typically automobile insurance)
where insureds are indemnified by their own insurer regardless of fault in the
incident.
 Protected Self-Insurance is an alternative risk financing mechanism in which an
organization retains the mathematically calculated cost of risk within the
organization and transfers the catastrophic risk with specific and aggregate limits
to an insurer so the maximum total cost of the program is known. A properly
designed and underwritten Protected Self-Insurance Program reduces and

14
 stabilizes the cost of insurance and provides valuable risk management
information.
 Retrospectively Rated Insurance is a method of establishing a premium on large
commercial accounts. The final premium is based on the insured's actual loss
experience during the policy term, sometimes subject to a minimum and
maximum premium, with the final premium determined by a formula. Under this
plan, the current year's premium is based partially (or wholly) on the current year's
losses, although the premium adjustments may take months or years beyond the
current year's expiration date. The rating formula is guaranteed in the insurance
contract. Formula: retrospective premium = converted loss + basic premium × tax
multiplier. Numerous variations of this formula have been developed and are in
use.

 Formal self insurance is the deliberate decision to pay for otherwise insurable
losses out of one's own money. This can be done on a formal basis by establishing
a separate fund into which funds are deposited on a periodic basis, or by simply
forgoing the purchase of available insurance and paying out-of-pocket. Self
insurance is usually used to pay for high-frequency, low-severity losses. Such
losses, if covered by conventional insurance, mean having to pay a premium that
includes loadings for the company's general expenses, cost of putting the policy
on the books, acquisition expenses, premium taxes, and contingencies. While this
is true for all insurance, for small, frequent losses the transaction costs may
exceed the benefit of volatility reduction that insurance otherwise affords.
 Reinsurance is a type of insurance purchased by insurance companies or self-
insured employers to protect against unexpected losses. Financial reinsurance is a
form of reinsurance that is primarily used for capital management rather than to
transfer insurance risk.
 Social insurance can be many things to many people in many countries. But a
summary of its essence is that it is a collection of insurance coverages (including
components of life insurance, disability income insurance, unemployment
insurance, health insurance, and others), plus retirement savings, that requires
participation by all citizens. By forcing everyone in society to be a policyholder
and pay premiums, it ensures that everyone can become a claimant when or if
he/she needs to. Along the way this inevitably becomes related to other concepts
such as the justice system and the welfare state. This is a large, complicated topic
that engenders tremendous debate, which can be further studied in the following
articles (and others):
 National Insurance
 Social safety net
 Social security
 Social Security debate (United States)
 Social Security (United States)
 Social welfare provision

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 Stop-loss insurance provides protection against catastrophic or unpredictable
losses. It is purchased by organizations who do not want to assume 100% of the
liability for losses arising from the plans. Under a stop-loss policy, the insurance
company becomes liable for losses that exceed certain limits called deductibles.
Some communities prefer to create virtual insurance amongst themselves by
other means than contractual risk transfer, which assigns explicit numerical values to
risk. A number of religious groups, including the Amish and some Muslim groups,
depend on support provided by their communities when disasters strike. The risk
presented by any given person is assumed collectively by the community who all bear
the cost of rebuilding lost property and supporting people whose needs are suddenly
greater after a loss of some kind. In supportive communities where others can be
trusted to follow community leaders, this tacit form of insurance can work. In this
manner the community can even out the extreme differences in insurability that exist
among its members. Some further justification is also provided by invoking the moral
hazard of explicit insurance contracts.
In the United Kingdom, The Crown (which, for practical purposes, meant the
Civil service) did not insure property such as government buildings. If a government
building was damaged, the cost of repair would be met from public funds because, in
the long run, this was cheaper than paying insurance premiums. Since many UK
government buildings have been sold to property companies, and rented back, this
arrangement is now less common and may have disappeared altogether.

1.2 Types and main principles of insurance

The six principles of insurance are:

1. Indemnity – Insurance is a contract of indemnity where the insurance company
indemnifies the insured against certain risks for a consideration known as
premium.
2. Insurable interest – means the loss of which will directly affect the insured.
3. Utmost good faith – means that the insured and the insurance company will not
willfully hide anything from each other.
4. Mitigation – means the insured will not behave irresponsibly and will take due
care so that the risk of loss or the loss is minimized.
5. Subrogation – means the insurance company acquires legal rights to act on
behalf of the insured i.e. the insurance company steps into the shoes of the
insured.
6. Causa Proxima or Proximate Cause – means the proximate cause of loss to
ascertain whether the loss is covered under the policy.
Commercially insurable risks typically share seven common characteristics.
1. Large number of homogeneous exposure units. The majority of insurance policies
are provided for individual members of very large classes. Automobile insurance,
for example, covered about 175 million automobiles in the United States in 2004.
Having a large number of homogeneous exposure units allows insurers to benefit
from the so-called “law of large numbers,” which states that as the number of

16
 exposure units increases, the actual results are increasingly likely to become close
to predicted proportions. There are exceptions to this criterion. Lloyd's of London
is famous for insuring the life or health of actors, actresses and sports figures.
Satellite Launch insurance covers events that are infrequent. Large commercial
property policies may insure exceptional properties for which there are no
‘homogeneous’ exposure units. Despite failing on this criterion, many exposures
like these are generally considered to be insurable.
2. Definite Loss. The event that gives rise to the loss that is subject to the insured, at
least in principle, take place at a known time, in a known place, and from a known
cause. The classic example is death of an insured person on a life insurance
policy. Fire, automobile accidents, and worker injuries may all easily meet this
criterion. Other types of losses may only be definite in theory. Occupational
disease, for instance, may involve prolonged exposure to injurious conditions
where no specific time, place or cause is identifiable. Ideally, the time, place and
cause of a loss should be clear enough that a reasonable person, with sufficient
information, could objectively verify all three elements.
3. Accidental Loss. The event that constitutes the trigger of a claim should be
fortuitous, or at least outside the control of the beneficiary of the insurance. The
loss should be ‘pure,’ in the sense that it results from an event for which there is
only the opportunity for cost. Events that contain speculative elements, such as
ordinary business risks, are generally not considered insurable.
4. Large Loss. The size of the loss must be meaningful from the perspective of the
insured. Insurance premiums need to cover both the expected cost of losses, plus
the cost of issuing and administering the policy, adjusting losses, and supplying
the capital needed to reasonably assure that the insurer will be able to pay claims.
For small losses these latter costs may be several times the size of the expected
cost of losses. There is little point in paying such costs unless the protection
offered has real value to a buyer.
5. Affordable Premium. If the likelihood of an insured event is so high, or the cost of
the event so large, that the resulting premium is large relative to the amount of
protection offered, it is not likely that anyone will buy insurance, even if on offer.
Further, as the accounting profession formally recognizes in financial accounting
standards, the premium cannot be so large that there is not a reasonable chance of
a significant loss to the insurer. If there is no such chance of loss, the transaction
may have the form of insurance, but not the substance. (See the U.S. Financial
Accounting Standards Board standard number 113)
6. Calculable Loss. There are two elements that must be at least estimable, if not
formally calculable: the probability of loss, and the attendant cost. Probability of
loss is generally an empirical exercise, while cost has more to do with the ability
of a reasonable person in possession of a copy of the insurance policy and a proof
of loss associated with a claim presented under that policy to make a reasonably
definite and objective evaluation of the amount of the loss recoverable as a result
of the claim.

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7. Limited risk of catastrophically large losses. The essential risk is often
aggregation. If the same event can cause losses to numerous policyholders of the
same insurer, the ability of that insurer to issue policies becomes constrained, not
by factors surrounding the individual characteristics of a given policyholder, but
by the factors surrounding the sum of all policyholders so exposed. Typically,
insurers prefer to limit their exposure to a loss from a single event to some small
portion of their capital base, on the order of 5 percent. Where the loss can be
aggregated, or an individual policy could produce exceptionally large claims, the
capital constraint will restrict an insurer's appetite for additional policyholders.
The classic example is earthquake insurance, where the ability of an underwriter
to issue a new policy depends on the number and size of the policies that it has
already underwritten. Wind insurance in hurricane zones, particularly along coast
lines, is another example of this phenomenon. In extreme cases, the aggregation
can affect the entire industry, since the combined capital of insurers and reinsurers
can be small compared to the needs of potential policyholders in areas exposed to
aggregation risk. In commercial fire insurance it is possible to find single
properties whose total exposed value is well in excess of any individual insurer’s
capital constraint. Such properties are generally shared among several insurers, or
are insured by a single insurer who syndicates the risk into the reinsurance market.

Indemnification
To "indemnify" means to make whole again, or to be put in the position that
one was in, to the extent possible, prior to the happening of a specified event or peril.
Accordingly, life insurance is generally not considered to be indemnity insurance, but
rather "contingent" insurance (i.e., a claim arises on the occurrence of a specified
event). There are generally two types of insurance contracts that seek to indemnify an
insured:
 an "indemnity" policy and
 a "pay on behalf" or "on behalf of" policy.
The difference is significant on paper, but rarely material in practice.
An "indemnity" policy will never pay claims until the insured has paid out of
pocket to some third party; for example, a visitor to your home slips on a floor that
you left wet and sues you for $10,000 and wins. Under an "indemnity" policy the
homeowner would have to come up with the $10,000 to pay for the visitor's fall and
then would be "indemnified" by the insurance carrier for the out of pocket costs (the
$10,000).
Under the same situation, a "pay on behalf" policy, the insurance carrier would
pay the claim and the insured (the homeowner) would not be out of pocket for
anything. Most modern liability insurance is written on the basis of "pay on behalf"
language.
An entity seeking to transfer risk (an individual, corporation, or association of
any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the
insuring party, by means of a contract, called an insurance 'policy'. Generally, an
insurance contract includes, at a minimum, the following elements: the parties (the

18
insurer, the insured, the beneficiaries), the premium, the period of coverage, the
particular loss event covered, the amount of coverage (i.e., the amount to be paid to
the insured or beneficiary in the event of a loss), and exclusions (events not covered).
An insured is thus said to be "indemnified" against the loss covered in the policy.
When insured parties experience a loss for a specified peril, the coverage
entitles the policyholder to make a 'claim' against the insurer for the covered amount
of loss as specified by the policy. The fee paid by the insured to the insurer for
assuming the risk is called the 'premium'. Insurance premiums from many insureds
are used to fund accounts reserved for later payment of claims—in theory for a
relatively few claimants—and for overhead costs. So long as an insurer maintains
adequate funds set aside for anticipated losses (i.e., reserves), the remaining margin is
an insurer's profit.

Insurers' business model. Underwriting and investing

The business model can be reduced to a simple equation:

Profit = earned premium + investment income - incurred loss - underwriting

expenses.

Insurers make money in two ways:

a) Through underwriting, the process by which insurers select the risks to insure
and decide how much in premiums to charge for accepting those risks;
b) By investing the premiums they collect from insured parties.
The most complicated aspect of the insurance business is the underwriting of
policies. Using a wide assortment of data, insurers predict the likelihood that a claim
will be made against their policies and price products accordingly. To this end,
insurers use actuarial science to quantify the risks they are willing to assume and the
premium they will charge to assume them. Data is analyzed to fairly accurately
project the rate of future claims based on a given risk. Actuarial science uses statistics
and probability to analyze the risks associated with the range of perils covered, and
these scientific principles are used to determine an insurer's overall exposure. Upon
termination of a given policy, the amount of premium collected and the investment
gains thereon minus the amount paid out in claims is the insurer's underwriting profit
on that policy. Of course, from the insurer's perspective, some policies are "winners"
(i.e., the insurer pays out less in claims and expenses than it receives in premiums and
investment income) and some are "losers" (i.e., the insurer pays out more in claims
and expenses than it receives in premiums and investment income); insurance
companies essentially use actuarial science to attempt to underwrite enough
"winning" policies to pay out on the "losers" while still maintaining profitability.
An insurer's underwriting performance is measured in its combined ratio which
is the ratio of losses and expenses to premiums. A combined ratio of less than 100
percent indicates underwriting profitability, while anything over 100 indicates an
underwriting loss. A company with a combined ratio over 100% may nevertheless
remain profitable due to investment earnings.

19
 Insurance companies earn investment profits on “float”. “Float” or available
reserve is the amount of money, at hand at any given moment, that an insurer has
collected in insurance premiums but has not paid out in claims. Insurers start
investing insurance premiums as soon as they are collected and continue to earn
interest or other income on them until claims are paid out. The Association of British
Insurers (gathering 400 insurance companies and 94% of UK insurance services) has
almost 20% of the investments in the London Stock Exchange.
In the United States, the underwriting loss of property and casualty insurance
companies was $142.3 billion in the five years ending 2003. But overall profit for the
same period was $68.4 billion, as the result of float. Some insurance industry
insiders, most notably Hank Greenberg, do not believe that it is forever possible to
sustain a profit from float without an underwriting profit as well, but this opinion is
not universally held.

Naturally, the “float” method is difficult to carry out in an economically

depressed period. Bear markets do cause insurers to shift away from investments and
to toughen up their underwriting standards. So a poor economy generally means high
insurance premiums. This tendency to swing between profitable and unprofitable
periods over time is commonly known as the "underwriting" or insurance cycle.
Property and casualty insurers currently make the most money from their auto
insurance line of business. Generally better statistics are available on auto losses and
underwriting on this line of business has benefited greatly from advances in
computing. Additionally, property losses in the United States, due to unpredictable
natural catastrophes, have exacerbated this trend.
Claims and loss handling is the materialized utility of insurance; it is the actual
"product" paid for, though one hopes it will never need to be used. Claims may be
filed by insureds directly with the insurer or through brokers or agents. The insurer
may require that the claim be filed on its own proprietary forms, or may accept
claims on a standard industry form such as those produced by ACORD.
Insurance company claims departments employ a large number of claims
adjusters supported by a staff of records management and data entry clerks. Incoming
claims are classified based on severity and are assigned to adjusters whose settlement
authority varies with their knowledge and experience. The adjuster undertakes a
thorough investigation of each claim, usually in close cooperation with the insured,
determines if coverage is available under the terms of the insurance contract, and if
so, the reasonable monetary value of the claim, and authorizes payment. Adjusting
liability insurance claims is particularly difficult because there is a third party
involved, the plaintiff, who is under no contractual obligation to cooperate with the
insurer and may in fact regard the insurer as a deep pocket. The adjuster must obtain
legal counsel for the insured (either inside "house" counsel or outside "panel"
counsel), monitor litigation that may take years to complete, and appear in person or
over the telephone with settlement authority at a mandatory settlement conference
when requested by the judge.

20
 If a claims adjuster suspects underinsurance, the condition of average may
come into play to limit the insurance company's exposure.
In managing the claims handling function, insurers seek to balance the
elements of customer satisfaction, administrative handling expenses, and claims
overpayment leakages. As part of this balancing act, fraudulent insurance practices
are a major business risk that must be managed and overcome. Disputes between
insurers and insureds over the validity of claims or claims handling practices
occasionally escalate into litigation; see insurance bad faith.

1.3The classification of the insurance companies

Insurance companies may be classified into two groups:

1. Life insurance companies, which sell life insurance, annuities and
pensions products.
2. Non-life, General, or Property/Casualty insurance companies, which sell
other types of insurance.
General insurance companies can be further divided into these sub categories.
 Standard Lines
 Excess Lines
In most countries, life and non-life insurers are subject to different regulatory
regimes and different tax and accounting rules. The main reason for the distinction
between the two types of company is that life, annuity, and pension business is very
long-term in nature — coverage for life assurance or a pension can cover risks over
many decades. By contrast, non-life insurance cover usually covers a shorter period,
such as one year.
In the United States, standard line insurance companies are "mainstream"
insurers. These are the companies that typically insure autos, homes or businesses.
They use pattern or "cookie-cutter" policies without variation from one person to the
next. They usually have lower premiums than excess lines and can sell directly to
individuals. They are regulated by state laws that can restrict the amount they can
charge for insurance policies.
Excess line insurance companies (also known as Excess and Surplus) typically
insure risks not covered by the standard lines market. They are broadly referred as
being all insurance placed with non-admitted insurers. Non-admitted insurers are not
licensed in the states where the risks are located. These companies have more
flexibility and can react faster than standard insurance companies because they are
not required to file rates and forms as the "admitted" carriers do. However, they still
have substantial regulatory requirements placed upon them. State laws generally
require insurance placed with surplus line agents and brokers not to be available
through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock
companies. Mutual companies are owned by the policyholders, while stockholders
(who may or may not own policies) own stock insurance companies. Demutualization
of mutual insurers to form stock companies, as well as the formation of a hybrid

21
known as a mutual holding company, became common in some countries, such as the
United States, in the late 20th century.
Other possible forms for an insurance company include reciprocals, in which
policyholders 'reciprocate' in sharing risks, and Lloyd's organizations.
Insurance companies are rated by various agencies such as A. M. Best. The
ratings include the company's financial strength, which measures its ability to pay
claims. It also rates financial instruments issued by the insurance company, such as
bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other
insurance companies, allowing them to reduce their risks and protect themselves from
very large losses. The reinsurance market is dominated by a few very large
companies, with huge reserves. A reinsurer may also be a direct writer of insurance
risks as well.
Captive insurance companies may be defined as limited-purpose insurance
companies established with the specific objective of financing risks emanating from
their parent group or groups. This definition can sometimes be extended to include
some of the risks of the parent company's customers. In short, it is an in-house self-
insurance vehicle. Captives may take the form of a "pure" entity (which is a 100%
subsidiary of the self-insured parent company); of a "mutual" captive (which insures
the collective risks of members of an industry); and of an "association" captive
(which self-insures individual risks of the members of a professional, commercial or
industrial association). Captives represent commercial, economic and tax advantages
to their sponsors because of the reductions in costs they help create and for the ease
of insurance risk management and the flexibility for cash flows they generate.
Additionally, they may provide coverage of risks which is neither available nor
offered in the traditional insurance market at reasonable prices.
The types of risk that a captive can underwrite for their parents include
property damage, public and product liability, professional indemnity, employee
benefits, employers' liability, motor and medical aid expenses. The captive's exposure
to such risks may be limited by the use of reinsurance.
Captives are becoming an increasingly important component of the risk
management and risk financing strategy of their parent. This can be understood
against the following background:
 heavy and increasing premium costs in almost every line of coverage;
 difficulties in insuring certain types of fortuitous risk;
 differential coverage standards in various parts of the world;
 rating structures which reflect market trends rather than individual loss
experience;
 insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a mortgage
broker, these companies are paid a fee by the customer to shop around for the best
insurance policy amongst many companies. Similar to an insurance consultant, an
'insurance broker' also shops around for the best insurance policy amongst many

22
companies. However, with insurance brokers, the fee is usually paid in the form of
commission from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies
and no risks are transferred to them in insurance transactions. Third party
administrators are companies that perform underwriting and sometimes claims
handling services for insurance companies. These companies often have special
expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major
consideration when buying an insurance contract. An insurance premium paid
currently provides coverage for losses that might arise many years in the future. For
that reason, the viability of the insurance carrier is very important. In recent years, a
number of insurance companies have become insolvent, leaving their policyholders
with no coverage (or coverage only from a government-backed insurance pool or
other arrangement with less attractive payouts for losses). A number of independent
rating agencies provide information and rate the financial viability of insurance
companies.

Insurance brokers.
Insurance brokers act as an intermediary between clients and insurance
companies. Clients may be either individuals or commercial businesses and
organizations. Brokers use their in-depth knowledge of risks and the insurance
market to find and arrange suitable insurance policies. Insurance brokers, unlike tied
agents, are independent and offer products from more than one insurer to ensure that
their clients get the best deal.
Insurance policies range from motor insurance, required by law to drive a
vehicle in the UK, to public, employers’ or product liability insurance, which pays
compensation on the basis of the assessment of legal liability for damage, injury or
harm.

Typical work activities.

Typical work activities depend largely on the size and nature of the employer
and the scale of the business. In a large company, a broker may specialise in a core
area; in a small firm, a broker could be involved in most functions, including new
business development and acting as placing broker and claims broker. Tasks typically
involve:
 gathering information from clients, assessing their insurance needs and risk
profile;
 building and maintaining ongoing relationships with clients including scheduling
and attending meetings and understanding the nature of clients’ businesses or
lives;
 foreseeing clients' insurance needs, such as policy renewals;
 researching insurance companies' policies and negotiating with underwriters to
find the most suitable insurance for clients at the best price;

23
 arranging specialized types of insurance cover in complex cases; this may involve
preparing reports for insurance underwriters and surveyors and negotiating with
insurers;
 advising clients on risk management, and helping to devise new ways to mitigate
risks, for example, by adding security measures such as fencing, surveillance
cameras or lighting to commercial properties to reduce the likelihood of break-ins;
 renewing or amending existing policies;
 advising clients whether and when they need to make a claim on their policies;
 marketing and acquiring new clients;
 developing relationships with underwriters, surveyors, photographers, structural
engineers and other professionals;
 administrative tasks such as dealing with paperwork, correspondence, keeping
detailed records;
 winning accounts against competitors;
 keeping up with changes in the insurance market and in the clients' industries;
 collecting insurance premiums and processing accounts.

Global insurance industry.

Non-life insurance premia written in 2005Global insurance premiums grew by
3.4% in 2008 to reach $4.3 trillion. For the first time in the past three decades,
premium income declined in inflation-adjusted terms, with non-life premiums falling
by 0.8% and life premiums falling by 3.5%. The insurance industry is exposed to the
global economic downturn on the assets side by the decline in returns on investments
and on the liabilities side by a rise in claims. So far the extent of losses on both sides
has been limited although investment returns fell sharply following the bankruptcy of
Lehman Brothers and bailout of AIG in September 2008. The financial crisis has
shown that the insurance sector is sufficiently capitalised. The vast majority of
insurance companies had enough capital to absorb losses and only a small number
turned to government for support.
Advanced economies account for the bulk of global insurance. With premium
income of $1,753bn, Europe was the most important region in 2008, followed by
North America $1,346bn and Asia $933bn. The top four countries generated more
than a half of premiums. The US and Japan alone accounted for 40% of world
insurance, much higher than their 7% share of the global population. Emerging
markets accounted for over 85% of the world’s population but generated only around
10% of premiums. Their markets are however growing at a quicker pace.

Controversies. Religious concerns.

Muslim scholars have varying opinions about insurance. Insurance policies that
earn interest are generally considered to be a form of riba (usury) and some consider
even policies that do not earn interest to be a form of gharar (speculation). Some
argue that gharar is not present due to the actuarial science behind the underwriting.

24
 Jewish rabbinical scholars also have expressed reservations regarding
insurance as an avoidance of God's will but most find it acceptable in moderation.
Some Christians believe insurance represents a lack of faith and there is a long
history of resistance to commercial insurance in Anabaptist communities
(Mennonites, Amish, Hutterites, Brethren in Christ) but many participate in
community-based self-insurance programs that spread risk within their communities.

Insurance insulates too much.

By creating a "security blanket" for its insureds, an insurance company may
inadvertently find that its insureds may not be as risk-averse as they might otherwise
be (since, by definition, the insured has transferred the risk to the insurer), a concept
known as moral hazard. To reduce their own financial exposure, insurance companies
have contractual clauses that mitigate their obligation to provide coverage if the
insured engages in behavior that grossly magnifies their risk of loss or liability.
For example, life insurance companies may require higher premiums or deny
coverage altogether to people who work in hazardous occupations or engage in
dangerous sports. Liability insurance providers do not provide coverage for liability
arising from intentional torts committed by or at the direction of the insured. Even if
a provider were so irrational as to want to provide such coverage, it is against the
public policy of most countries to allow such insurance to exist, and thus it is usually
illegal.

Complexity of insurance policy contracts.

Insurance policies can be complex and some policyholders may not understand
all the fees and coverages included in a policy. As a result, people may buy policies
on unfavorable terms. In response to these issues, many countries have enacted
detailed statutory and regulatory regimes governing every aspect of the insurance
business, including minimum standards for policies and the ways in which they may
be advertised and sold.
For example, most insurance policies in the English language today have been
carefully drafted in plain English; the industry learned the hard way that many courts
will not enforce policies against insureds when the judges themselves cannot
understand what the policies are saying.
Many institutional insurance purchasers buy insurance through an insurance
broker. While on the surface it appears the broker represents the buyer (not the
insurance company), and typically counsels the buyer on appropriate coverage and
policy limitations, it should be noted that in the vast majority of cases a broker's
compensation comes in the form of a commission as a percentage of the insurance
premium, creating a conflict of interest in that the broker's financial interest is tilted
towards encouraging an insured to purchase more insurance than might be necessary
at a higher price. A broker generally holds contracts with many insurers, thereby
allowing the broker to "shop" the market for the best rates and coverage possible.

25
 Insurance may also be purchased through an agent. Unlike a broker, who
represents the policyholder, an agent represents the insurance company from whom
the policyholder buys. An agent can represent more than one company.
An independent insurance consultant advises insureds on a fee-for-service
retainer, similar to an attorney, and thus offers completely independent advice, free of
the financial conflict of interest of brokers and/or agents. However, such a consultant
must still work through brokers and/or agents in order to secure coverage for their
clients.

Redlining.
Redlining is the practice of denying insurance coverage in specific geographic
areas, supposedly because of a high likelihood of loss, while the alleged motivation is
unlawful discrimination. Racial profiling or redlining has a long history in the
property insurance industry in the United States. From a review of industry
underwriting and marketing materials, court documents, and research by government
agencies, industry and community groups, and academics, it is clear that race has
long affected and continues to affect the policies and practices of the insurance
industry.

In July, 2007, The Federal Trade Commission released a report presenting the
results of a study concerning credit-based insurance scores and automobile insurance.
The study found that these scores are effective predictors of the claims that
consumers will file.
All states have provisions in their rate regulation laws or in their fair trade
practice acts that prohibit unfair discrimination, often called redlining, in setting rates
and making insurance available.
In determining premiums and premium rate structures, insurers consider
quantifiable factors, including location, credit scores, gender, occupation, marital
status, and education level. However, the use of such factors is often considered to be
unfair or unlawfully discriminatory, and the reaction against this practice has in some
instances led to political disputes about the ways in which insurers determine
premiums and regulatory intervention to limit the factors used.
An insurance underwriter's job is to evaluate a given risk as to the likelihood
that a loss will occur. Any factor that causes a greater likelihood of loss should
theoretically be charged a higher rate. This basic principle of insurance must be
followed if insurance companies are to remain solvent. Thus, "discrimination" against
(i.e., negative differential treatment of) potential insureds in the risk evaluation and
premium-setting process is a necessary by-product of the fundamentals of insurance
underwriting. For instance, insurers charge older people significantly higher
premiums than they charge younger people for term life insurance. Older people are
thus treated differently than younger people (i.e., a distinction is made, discrimination
occurs). The rationale for the differential treatment goes to the heart of the risk a life
insurer takes: Old people are likely to die sooner than young people, so the risk of
loss (the insured's death) is greater in any given period of time and therefore the risk

26
premium must be higher to cover the greater risk. However, treating insureds
differently when there is no actuarially sound reason for doing so is unlawful
discrimination.
What is often missing from the debate is that prohibiting the use of legitimate,
actuarially sound factors means that an insufficient amount is being charged for a
given risk, and there is thus a deficit in the system. The failure to address the deficit
may mean insolvency and hardship for all of a company's insureds. The options for
addressing the deficit seem to be the following: Charge the deficit to the other
policyholders or charge it to the government (i.e., externalize outside of the company
to society at large).

Insurance patents
New assurance products can now be protected from copying with a business
method patent in the United States.
A recent example of a new insurance product that is patented is Usage Based
auto insurance. Early versions were independently invented and patented by a major
U.S. auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134)
and a Spanish independent inventor, Salvador Minguijon Perez (EP patent 0700009).

Many independent inventors are in favor of patenting new insurance products

since it gives them protection from big companies when they bring their new
insurance products to market. Independent inventors account for 70% of the new U.S.
patent applications in this area.
Many insurance executives are opposed to patenting insurance products
because it creates a new risk for them. The Hartford insurance company, for example,
recently had to pay $80 million to an independent inventor, Bancorp Services, in
order to settle a patent infringement and theft of trade secret lawsuit for a type of
corporate owned life insurance product invented and patented by Bancorp.
There are currently about 150 new patent applications on insurance inventions
filed per year in the United States. The rate at which patents have issued has steadily
risen from 15 in 2002 to 44 in 2006.
Inventors can now have their insurance U.S. patent applications reviewed by
the public in the Peer to Patent program. The first insurance patent application to be
posted was US2009005522 “Risk assessment company”. It was posted on March 6,
2009. This patent application describes a method for increasing the ease of changing
insurance companies.

The insurance industry and rent seeking

Certain insurance products and practices have been described as rent seeking
by critics. That is, some insurance products or practices are useful primarily because
of legal benefits, such as reducing taxes, as opposed to providing protection against
risks of adverse events. Under United States tax law, for example, most owners of
variable annuities and variable life insurance can invest their premium payments in
the stock market and defer or eliminate paying any taxes on their investments until

27
withdrawals are made. Sometimes this tax deferral is the only reason people use these
products. Another example is the legal infrastructure which allows life insurance to
be held in an irrevocable trust which is used to pay an estate tax while the proceeds
themselves are immune from the estate tax.

(Source: Mehr and Camack “Principles of Insurance”, 6th edition;)

Chapter II. Insurance company operations on the example of JSC

«Centras Insurance» insurance company

2.1 Company overview, organizational structure, management

information

Only 15 million people live in Kazakhstan, which is almost four times the size
of Texas, so an insurance companies main client tend to be the oil and construction
companies that are creating the state’s ever increasing infrastructure and the
individual client base which is growing each day.

Company overview.
Headquartered in Almaty, Kazakhstan, Centras Insurance is a non-life
insurance company founded in 1997. It is a joint-stock company, subsidiary of the
Centras Group, an investment group headquartered in Kazakhstan.
Centras Insurance is a universal company, which aims at serving corporate
clients as well as individuals. The company distributes its products through a branch
network spread throughout of Kazakhstan.
The company’s business mix primarily consists of General Liability (26% of
the gross premiums written in 2007), Motor (20%), Aviation (16%) and Property
(12%).
In 2007, Centras Insurance reported Gross Premiums Written of KZT1,674
million and net income of KZT162 million, compared to KZT1,003 million and

28
KZT117 million in 2006. Shareholders equity was KZT850 million as at 31
December 2007.

Year Financial Highlights (as reported)

(Source: www.centrasinsurance.kz/financial_statements)

Business Activities

(Source: www.centrasinsurance.kz/financial_statements)

General Liability
General Liability encompasses a variety of insurance products and guarantees,
such as dangerous object owners, organisers of special events or life, health and

29
property damage. Centras Insurance reported a net loss ratio of 2% in 2007 in this
segment.

Motor Insurance
Centras Insurance writes Voluntary Motor Hull as well as Compulsory Motor
Owners’ Liability. Rates on Compulsory Motor Owners’ Liability are set by the
Kazakh government and have been increased in 2007. The company reported a net
loss ratio of 44% in Compulsory Motor Owners’ Liability and of 51% in Voluntary
Motor Hull in 2007.

Aviation
Aviation consists of both Civil Liability of Air Transport Owners and Air
Transport. In 2007, Centras Insurance reported net loss ratios of 190% and 9%
respectively in these lines.

Property Insurance
Property insurance is sold to both retail and corporate clients. Centras
Insurance reported a net loss ratio of 9% in 2007 in this segment.

Distribution Channels
Centras Insurance distributes primarily through a network of 16 branches
spread throughout of Kazakhstan. This network comprises more than 400 agents.

Organization Structure and Ownership

(Source: www.centrasinsurance.kz/financial_statements)

Ownership Structure
As of 31 December 2007, ultimate shareholder of the company was Mr E.S.
Abdrazakov.

30
Management Information

(Source: www.centrasinsurance.kz/financial_statements)

Company History

 May 28, 2009 - In May 2009 the journalists of Kazakhstani business publications
were surveyed to identify the best press service among the Kazakhstani
companies. The winners were selected by the following criteria: maximum
openness, efficiency, competence, social activity, creativity and sense of humor.
According to the survey the Centras Insurance PR Division was in 30 best press
relation services among the largest companies of Kazakhstan.
 June 30, 2009 - in June, 2009 the insurance forum organized by FM Global, one
of the largest international insurance companies took place in London. The most
reputable insurers from 30 countries worldwide came to participate in this
significant event. The subjects of the forum became the prospects of mutual
insurance, innovation development and FM Global partnership network.
Kazakhstan was represented by Talgat Ussenov, the Chairman of the Board of
Centras Insurance Company which is an old and the only Kazakhstani partner of
FM Global. One of the important results of the Forum for Centras Insurance
became providing the Company since 01 July, 2009 the exclusive opportunity to
insure the large industrial enterprises of Kazakhstan with a large volume of
insurance coverage on the principle of mutual insurance under the scheme of FM
Global program
 August 10, 2009 – Centras Insurance Company launched an unprecedented
campaign "the Week of Discount ". Every week, the clients can purchase the

31
 insurance policy under one of the voluntary insurance program with 10 per cent
discount.
 September 11, 2009 - Insurance Company Centras Insurance and Ular Umit
Pension fund concluded an exclusive agreement on mutual cooperation. This
agreement will allow Ular Umit Pension fund investors conclude voluntary
insurance agreements with Centras Insurance Company on attractive terms.
 September 18, 2009 – Centras Insurance Almaty office on individuals servicing №
3 changed its address. The new address is: 8A Astana micro district, Shalyapin St.
(between Sayin and Momysh-uly St), Almaty,
 September 30, 2009 – the Company Employees together with the Almaty bikers
visited Zhanuya orphanage. Few computers, children’s clothes and toys were
bought for the money collected by the employees of the company.
 October 20, 2009 – the Centras Insurance football team among 14 Kazakhstani
companies participated in the Championship of the football fans League
“Autumn” 2009. The Championship was held with the support of Almaty Akimat
and was aimed at the development of Kazakhstan sports.
 October 24, 2009 - Centras Insurance Company launched the unique insurance
program" 50 X 50 ".The program includes coverage for two classes of insurance:
Voluntary motor TPL insurance (up to 50 000 KZT) + Motor hull insurance (up to
50 000 KZT). The advantages of the program are: indemnities without providing
documents to the Road police within 3 days after the road traffic accident;
reimbursement of damages regardless of the Insured’s guilt; any number of the
accident participants;
 November 1, 2009 - In all branches of Centras Insurance JSC (except Semey) the
single telephone number +7 / city code / 59-77-55 operates.

 November 30, 2009 - the International rating agency Moody's Investors Service
has confirmed the insurer’s financial strength rating according to the global scale -
B3, “the stable” rating outlook of the Insurance Company Centras Insurance. As
the positive factors the experts of Moody’s noted the Company’s adjusted
business model aimed at the corporate and retail market, adequate risk
diversification, high reliability and the efficient system of reinsurance as well as
the stable investment portfolio. According to analysts of the agency, Centras
Insurance Company "has all the prerequisites for further development. The experts
of Moody’s believe that the company’s rating could rise this year, but this was
prevented by a low sovereign rating of Kazakhstan.
 May 25, 2009 - Centras Insurance JSC reviewed the development of the regional
network in 2008. The Astana branch on behalf of its director Alexander Belochkin
was recognized as the best. The second place was taken by the branch of Almaty
region with representative office in Taldykorgan in the person of the director L.
Kabylov. The third place went to the branch in West-Kazakhstan region in the
person of the director I. Kotlyarov and the special prize for the activity was
obtained by the Atyrau branch.

32
 From 18 to 22 May 2009 at the head office of IC Centras Insurance JSC the
seminar for the directors of regional branches took place. The seminar outlined
strategies for the Company’s development in the regions, methods of sales
increasing as well as the ways of service improving. Today Centras Insurance
Company pays great attention to work with individuals and plans to expand its
business in the regions.
 May 01, 2009 - Centras Insurance launches free mobile Call-center. Now you can
call Centras Insurance to 7072 free mobile phone number from any mobile
operator!
 April 30, 2009 – NOW Centras Insurance offers insurance for
MOTOTRANSOPT. This is a pioneer insurance program for Kazakhstan.
 April 07, 2009 – Centras Insurance Company provides the unique service package
“FIRST Insurance Aid”.
 February 01, 2009 – the Centras Insurance Company Head Office moved to new
office at the address: 157 “V” Shevchenko Str. (Between Zharokov and Auyezov
Str.), Almaty, 050008
 January 01, 2009 – By the independent research of Exclusive magazine, in which
more than 750 heads of the largest Kazakhstani companies and organizations from
different branches of economy, Centras Insurance JSC already the second year
ranks among 50 Kazakhstani companies with the best image.
 December 01, 2008 – Centras Insurance Company launched the campaign"
Season of Winter Gifts ", which lasted the whole winter. Every customer who
bought CTPL policy received 20 liters of gasoline and stylish souvenir as a gift!
 September 12, 2008 – Centras Insurance Company is 11 years!

 August 30, 2008 –Centras Insurance Company is an official sponsor of

competitions on extreme kinds of sport “Mercur Open Cup” which will be carried
out during the whole year at the Tabagan sports complex.
 July 31, 2008 – Centras Insurance Company is a sponsor and the insurer of hang-
gliding Open Kazakhstan Championship.
 July 15, 2008 – signing of cooperation Agreement between GNPF Accumulation
Pension Fund and Centras Insurance Company on privileged insurance of Fund’s
depositors.
 June 25, 2008 – with the participation of Association of financiers of Kazakhstan
the memorandum between the insurance companies and the Insurance
Ombudsman on granting to the insurance Ombudsman the right on regulation of
relationships between insurance organizations and their clients was signed.
 June 25, 2008 –registration of new office of sales – the Retail Insurance Devision
#3 at the address: 1A, Zhetysu-3 microdistrict.
 June 16, 2008 (Paris) – the international rating agency Moody’s Investors Service
awarded the Kazakhstani Insurance Company Centras Insurance with insurance
financial strength rating according to the international scale ‘B3’, positive outlook.

33
 June 01, 2008 – the Central development fund Eldani and NAYADA company
carried out a presentation of ‘Masters’ city’ project on Arbat, Almaty aimed at
development and support of Disabled children. IC Centras Insurance JSC became
the official insurer of the event which also provided sponsorship to the central
development fund Eldani on the holiday dated for the Day of children’s
protection.
 March 01, 2008 – the internet site www.kupipolis.kz containing calculator for
insurance premium and application for insurance policy order was put into
operation. This kind of service is popular worldwide, as it significantly saves time
of insurer. Centras Insurance JSC is pleased to offer this service to Kazakhstan
residents. The first policy drawn on internet-application was delivered 15.03.2008.
 February 01, 2008 – the direct internet site www.отказов.net of the Regulation of
losses Division of Centras Insurance Company was put into operation. The on-line
portal provides information on the Department’s staff, insurance indemnities
execution, interesting facts and necessary data on insurance indemnities.
 January 21, 2008 – by the results of independent research of Exclusive magazine
(#1 from 21.01.2008) Centras Insurance JSC already the second year ranks among
50 Kazakhstani companies with the best image.
 December 01, 2007 – Centras Insurance JSC became the participant of
International Network of Insurance (INI) on the Kazakhstani insurance market.
 October 01, 2007 – at the competition of annual reports held by National Business
the annual report of Centras Insurance 2006 took a Grand Prix as the best annual
report of 2006.
 September 12, 2007 – Centras Insurance celebrated its 10 birthday!

 July 5, 2007 – registration of one more office of IC Centras Insurance on clients

servicing in Almaty at the address: 549, Seyfullin Str. (corner of Bohenbay Batyr
Str.)
 May 1, 2007 – Centras Insurance JSC concluded the agreements on catastrophic
excess of loss (CatXL) insurance upon losses as a result of catastrophes with the
largest world reinsurers: Swiss Re (Switzerland, rating “AA-” on S&P) and
Munich Re (Germany, rating “AA-” on S&P)
 The branches in South –Kazakhstan and Kyzylorda regions are opened.
 April 15, 2007 – registration of new office of IC Centras Insurance on clients
servicing in Almaty at the address: 49/104 Tole bi Str. (corner of Furmanov Str.)
 January 15, 2007 – signing the Agreement on insurance pool creation between
insurance companies: Centras Insurance JSC, Nomad Insurance JSC, BTA
Strakhovaniye, Alliance Polis JSC and Amanat Insurance JSC.
 December 15, 2006 – signing the cooperation Agreement between Centras
Insurance JSC and Neftebank JSC in the field of pledge insurance of bank clients
and other risks.
 December 12, 2006 – the Company launched the 24/7 multi-channel Call center
+7 /327/ 2 600 602

34
 August 1, 2006 – the specialized electronic system of registration and control of
activity PREMIA is put into operation in Centras Insurance JSC. The similar
system is used by the largest world insurance companies such as AIG, Tokyo Fire
& Marine Insurance and others.
 July 15, 2006 – in connection with the removal to new office the legal address of
the Company has changed. The new address of the Company: 32-A Manas Str.,
Almaty, 050008, Kazakhstan.
 May 18, 2006 – the current license of Centras Insurance includes as additional
class of insurance – the Compulsory ecological insurance.
 March 15, 2006 – the state registration of authorized shares issue in connection
with the increasing of Centras Insurance Company’s authorized capital up to KZT
1,003,250.
 March 01, 2006 – the conclusion of obligatory reinsurance agreement with
Lloyd’s corporation and pool of western reinsurers among which SCOR (France),
Partner Re (Switzerland), Hannover Re (Germany), Translantic Re (USA) and
CCR (France).
 February 24, 2006 - registration of first branch of Centras Insurance Company –
the Almaty regional branch in Taldykorgan. By the end of 2006, 5 more branches
in different regions of Kazakhstan are opened.
 January 16, 2006 – the license on the right of reinsurance activity implementation
Series DP# 16-1/1 is obtained.
 August 31, 2005 – the state registration of authorized shares issue in connection
with increasing of Centras Insurance Company’s authorized capital up to KZT
500 mln.

 June 20, 2005 – reregistraiton of Insurance Company TERRA in connection with

the name changing to Insurance Company Centras Insurance JSC.
 April 25, 2005 – changes in number of shareholders of Insurance Company
TERRA JSC related to entering into Centras Group of companies.
 April 12, 2005 – the decision on purchase of shares of Insurance Company
TERRA JSC by Centras Group.
 December 12, 2003 - reregistration of Insurance Company TERRA LLP to JSC
with the purpose of matching of procedural and institutional form of the Company
with the legal requirements of the Republic of Kazakhstan “on joint-stock
companies” from May 13, 2003.
 December 1, 2000 - Re-registration of Insurance Company TERRA ltd in
connection with the change of shareholding structure and meeting of legislation
requirements on the equity capital size increasing.
 December 27, 1999 – creation of Limited Liability Partnership Insurance
Company TERRA which served as assignee of the Insurance Company TERRA
ltd in connection with changing of legislation requirements.
 September 12, 1997 - State registration of Insurance Company TERRA lld.

35
2.2 Global Credit Research. Credit Opinion: Centras Insurance

Summary rating rationale

Moody's B3 insurance financial strength rating for Centras Insurance reflects
the sustainable business model of the company, with a very good business
diversification and a well spread regional network which gives the company a good
position to grow in retail lines, a conservative management as evidenced by a very
comprehensive reinsurance programme placed with quality Western reinsurers and an
investment policy favouring investments in local bank deposits, as well as a good
underwriting profitability. However, this is offset by a very low capitalization and a
significant asset risk, the most prominent local banks in Centras Insurance's portfolio
being rated in the Brange.
Furthermore, despite its fast growth, Centras is still a relatively small company
with a small market share in an increasingly competitive market.
Since 2005, Centras Insurance has been owned by Centras Capital, holding company
of the Centras Group, an investment group headquartered in Kazakhstan which also

36
includes an investment bank. Centras Insurance is a fast growing company and
ranked number 17 in the Kazakh insurance market at year-end 2007. The company's
main business lines are General Liability (26% of GPW in 2007), Motor (20%),
Aviation (16%) and Property (12%).

Credit strengths
The main credit strengths of Centras Insurance are as follows:
• a very good product diversification and a good regional network, giving the
company a good position to grow in retail lines
• an excellent comprehensive reinsurance programme with large quota shares
placed with quality reinsurers, enabling the company to control its rapid
growth and to reduce the risks inherent to commercial lines which are
predominant in the premiums mix in the Kazakh market
• a low and relatively diversified liability risk profile, focused on short-tail lines
and with more and more products being sold to individuals
• a good underwriting profitability with reasonable acquisition costs and
consistent low loss ratios
• a conservative risk management

Credit challenges
The main credit challenges of Centras Insurance are as follows:
 the company is still a relatively small player, while Kazakhstan is an increasing
competitive market
 achieve sustainable growth while maintaining a conservative risk profile and a
good profitability
 control the risk of investments concentrated in local banks, given the
challenging operating environment and the pressure suffered by local banks
 the level of capitalisation is currently low, therefore the solvency position is
very reliant on reinsurance and any adverse event would expose the company
to a regulatory capital pressure

Rating Outlook
The rating outlook is positive, reflecting Moody's expectation that Centras Insurance
will continue to improve its market position in the short to medium-term, as well as
seek to improve its capital position through continued profitability and retained
earnings. What Could Change the Rating - Up
The following factors could put upward pressure on the rating:
 an improved capital position in order to finance the growth of the company
inside and outside Kazakhstan and remove the pressure from potential for
regulatory capital pressures
 reaching a top tier position in the Kazakh insurance market, while maintaining
a conservative risk profile and a good profitability
 improvement in the credit quality of the investment portfolio

37
What Could Change the Rating - Down
The following factors could contribute to a ratings downgrade:
 a riskier business risk profile, with a significant growth in longer-tailed lines
such as inwards reinsurance or commercial lines and a less comprehensive
reinsurance programme
 a failure to grow in the Kazakh insurance market and a failure to maintain the
current level of profitability, which would prevent the company from breaking-
even on its fixed costs
 a deterioration of the credit quality of the investments portfolio, as evidenced
by downgrades of local banks
 a decline in solvency ratio below 105%

Recent results and company events

In 2007, Centras Insurance reported Gross Premiums Written of KZT1.675
million and net income of KZT162 million, compared to KZT1.003 million and
KZT117 million in 2006. Shareholders' equity including minority interests was
KZT850 million as at 31 December 2007.

Detailed rating considerations

Moody's rates Centras Insurance B3, positive outlook, for insurance financial
strength, which is lower than the rating indicated by Moody's insurance financial
strength rating scorecard. The B3 rating is currently driven by the company's low
capitalisation and poor asset quality.

Insurance financial strength rating

The key factors currently influencing the rating and outlook are:
Factor 1 - Market Position, Brand and Distribution: Ba

Centras Insurance is a recent, fast growing but small insurance company with a
market share of 1% in the Kazakh insurance market. However, most of the local
insurance companies are captives of large industrial or financial groups, and are not
competitors of Centras Insurance. In fact, the company belongs to the top-10 of the
diversified insurance companies in Kazakhstan. The company is very well positioned
to grow in retail lines, thanks to a well geographically spread distribution network of
16 branches, one of the largest in Kazakhstan. Hence, Centras Insurance expects to
grow significantly in Motor Insurance, targeting a market share at around 7% in
Motor TPL in the short-term.
The company's expense ratio is high (34% on a gross basis in 2007), partly
reflecting the subscale nature of the company, but the commissions (10% of
premiums on average) are in line with the industry in Kazhakstan.
Nonetheless Moody's notes that the business plan of the company may be
challenged by increasing competition and growing entry of foreign players in this
market.

38
Factor 2 - Product Focus and Diversification: A
Centras Insurance has a very well diversified liability profile. In 2007, the main
business lines were General Liability (26% of GPW), Motor (20%), Aviation (16%),
Health and Accident (14%) and Property (12%). Although the
company mostly writes commercial insurance, reflecting the business mix in
Kazakhstan, most of these risks are short-tailed. Furthermore Centras Insurance
benefits from a very comprehensive reinsurance programme (the retention ratio was
42% in 2007) placed with high quality reinsurers. Going forward, the company
expects to increase the volume of retail business and to develop life insurance.
Inwards reinsurance may also be underwritten more actively in the medium term, but
primary insurance will still be predominant. The low business risk profile is
also partly offset by a lack of geographic diversification, most of the exposure being
concentrated in Almaty.

Factor 3 - Asset Quality: B

Goodwill and reinsurance recoverables represent a small fraction of the
company's assets. Nonetheless, Moody's notes that insurance premiums receivables
were fairly high at year-end 2007 (17% of total assets). This partly reflects the high
proportion of commercial clients in Centras Insurance's portfolio, and Moody's
expects this item to progressively decrease in the coming years.
The investment policy of Centras Insurance appears to be conservative, with a
predominance of bank deposits (63% of investments at year-end 2007), fixed income
securities (20%) and cash (8%). However, Centras Insurance's investments portfolio
is lowly diversified and heavily exposed to credit risk of local banks. Four banks
with an average credit quality of B1 represent around 75% of the investments
portfolio (90% of shareholders' equity). Moody's further notes that the Kazakh
banking has seen liquidity issues as a result of the credit crisis since the Summer
2007. Therefore, Moody's considers asset quality to be consistent with a B-range
rating.

Factor 4 - Capital Adequacy: B

The good Gross Underwriting Leverage (2.1x at year-end 2007) reflects a low
amount of loss reserve in the balance sheet, thanks to a very quick settlement of
claims. However, Moody's considers the capitalization of Centras Insurance to be
very lean, bearing in mind the fast growth of the company and the credit risks
accumulated on the asset side of the balance sheet. In addition, the solvency ratio was
only 112% as of 31December 2007 and has been decreasing since 2005, which is
more in line with a B-rating. Nonetheless, Moody's believes that the company will
seek to improve its capital position, through for example continued profitability and
retained earnings.

Factor 5 – Profitability: Baa

39
 Centras Insurance has recorded a very good overall profitability in recent years
with ROE of 20% in 2006 and 2007, driven primarily by low net loss ratio (20% in
2007). Yet, the net expense ratio is very high, mainly reflecting the cost of the
reinsurance programme (net expenses divided by net premiums written was 62% in
2007, whereas expenses divided by gross premiums written was 34% in 2007).
Moody's expects the company's profitability to deteriorate in the medium term, since
we expect the local insurance market to become increasingly competitive,
although the strategy of the company focused on quality with above average tariffs
should partly mitigate this trend. Nonetheless, given the short operating history of the
company, we also believe that Centras Insurance has yet to establish a track record of
profitable growth.

Factor 6 - Reserve Adequacy: Baa

Centras Insurance does not disclose any information on prior year reserving,
and the history of the company is too short to enable any statistical study. Although
Moody's acknowledges that most claims are settled within one year, which limits the
amount of technical liabilities on the balance sheet, we believe that Centras
Insurance's reserve estimation may have to evolve further to achieve full accuracy.

Factor 7 - Financial Flexibility: Baa

Centras Insurance has not issued any financial debt so far. However, significant
operating leases (rent expense) result in a financial leverage ratio of 35.5% as of year-
end 2007. In addition, Moody's believes that Centras Insurance has limited access to
capital or liquidity in times of financial distress at short notice.

Other Considerations
Accounting Policy and Disclosure

Centras Insurance has reported under IFRS since 2005. The scope of
disclosure, e.g. with regards to prior year reserve development and the more sensitive
areas such as management compensation, is more limited than that of large Western
insurance groups.

Sovereign and Regulatory Environment

Sovereign ceilings, such as the foreign currency bond ceiling and local
currency deposit ceiling, do not feature as immediate constraints for Centras
Insurance's rating. However, in addition to company-specific fundamentals,
Centras Insurance's rating incorporates Moody's view that the operating environment
in Kazakhstan – which reflects country-specific systemic risk - remains challenging.
This assessment - which is based on a combination of political, economic and legal
system indicators in comparison with other countries worldwide - leads us to believe
that the company's credit profile is subject to additional pressures. The rates in
compulsory motor insurance are for example fixed by law and may, in some period
and/or in some region, not reflect the fair price of the guarantees.

40
 Furthermore, the Kazakh banking system has experienced liquidity issues as a
result of the credit crisis since the Summer 2007. Adaptation of risk management
practices and underwriting processes to these changes to the economic environment
will constitute a major challenge for Centras Insurance as well as for the insurance
industry as a whole in Kazakhstan.

2.3 Business activities and products

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Motor hull insurance
Programms:
1. Auto-Exclusive
2. Auto-Elite
3. Auto-Standard
4. Auto-Limit

Insurance event is a loss and/or damage of motor hull as a result of the

following events:
 Traffic accident
 Theft/Stealing – property damage of Insured caused by the illegal
acquisition of ensured vehicle by theft, robbery or by the attempt of their
commission.
 Wrongful acts of third parties – hooliganism against vehicle, theft or
robbery, theft of its separate parts, details and their destruction or damage.
 Natural disasters
 other unforeseen circumstances– fire, accidental percussion external
attack, lightning stroke, falling under the ice, damage of water-supply, heating or
sewerage systems, falling at the motor transport the subjects from outside.

An agreement may be concluded on the basis of one of the following variants of

motor hull insurance under the events of:
1) Variant А – ‘All risks’;
2) Variant B – ‘Traffic accident’, ‘Stealing’;
3) Variant C– ‘All risks’, excluded ‘Stealing’;
4) Variant D – ‘All risks’, excluded ‘Stealing’ and ‘Natural Disasters’;
5) Variant E – ‘Traffic accident’.
Insurance rate at insurance upon all risks is stated within the limits from 3.5%
up to 7% from sum insured. The value of the premium depends on characteristic of
concrete car (model, year of issue), conditions of exploitation and storage.
Amount of the sum insured at the moment of the conclusion of insurance
contract is defined according to the balance cost of automobile on basis of accounting
documents or market value.
Insurance indemnity is carried out at the amount of the real damage caused to
vehicle within the limits of sum insured stipulated in the contract of insurance
with/without deterioration.

Motor third-party liability insurance

Compulsory motor third-party liability insurance CTPL is carried out on the
basis of the Law of the Republic of Kazakhstan.
Limits of compensation on this insurance event (sum insured) are legislatively
determined within the following values (in monthly estimated index):
1) for harm caused to life or health of each victim and caused:

42
 i) loss – 1000;
ii) disability:
iii) I group – 800;
iv) II group – 600;
v) III group – 500;
vi) ‘disabled child’ – 500;

Mutilation, trauma and other injury without establishment disability – in

amount of actual expenses on outpatient and (or) impatient treatment but not more
than 300. At that, the amount of insurance indemnity for each day of inpatient
treatment should make not less than 2 monthly estimated indexes;
2) for harm caused to property of one victim – in amount of caused harm but
not more than 600;
3) for harm caused to property of two and more victims at the same time - in
amount of caused harm but not more than 600 to each victim. At that, the total
amount of insurance indemnities to all victims should not exceed 2 000.
In case the harm exceeding the insurer’s liability limit, the insurance indemnity
to each victim will be executed in proportion to harm caused to his property.
Insurance premium is determined by multiplying the basic insurance premium
(1.9 monthly estimated index) on coefficients depending on type, place of registration
and operation life of vehicle as well as on coefficients depending on age and driving
experience of Insured/Assured and on coefficient of Bonus-Malus system which
depends on insurance events within the last 12 months.
Owners of vehicles - members of Great World War II and persons equated to
them, disabled persons of I and II groups, pensioners with conclusion of standard
agreement pay insurance premiums in amount of 50% from insurance premium
payable.
If the vehicle is run by other owners not belong to the category of persons
stipulated above, an agreement is concluded without providing such a privilege.
In case the limits on compulsory insurance are not sufficient to you, we may
conclude voluntary motor third-party liability insurance Agreement with greater
limits of liability.

Property insurance
Any property is a subject to insurance: personal, real, pledged property, the
goods in a warehouse and in a trading hall.
Insured event is the destruction (loss) or damage of property as a result of
following events:
• a fire, explosion, lightning, smoke;
• hurricane (storm);
• a hailstones;
• flooding;

43
 • earthquake;
• flooding by water from pipes of water, sewer and heating systems;
• False operation of automatic sprinkler;
• Burglary and a robbery, including the subsequent destruction or damage of
property;
• Run over by a self-propelled vehicle;
• Collision or falling on the ground of piloted aircrafts, their parts or a cargo
transported on these aircrafts, overcoming by flying object of a sonic barrier.
Sum insured is established at a rate of actual (market) value of property.
Insurance rates are established depending on the characteristics of insurance object,
its site and the other factors having essential value for definition of a degree of risk
within the limits from 0.2 % up to 0.9 % from the insurance amount.
Insurance indemnity is carried out at a rate of the real damage caused to
property within the limits of the insurance amount stipulated in the contract of
insurance.

Casualty insurance
Influence of the following external factors concerns to accident: explosion,
burn, chilblain, drowning, action of an electric current, impact of a lightning, a
sunstroke, an attack of malefactors and animals, stings of the snakes or stinging
insects, falling of any subject or Insurant himself, sudden suffocation, casual hit in
respiratory ways of an alien body, a casual acute poisoning with poisonous plants,
chemical substances (industrial or household), medical products, substandard
foodstuff, and also the traumas received at movement of automobiles or at their
wreck, at using machines, mechanisms, the weapon and any kind of tools.

The contract can stipulate the following insurance:

o from accident on plant, including the time of the trip between house and a
place of execution of service duties on the transport given by the employer;
o accident insurance on plant and in a private life (24 hours per day);
o accident insurance in a private life;
o insurance during a trip, rest
o insurance for the period of performance of the certain work etc.
The sum insured is stated under the agreement of parties.
In case of insured accident the value of insurance indemnity is:
1) in case of Insured temporary disability as a result of accident - at a rate of 0,03%
of the insurance amount per every day of disability, but no more than 90 (ninety)
days;
2) after the Insured physical inability setting:
i) I group – 100% from sum insured
ii) II group – 75% from sum insured
iii) III group – 50% from sum insured
3) in case of Insurant death – 100 % from sum insured

44
 The insurance rate is stated within the limits of from 0,2% up to 2,0%
depending on a sort of activity or a profession.

Compulsory employer’s liability insurance

Compulsory Employer’s liability insurance is carried out on the basis of the
Law of Republic Kazakhstan from 2/7/2005 30-IIIZKR.
Insurance event is the fact of approach of third-party liability of employer on
reimbursement of harm, caused to life and health of employee at execution of his
labor (service) duties.
Harm caused to life and health of the worker includes material expression of
the harm related to death or proof disability.
Sum insured is set by the agreement of parties, but should not be less than the
annual wage fund of all workers on staff categories.
Insurance rates are differentiated according to the Law on three categories of
the personnel (factory, auxiliary, and administrative) and on 22 classes of
professional risk depending on kinds of economic activities.
Insurance indemnity is made at the rate of actual harm but not more than sum
insured established by the contract of compulsory employer’s liability insurance and
includes the following expenses:
1. earnings which the victim has lost owing to disability or its reduction as a
result of the caused mutilation or other health damage;

2. additional charges caused by harm to health and additional feed necessary for
its restoration, medicines purchase, prosthetics, nursing care, sanatorium
treatment, purchase of special vehicles, training for other profession, etc.) if it
is recognized that the victim requires these kinds of help and care and does not
receive them free of charge;
3. part of earnings which in the case of victim’s death has been lost by the
disabled persons consisted on its expense or had the right for material support
from him
4. charges on burial (the grant to the burial received by residents suffered these
losses is not in the account of harm reimbursement
5. necessary and appropriate charges of the Insured on prevention or reduction of
the losses caused by an insurance event, at their presence.

Constructional risk insurance

Object of insurance is the property interest of the Insured connected to
unforeseen expenses and losses at construction and erection and other works during
construction, including loss indemnification.
Under this insurance any individual or legal entity can be considered as the
Insured’s who has the risk of:
• Customers;
• Contractors, Sub-Contractors;
• Project Organizations

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Contractor’s All Risk is performed under two sections:
Section 1 - Material Damage
Section 2 - Third Party Liability
Under the first section contraction objects, reconstruction and complete
overhaul, construction machinery, equipment and mechanisms, other property is
subject to insurance.
Under the second section Liability of the Insured against third party for
material damage to their property or harm to their life, health caused at contraction,
erection and starting-up/adjustment at a construction site or direct nearby, as well as
maintenance period are subject to insurance.
Debris removal may also be the subject of insurance additionally.
Sum insured is set up by the agreement of parties and includes contractual
works, book value of machinery and equipment, starting-up/adjustment expenses
subject to maximal possible loss, costs of material and other property purchase that
are the contraction object thereto.
Basic insurance rates for this type of insurance are from 0.3% to 3.4% from
sum insured.

Cargo insurance
All types of cargo transported by railway, road, air, marine, river, or other type
of transportation, including pipelines or other communications owned by the Insured
(Assured) based on ownership right or other grounds are subject to insurance.
Insurance contract shall be concluded based on the following Liability risks:
 All Risks
 Partial Risk
 Without Liability for damage, excluding crashes
In the first case the cargo owners are indemnified the losses against damage or
total loss of the cargo or its part arising by any reasons, except those that are
specifically agreed in the contract.
At “Partial Risk” insurance the Insurer indemnifies the losses against damage
or total loss of the cargo only in cases of different accidental situations caused by
thunderstorm, storm, natural disasters, crashes or collisions of motor vehicles,
accidents, mysterious disappearance of motor vehicle with cargo.
In case of “Without Liability for damage, excluding crashes” losses for cargo
damage shall not be paid, but indemnification shall be made only in case of total loss
of cargo or its part. For example, if during marine journey a tanker gets the breach
and oil flows out, the claim will be paid, but if there is a fair amount of water within
the fuel tank than no payment is made.
In all three cases, besides loss compensation, the Insurer indemnifies the
owners expenses on salvage cargo insured.
As a rule, insurance covers applies for the whole time of cargo transportation
commencing from the moment of cargo acceptance from the warehouse in the point
of departure and continues during all transportation (including reloading,
transshipment and interim custody in reloading and transshipment points), and

46
finishing from the moment of cargo delivery to the warehouse of the recipient or
other ending warehouse at the point of destination shown in the contract.
Contract may be concluded as for the one-time shipment as for the insurance of
all cargo shipments during long-term period.
Sum insured shall be stipulated in compliance with the actual cargo price.
Besides its cots, the sum insured may include the expenses for shipment
(fright) and cargo custody. This is plus 10% to the cargo value.
Rates for cargo insurance depend on transportation, volume of Insurer liability,
type of the transport, list of cargo, extension and rout risk; reloading, transshipment
and interim custody.

Energy package insurance

Oil Operation Insurance is the combination of those risks insurance that are
related to oil operations: Property Insurance, money contingencies insurance related
to the loss of control of borehole, Third Party Liability Insurance for causing harm to
life, health or property of third parties and environment, compulsory Employer’s
Liability Insurance for causing harm to employee under execution his labor duties.
Insurance covers:
 Buildings and premises, transmissive devises;
 Pipeline (oil and gas);
 Hull and mechanisms of drilling structures;
 Specialized devices and equipment for geological prospecting and
exploration;
 Spare parts, aggregates and other materials for maintenance and
servicing oil and gas wells;
 Mud or reservoir fluids;
 Finished goods kept in special depository and transported to oil and gas
pipelines;
 Objects of uncompleted production and complete constructions;
 Other oil property and equipment;
 Additional expenses of the Insured connected to loss of control of well,
repeated drilling and restoration of wells insured or any of its plot; debris
removal, dismantling, demolition, fasten of destructed (damaged)
property.

(Source: Centras Insurance official website

(www.centrasinsurance.kz))

47
 Chapter III. Economic basis of activity of the insurance companies and
Kazakhstani insurance market analysis

3.1 Economic basis of insurance, regulatory definitions

Transfer and sharing of risk
Insurance as an economic device involves the transfer and sharing of risk. It is
one of the ways in which risk can be managed. For example, risk may be avoided by
not engaging in any form of hazardous enterprise at all. It may be retained, so that the
person exposed to risk accepts responsibility for the potential financial loss,
sometimes called self-insurance, that groups of companies may undertake using a
captive. It may be reduced, by limiting the magnitude of the loss or the likelihood of
its occurrence, for example by installing a sprinkler system, or putting more secure
locks on your doors and windows. It may be shared, for example by combining with
others as members of a company.
Insurance is a way of sharing risk by transferring it to another person who is
more willing to bear it. Such a transfer may be contractual, but not all contracts which
transfer risk are contracts of insurance. Hedging instruments and guarantees are
examples of non-insurance contracts which transfer risk, though the dividing line
between insurance and other forms of risk transfer, and in particular derivatives, is
sometimes a very fine one. The economic benefits of insurance are that the transfer

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and sharing of risk encourages economic activity, as the full risk does not fall on the
entrepreneur.
Emmett J. Vaughan in Fundamentals of Risk and Insurance sums up the
economic function and mathematical basis of insurance as follows:
‘From the social point of view, insurance is an economic device for reducing
and eliminatingrisk through the process of combining a sufficient number of
homogeneous exposures into agroup in order to make the losses predictable for the
group as a whole.’

Meaning of risk
Risk does not necessarily equal uncertainty. If bullets are added to a revolver
used for Russian roulette the uncertainty is reduced but the risk increases. Vaughan
gives the following definition:
‘Risk is a condition in which there is a possibility of an adverse deviation from
a desired outcome that is expected or hoped for.’
For a risk to be insurable it does not need to be measurable, but it does need to
be related to a measurable financial loss, or to a valued loss. This means a loss on
which a value has been placed. For example, an accident insurance policy may value
the loss of a limb at £10,000. Degree of risk should be distinguished from magnitude
of risk. Degree of risk is the probability of the adverse event occurring, whereas
magnitude of risk is the amount of the likely loss. In mathematical terms the
probability of a loss of £1,000 does not necessarily reflect a greater degree of risk
than the probability of a loss of £10.

Risk can be distinguished from peril, which is the actual or potential cause of
loss (for example hail or fire); in practice, though, the term risk is often loosely used
instead of peril. Risk and peril can both be distinguished from hazard, which is a
condition that may create, decrease or increase the chance of a loss arising from a
given peril (for example driving when visibility is poor as opposed to good). Insurers
may also refer to ‘moral hazard’ which is where the policyholder, either intentionally
or through carelessness, adds to the risks assumed by the insurer because they expect
to be covered. For example a person covered by sickness insurance may prefer not to
return to work even though fit to do so.

Risk and premiums

Although complicated in practice the insurance mechanism is essentially quite
simple. An insured person may pay £500 to his insurer for comprehensive cover for
his car. He may not see a penny for his £500, and indeed he hopes not to do so.
However, his insurer may have to pay say £15,000 if the policyholder writes off his
car, and possibly £1 million or more in the event of an accident involving traumatic
personal injury. Similarly, private individuals may insure their house against fire and
other perils, or personal belongings against theft. A private policyholder pays a
(relatively) small certain sum, a premium, for protection from the financial loss
which may arise from the specified peril and which might otherwise be difficult or

49
impossible to bear. Thus even at the level of the private individual the availability of
insurance may encourage economic activity in the form of the purchase of a car or a
house. A manufacturer may similarly insure a factory against damage or destruction
by fire or some other peril, and may in addition take out loss of profits insurance
against the possibility of interruption of the manufacturing process by the peril. Again
the availability of insurance may be one factor in deciding to invest in plant or
premises, by eliminating a degree of uncertainty from the potential costs. From this
perspective Vaugha gives the following definition of insurance:
‘From an individual point of view, insurance is an economic device whereby
the individualsubstitutes a small certain cost (the premium) for a large uncertain
financial loss (thecontingency insured against) which would exist if it were not for
the insurance.’

Pooling of risks
However, an insurer could not sensibly take on a liability of £15,000 for a
premium of £500 without entering into other similar contracts. From the perspective
of the insurer, the mechanism involves not just assumption of risk, but also the
reduction and ideally elimination of risk by a process of risk sharing. At its simplest
this may involve no more than a group of people collectively agreeing to share each
other's losses. Suppose 1,000 car owners each have a car worth £10,000. If one car is
stolen each owner pays £10 rather than one having to pay £10,000 for a new car. If
the 1000 car owners agree to put their estimated contributions into a central fund, and
from previous experience they estimate that two cars will be stolen in a year then they
will each need to pay £20 plus a share of the cost of administering the fund. If three
cars are stolen rather than the two they predicted each will have to pay an additional
£10. This is in effect a description of the purest form of mutual insurance and some
marine insurance is still conducted on this simple basis in Protection and Indemnity
Clubs (P & I Clubs) whose membership consists, for example, of UK and foreign
ship-owners.

Law of large numbers

The majority of insurers, however, will be unwilling or unable to go back to
their policyholders for additional payment if losses turn out to be greater than
expected. They must rely on a cushion of working capital (provided by the
shareholders in anticipation of an investment return in a proprietary company) to
meet such losses. One of the main aims of insurance regulators is to ensure that
companies always have a sufficient margin of assets over estimated liabilities
appropriate to the business that they conduct.
The sharing and pooling of risk is still, however, vitally important. In the real
world the pattern of losses (cars stolen or houses burning down) is unstable. Suppose
that, on average, one car in ten is stolen each year. If the thefts are independent of one
another an insurer who had only insured ten cars would find that there was a one in
four chance that two or more would be stolen, which would double the expected
outlay on claims. It would not be possible to do business on that basis.

50
 But if 100,000 cars are insured, the probability that more than 10,200 (or less
than 9,800) will be stolen is only about 1%. This is an example of the operation of the
‘law of large numbers’, which may be expressed as follows:
"The observed frequency of an event more nearly approaches the underlying
probability of the population as the number of trials approaches infinity."
In other words, the more cars insured, the more accurately can be predicted the
percentage of cars likely to be stolen. It is this aspect of probability theory that
enables the insurer to cope with variations in the pattern of actual losses.
Underwriters and actuaries may also consider various measures of dispersion, that is
the difference between the actual losses and average losses, when setting premiums
or assessing liabilities.

Spread of business
The central point is that the risk borne by the insurer is not the sum of the risks
transferred but rather the possibility of an adverse deviation from the desired
outcome.
This is significant when considering captive insurance and financial insurance
and reinsurance.
The law of large numbers only works when the risks are independent of each
other. The risk of a car being stolen is largely independent of the risk that a
neighbour’s car will be stolen; but if a house is damaged by a storm it is quite likely
that the same will happen to a neighbour’s house. An insurer writing property
insurance therefore needs to ensure that it has a good geographical spread of
business.
In the past some UK insurance companies suffered large losses on mortgage
indemnity business, which protects lenders against the risk that the sale of a
repossessed property will not provide sufficient money to pay off the outstanding
debt. Such risks were not independent, as insurers discovered in 1990 when an
economic downturn simultaneously threw people out of work and depressed house
prices.

Underwriting risk and timing risk

Another aspect of the economic basis of insurance is the nature of the risk
transferred. One commonly recognised distinction is between’ “underwriting risk’
(uncertainty about whether an event will occur) and ’timing risk’ (uncertainty about
when an event will occur). Discussion of this is to be found in the Statement of
Recommended Accounting Practice (SORP) on Accounting for Insurance Business
issued by the Association of British Insurers (ABI) in 2005. For example, insurance
risk is defined as:
“Uncertainty over the likelihood of an insured event occurring, the quantum of
the claim, or the time when claims payments will fall due.”

A transfer of an insurance risk is defined as:

51
 “A transfer of insurance risk, which may involve underwriting risk or timing
risk or both, between the insured and insurer as a result of which, having regard to the
commercial substance of the contract or contracts being evaluated, there are a number
of reasonably possible outcomes some of which may present the insurer with the
possibility of suffering a material loss.”
And in relation to reinsurance, paragraph 248 onwards refers to the importance
of identifying the economic substance of the transaction:
“A key characteristic of reinsurance is the transfer and assumption of
significant insurance risk…The insurance risks relating to a general insurance
contract may consist of either or both of underwriting and timing risk.’’
A contract in which only timing risk (that is where there is uncertainty not
about an event but about when claims will need to be met) is transferred, is arguably
not a contract of insurance. Whole of life policies (where a benefit is paid on the
certain event of death, whenever it occurs) are a type of contingency contract, and
therefore insurance, but there are differing views as to whether an indemnity contract
under which only timing risk is transferred can properly be described as a contract of
insurance. This is discussed further in the section on financial insurance and
reinsurance.

Reinsurance and coinsurance

An insurer will often seek to transfer some of the risks it has accepted from
policyholders by means of reinsurance. From both an economic and a legal point of
view reinsurance is no different from direct insurance in the sense that it involves the
transfer of risk under a contractual agreement. It differs from direct insurance only as
regards the parties to the contract and takes place when one insurer insures with
another insurer a part, or occasionally the whole, of the risks which it has assumed.
As each party is financially sophisticated, the regulatory regime is lighter for
reinsurance, but some tightening followed implementation of the Reinsurance
Directive 2005/68/EC in 2007.
Reinsurance as a concept is not especially complicated but it does have a
jargon all of its own. The terms used in reinsurance and the types of reinsurance
contracts encountered (reinsurance and other forms of risk transfer).

Co-insurance is used to mean different things:

 insurance, usually of large risks, by two or more direct insurers on a joint basis
as a means of spreading the risk
 (particularly in North America) certain types of reinsurance
 sharing of risk between the insurer and the insured
 joint insurance, for instance by couples on their home; sometimes this can give
rise to difficult questions of whether the policy should be construed as
containing separate contracts between insurer and each co-insured, as distinct
from a single indivisible contract, and this is one of the topics addressed by the
insurance contract law review.

52
 (Source: Dickson, P.G.M. (1960). The Sun Insurance Office 1710-1960:
The History of Two and a half Centuries of British Insurance.
London: Oxford University Press)

3.2 Financial activities of the insurance companies (investment strategy,

portfolio and risk management)

Investment is the commitment of money or capital to purchase financial

instruments or other assets in order to gain profitable returns in form of interest,
income, or appreciation of the value of the instrument. It is related to saving or
deferring consumption. Investment is involved in many areas of the economy, such as
business management and finance no matter for households, firms, or governments.
An investment involves the choice by an individual or an organization such as a
pension fund, after some analysis or thought, to place or lend money in a vehicle,
instrument or asset, such as property, commodity, stock, bond, financial derivatives
(e.g. futures or options), or the foreign asset denominated in foreign currency, that
has certain level of risk and provides the possibility of generating returns over a
period of time.
Investment comes with the risk of the loss of the principal sum. The investment
that has not been thoroughly analyzed can be highly risky with respect to the
investment owner because the possibility of losing money is not within the owner's
control. The difference between speculation and investment can be subtle. It depends
on the investment owner's mind whether the purpose is for lending the resource to
someone else for economic purpose or not.
In the case of investment, rather than store the good produced or its money
equivalent, the investor chooses to use that good either to create a durable consumer
or producer good, or to lend the original saved good to another in exchange for either
interest or a share of the profits. In the first case, the individual creates durable
consumer goods, hoping the services from the good will make his life better. In the
second, the individual becomes an entrepreneur using the resource to produce goods
and services for others in the hope of a profitable sale. The third case describes a
lender, and the fourth describes an investor in a share of the business. In each case,
the consumer obtains a durable asset or investment, and accounts for that asset by
recording an equivalent liability. As time passes, and both prices and interest rates
change, the value of the asset and liability also change.
An asset is usually purchased, or equivalently a deposit is made in a bank, in
hopes of getting a future return or interest from it. The word originates in the Latin
"vestis", meaning garment, and refers to the act of putting things (money or other
claims to resources) into others' pockets. The basic meaning of the term being an
asset held to have some recurring or capital gains. It is an asset that is expected to
give returns without any work on the asset per se. The term "investment" is used
differently in economics and in finance. Economists refer to a real investment (such
as a machine or a house), while financial economists refer to a financial asset, such as

53
money that is put into a bank or the market, which may then be used to buy a real
asset.
In all economics or macro-economics, fixed asset investment or formation
(sometimes simply called investment) is the production per unit time of goods which
are not consumed but are to be used for future production. Examples include
tangibles (such as building a railroad or factory) and intangibles (such as a year of
schoolings or on-the-job training like). In measures of national income and output,
gross investment (represented by the variable I) is also a component of Gross
domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is
consumption, G is government spending, and NX is net exports. Thus investment is
everything that remains of production after consumption, government spending, and
exports are subtracted (i.e. I = GDP - C - G - NX).
Both non-residential investment (such as factories) and residential investment
(new houses) combine to make up I. Net investment deducts depreciation from gross
investment. It is the value of the net increase in the capital stock per year.
Investment, as production over a period of time ("per year"), is not capital. The
time dimension of investment makes it a flow. By contrast, capital is a stock, that is,
an accumulation measurable at a point in time (such as December 31).
Investment is often modeled as a function of Income and Interest rates, given
by the relation I = f(Y, r). An increase in income encourages higher investment,
whereas a higher interest rate may discourage investment as it becomes more costly
to borrow money. Even if a firm chooses to use its own funds in an investment, the
interest rate represents an opportunity cost of investing those funds rather than
lending out that amount of money for interest.
The investment decision (also known as capital budgeting) is one of the
fundamental decisions of business management: Managers determine the investment
value of the assets that a business enterprise has within its control or possession.
These assets may be physical (such as buildings or machinery), intangible (such as
patents, software, goodwill), or financial (see below). Assets are used to produce
streams of revenue that often are associated with particular costs or outflows. All
together, the manager must determine whether the net present value of the investment
to the enterprise is positive using the marginal cost of capital that is associated with
the particular area of business.
In terms of financial assets, these are often marketable securities such as a
company stock (an equity investment) or bonds (a debt investment). At times the goal
of the investment is for producing future cash flows, while at others it may be for
purposes of gaining access to more assets by establishing control or influence over
the operation of a second company.
In finance, investment is the commitment of funds by buying securities or other
monetary or paper (financial) assets in the money markets or capital markets, or in
fairly liquid real assets, such as gold or collectibles. Valuation is the method for
assessing whether a potential investment is worth its price. Returns on investments
will follow the risk-return spectrum.

54
 Types of financial investments include shares, other equity investment, and
bonds (including bonds denominated in foreign currencies). These financial assets are
then expected to provide income or positive future cash flows, and may increase or
decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have
future positive expected cash flows, and so are not considered assets, or strictly
speaking, securities or investments. Nevertheless, since their cash flows are closely
related to (or derived from) those of specific securities, they are often studied as or
treated as investments.
Investments are often made indirectly through intermediaries, such as banks,
mutual funds, pension funds, insurance companies, collective investment schemes,
and investment clubs. Though their legal and procedural details differ, an
intermediary generally makes an investment using money from many individuals,
each of whom receives a claim on the intermediary.
Within personal finance, money used to purchase shares, put in a collective
investment scheme or used to buy any asset where there is an element of capital risk
is deemed an investment. Saving within personal finance refers to money put aside,
normally on a regular basis. This distinction is important, as investment risk can
cause a capital loss when an investment is sold, unlike saving(s) where the more
limited risk is cash devaluing due to inflation.
In many instances the terms saving and investment are used interchangeably,
which confuses this distinction. For example many deposit accounts are labeled as
investment accounts by banks for marketing purposes. Whether an asset is a saving(s)
or an investment depends on where the money is invested: if it is cash then it is
savings, if its value can fluctuate then it is investment.

Project Portfolio Management

Project Portfolio Management (PPM) is a term used by project managers and
project management (PM) organizations to describe methods for analyzing and
collectively managing a group of current or proposed projects based on numerous key
characteristics. The fundamental objective of the PPM process is to determine the
optimal mix and sequencing of proposed projects to best achieve the organization's
overall goals - typically expressed in terms of hard economic measures, business
strategy goals, or technical strategy goals - while honoring constraints imposed by
management or external real-world factors. Typical attributes of projects being
analyzed in a PPM process include each project's total expected cost, consumption of
scarce resources (human or otherwise) expected timeline and schedule of investment,
expected nature, magnitude and timing of benefits to be realized, and relationship or
inter-dependencies with other projects in the portfolio.
The key challenge to implementing an effective PPM process is typically
securing the mandate to do so. Many organizations are culturally inured to an
informal method of making project investment decisions, which can be compared to
political processes observable in the U.S. legislature. However this approach to
making project investment decisions has led many organizations to unsatisfactory

55
results, and created demand for a more methodical and transparent decision making
process. That demand has in turn created a commercial marketplace for tools and
systems which facilitate such a process.
Some commercial vendors of PPM software emphasize their products' ability
to treat projects as part of an overall investment portfolio. PPM advocates see it as a
shift away from one-off, ad hoc approaches to project investment decision making.
Most PPM tools and methods attempt to establish a set of values, techniques and
technologies that enable visibility, standardization, measurement and process
improvement. PPM tools attempt to enable organizations to manage the continuous
flow of projects from concept to completion.

(Source: www.ppm.org – Project Portfolio Management)

Treating a set of projects as a portfolio would be, in most cases, an

improvement on the ad hoc, one-off analysis of individual project proposals. The
relationship between PPM techniques and existing investment analysis methods is a
matter of debate. While many are represented as "rigorous" and "quantitative", few
PPM tools attempt to incorporate established financial portfolio optimization methods
like
Resource allocation is a critical component of PPM. Once it is determined that
one or many projects meet defined objectives, the available resources of an

56
organization must be evaluated for its ability to meet project demand (as a demand
"pipeline" discussed below). Effective resource allocation typically requires an
understanding of existing labor or funding resource commitments (in either business
operations or other projects) as well as the skills available in the resource pool.
Project investment should only be made in projects where the necessary resources are
available during a specified period of time.
Resources may be subject to physical constraints. For example, IT hardware
may not be readily available to support technology changes associated with ideal
implementation timeframe for a project. Thus, a holistic understanding of all project
resources and their availability must be conjoined with the decision to make initial
investment or else projects may encounter substantial risk during their lifecycle when
unplanned resource constraints arise to delay achieving project objectives.
Beyond the project investment decision, PPM involves ongoing analysis of the
project portfolio so each investment can be monitored for its relative contribution to
business goals versus other portfolio investments. If a project is either performing
below expectations (cost overruns, benefit erosion) or is no longer aligned to business
objectives (which change with natural market and statutory evolution), management
can choose to decommit from a project to stem further investment and redirect
resources towards other projects that better fit business objectives. This analysis can
typically be performed on a periodic basis (eg. quarterly or semi-annually) to
"refresh" the portfolio for optimal business performance. In this way both new and
existing projects are continually monitored for their contributions to overall portfolio
health. If PPM is applied in this manner, management can more clearly and
transparently demonstrate its effectiveness to its shareholders or owners.
Implementing PPM at the enterprise level faces a challenge in gaining
enterprise support because investment decision criteria and weights must be agreed to
by the key stakeholders of the organization, each of whom may be incentivised to
meet specific goals that may not necessarily align with those of the entire
organization. But if enterprise business objectives can be manifested in and aligned
with the objectives of its distinct business unit sub-organizations, portfolio criteria
agreement can be achieved more easily.
From a requirements management perspective Project Portfolio Management
can be viewed as the upper-most level of business requirements management in the
company, seeking to understand the business requirements of the company and what
portfolio of projects should be undertaken to achieve them. It is through portfolio
management that each individual project should receive its allotted business
requirements

Risk management.
Risk is defined in ISO 31000 as the effect of uncertainty on objectives
(whether positive or negative). Risk management can therefore be considered the
identification, assessment, and prioritization of risks followed by coordinated and
economical application of resources to minimize, monitor, and control the probability
and/or impact of unfortunate events or to maximize the realization of opportunities.

57
Risks can come from uncertainty in financial markets, project failures, legal
liabilities, credit risk, accidents, natural causes and disasters as well as deliberate
attacks from an adversary. Several risk management standards have been developed
including the Project Management Institute, the National Institute of Science and
Technology, actuarial societies, and ISO standards. Methods, definitions and goals
vary widely according to whether the risk management method is in the context of
project management, security, engineering, industrial processes, financial portfolios,
actuarial assessments, or public health and safety.

The strategies to manage risk include transferring the risk to another party,
avoiding the risk, reducing the negative effect of the risk, and accepting some or all
of the consequences of a particular risk.
Certain aspects of many of the risk management standards have come under
criticism for having no measurable improvement on risk even though the confidence
in estimates and decisions increase.
In ideal risk management, a prioritization process is followed whereby the risks
with the greatest loss and the greatest probability of occurring are handled first, and
risks with lower probability of occurrence and lower loss are handled in descending
order. In practice the process can be very difficult, and balancing between risks with
a high probability of occurrence but lower loss versus a risk with high loss but lower
probability of occurrence can often be mishandled.
Intangible risk management identifies a new type of a risk that has a 100%
probability of occurring but is ignored by the organization due to a lack of
identification ability. For example, when deficient knowledge is applied to a
situation, a knowledge risk materializes. Relationship risk appears when ineffective
collaboration occurs. Process-engagement risk may be an issue when ineffective
operational procedures are applied. These risks directly reduce the productivity of
knowledge workers, decrease cost effectiveness, profitability, service, quality,
reputation, brand value, and earnings quality. Intangible risk management allows risk
management to create immediate value from the identification and reduction of risks
that reduce productivity.
Risk management also faces difficulties allocating resources. This is the idea of
opportunity cost. Resources spent on risk management could have been spent on
more profitable activities. Again, ideal risk management minimizes spending and
minimizes the negative effects of risks.
For the most part, these methods consist of the following elements, performed,
more or less, in the following order.
1. identify, characterize, and assess threats
2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of
attacks on specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy

58
Principles of risk management
The International Organization for Standardization identifies the following
principles of risk management should:
 create value.
 be an integral part of organizational processes.
 be part of decision making.
 explicitly address uncertainty.
 be systematic and structured.
 be based on the best available information.
 be tailored.
 take into account human factors.
 be transparent and inclusive.
 be dynamic, iterative and responsive to change.
 be capable of continual improvement and enhancement.
After establishing the context, the next step in the process of managing risk is
to identify potential risks. Risks are about events that, when triggered, cause
problems. Hence, risk identification can start with the source of problems, or with the
problem itself.
 Source analysis. Risk sources may be internal or external to the system that is
the target of risk management. Examples of risk sources are: stakeholders of a
project, employees of a company or the weather over an airport.
 Problem analysis. Risks are related to identified threats. For example: the
threat of losing money, the threat of abuse of privacy information or the threat
of accidents and casualties. The threats may exist with various entities, most
important with shareholders, customers and legislative bodies such as the
government. When either source or problem is known, the events that a source
may trigger or the events that can lead to a problem can be investigated. For
example: stakeholders withdrawing during a project may endanger funding of
the project; privacy information may be stolen by employees even within a
closed network; lightning striking a Boeing 747 during takeoff may make all
people onboard immediate casualties. The chosen method of identifying risks
may depend on culture, industry practice and compliance. The identification
methods are formed by templates or the development of templates for
identifying source, problem or event. Common risk identification methods are:
 Objectives-based risk identification. Organizations and project teams have
objectives. Any event that may endanger achieving an objective partly or
completely is identified as risk.
 Scenario-based risk identification. In scenario analysis different scenarios are
created. The scenarios may be the alternative ways to achieve an objective, or
an analysis of the interaction of forces in, for example, a market or battle. Any
event that triggers an undesired scenario alternative is identified as risk - see
Futures Studies for methodology used by Futurists.

59
  Taxonomy-based risk identification. The taxonomy in taxonomy-based risk
identification is a breakdown of possible risk sources. Based on the taxonomy
and knowledge of best practices, a questionnaire is compiled. The answers to
the questions reveal risks.
 Common-risk checking In several industries lists with known risks are
available. Each risk in the list can be checked for application to a particular
situation.
 Risk charting. This method combines the above approaches by listing
resources at risk, Threats to those resources Modifying Factors which may
increase or decrease the risk and Consequences it is wished to avoid. Creating
a matrix under these headings enables a variety of approaches. One can begin
with resources and consider the threats they are exposed to and the
consequences of each. Alternatively one can start with the threats and examine
which resources they would affect, or one can begin with the consequences and
determine which combination of threats and resources would be involved to
bring them about.

Risk reduction.
Risk reduction or "optimisation" involves reducing the severity of the loss or
the likelihood of the loss from occurring. For example, sprinklers are designed to put
out a fire to reduce the risk of loss by fire. This method may cause a greater loss by
water damage and therefore may not be suitable. Halon fire suppression systems may
mitigate that risk, but the cost may be prohibitive as a strategy.
Acknowledging that risks can be positive or negative, optimising risks means
finding a balance between negative risk and the benefit of the operation or activity;
and between risk reduction and effort applied. By an offshore drilling contractor
effectively applying HSE Management in its organisation, it can optimise risk to
achieve levels of residual risk that are tolerable.
Modern software development methodologies reduce risk by developing and
delivering software incrementally. Early methodologies suffered from the fact that
they only delivered software in the final phase of development; any problems
encountered in earlier phases meant costly rework and often jeopardized the whole
project. By developing in iterations, software projects can limit effort wasted to a
single iteration.
Outsourcing could be an example of risk reduction if the outsourcer can
demonstrate higher capability at managing or reducing risks. For example, a company
may outsource only its software development, the manufacturing of hard goods, or
customer support needs to another company, while handling the business
management itself. This way, the company can concentrate more on business
development without having to worry as much about the manufacturing process,
managing the development team, or finding a physical location for a call center.

Risk sharing

60
 Briefly defined as "sharing with another party the burden of loss or the benefit
of gain, from a risk, and the measures to reduce a risk."
The term of 'risk transfer' is often used in place of risk sharing in the mistaken
belief that you can transfer a risk to a third party through insurance or outsourcing. In
practice if the insurance company or contractor go bankrupt or end up in court, the
original risk is likely to still revert to the first party. As such in the terminology of
practitioners and scholars alike, the purchase of an insurance contract is often
described as a "transfer of risk." However, technically speaking, the buyer of the
contract generally retains legal responsibility for the losses "transferred", meaning
that insurance may be described more accurately as a post-event compensatory
mechanism. For example, a personal injuries insurance policy does not transfer the
risk of a car accident to the insurance company. The risk still lies with the policy
holder namely the person who has been in the accident. The insurance policy simply
provides that if an accident (the event) occurs involving the policy holder then some
compensation may be payable to the policy holder that is commensurate to the
suffering/damage.
Some ways of managing risk fall into multiple categories. Risk retention pools
are technically retaining the risk for the group, but spreading it over the whole group
involves transfer among individual members of the group. This is different from
traditional insurance, in that no premium is exchanged between members of the group
up front, but instead losses are assessed to all members of the group.

Risk retention
Involves accepting the loss, or benefit of gain, from a risk when it occurs. True
self insurance falls in this category. Risk retention is a viable strategy for small risks
where the cost of insuring against the risk would be greater over time than the total
losses sustained. All risks that are not avoided or transferred are retained by default.
This includes risks that are so large or catastrophic that they either cannot be insured
against or the premiums would be infeasible. War is an example since most property
and risks are not insured against war, so the loss attributed by war is retained by the
insured. Also any amounts of potential loss (risk) over the amount insured is retained
risk. This may also be acceptable if the chance of a very large loss is small or if the
cost to insure for greater coverage amounts is so great it would hinder the goals of the
organization too much.

3.3 Financial Control Agency’s report on insurance market as of January 1,

2010

Total insurance premiums taken during 2009 by insurance/reinsurance

organizations under direct insurance agreements equaled KZT113 289,71 mln., which
is 15,1% less than total premiums over the same period last year.

Insurance premium inflow

61
 (Source: www.afn.kz – Insurance sector)

The mix of received insurance premiums, %

(Source: www.afn.kz – Insurance sector)

The breakdown, by insurance classes, of insurance premiums received by

January 1, 2010 looks as follows:

Mandatory insurance: 55,0% (KZT16 794,3 mln.) of received insurance

premiums fell on mandatory motor third party insurance, 32,6% (KZT9 958,2 mln.)
on an employer’ civil liability insurance against causing life and health damage to a
worker while at office/work; 5,5% (KZT1678,5 mln.) on insurance of civil liability of
owners of facilities whose operations is fraught with risk of causing damage to third
parties; and others: 6,9%.

Voluntary personal insurance: 20,5% (KZT4 491,0 mln.) of received

insurance premiums fell on casualty insurance, 36,9% (KZT8099,9 mln.) on health
insurance, 6,1% (KZT1 334,2 mln.) on life insurance, 36,5 (KZT7999,1 mln.) on
annuity insurance.
Voluntary property insurance: 6,9% (KZT4 228,8 mln.) fell on insurance on
other financial losses, 54,0% (KZT32 855,7 mln.) on property insurance (except for
automobile, air, railway, waterborne transport and cargo insurance), 18,6% (KZT11
330,7 mln.) on insurance of civil liability (except for civil liability of owners of
automobile, air and waterborne transport), and others -20,5%.

62
Total insurance premiums collected by insurance sectors (life, non-life) were as
follows:

"Life insurance" sector. As of January 1, 2010, total insurance premiums

collected in "life insurance" sector equaled KZT9 331,3 mln., which is a 61,5%
increase vs. the same date of the last year. Percentage of insurance premiums
collected in "life insurance" sector related to total premiums, as of reporting date,
totaled 8,2% vs. 4,3% as of January 1, 2009.

"General insurance" sector

Total insurance premiums
collected during 2009 in "general
insurance" sector totaled KZT103
958,4 mln., which is a 18,6% decrease
vs. the same period of 2009.

Reinsurance
Total insurance premiums
passed for reinsurance equaled KZT55
880,4 mln., i.e. 49,3% of total
insurance premiums. Herewith, 43%
of total insurance premiums were
passed to non-residents for
reinsurance.
Total insurance premiums
received by insurance/reinsurance
organizations under reinsurance
agreements equals KZT19 186,8 mln. Herewith, total insurance premiums accepted
from non-residents for reinsurance equals KZT11101,9 mln.

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 (Source: www.afn.kz – Insurance sector)

Of total insurance premiums passed for reinsurance, the percentage of

voluntary property insurance is the largest: 92,3%, mandatory insurance is 6,5%,
voluntary personal insurance is 1,2%,

Insurance
payments
Insurance
payments over 12
months of 2009 totaled
KZT27 756,02 mln.,
which is ntage of
insurance payments
made using the
reinsurance
compensation from
reinsurance
organizations totaled 37,7% (KZT10 456,6 mln.).

(Source: www.afn.kz – Insurance sector)

64
 (Source: www.afn.kz – Insurance sector)

When analyzing the effectuated insurance payments by insurance classes, as of

January 1, 2010, the following can be noted:

Mandatory insurance: 43,3% (KZT3 373,9 mln.) of total payments fell on

mandatory motor third party insurance, 46,1% (KZT3 594,7 mln.) on an employer’
civil liability insurance against causing life and health damage to a worker while at
office/work, 9,8% (KZT767,1 mln.) on plant-growing insurance, and 0,8% fell on
other classes of insurance;

Voluntary personal insurance: 69,1% (KZT6 093,2 mln.): on health

insurance, 7,2% (KZT636,3 mln.) were payments on casualty insurance, 21,5%
(KZT1 886,8 mln.) on annuity insurance, 2,2% (KZT196,3 mln.) on life insurance;

Voluntary property insurance: 9,6% (KZT1 070,1 mln.) on insurance against

other financial losses; 13,4% (KZT1 493,1 mln.) on car insurance; 68,2% (KZT7
602,1 mln.) on property insurance (except for automobile, air, railway, waterborne
transport and cargo insurance); 8,8% account for other classes of insurance.
Of total insurance payments made in 12 months 2009, payments on property
insurance (except for automobile, air, railway, waterborne transport and cargo
insurance) are greatest: 27,4% of total payments.

General information on insurance market

As of 1 January 2010, 41 insurance organizations (including 7 organizations on
life insurance), 13 insurance brokers and 63 actuaries were engaged in licensed
activity in insurance market of the Republic of Kazakhstan.

(Source: www.afn.kz – Insurance sector)

As of reporting date, 32 insurance/reinsurance organizations were the

participant of Insurance Payments Guaranteeing Fund, JSC.

65
Capital. As of 1 January 2010, insurance organizations own capital totaled KZT180
480,0 mln.

(Source: www.afn.kz – Insurance sector)

Assets. Total assets of insurance organizations as of 1 January 2010, equaled

KZT297 252,1 mln., which is a 10,6% increase vs. the same indicator on January 1,
2009, including:

(Source: www.afn.kz – Insurance sector)

Liabilities. As of 1 January 2010, insurance/reinsurance organizations’ liabilities

totaled KZT116 772,2 mln., 13,5% increase vs. the same date the last year.
As of reporting date, total insurance reserves established by
insurance/reinsurance organizations in order to fulfill the undertaken obligations
under current insurance and reinsurance agreements, equaled KZT101 011,5 mln.,
which is 17,1% over than established reserves as of 1 January 2009.

66
 (Source: www.afn.kz – Insurance sector)

Investment portfolio

(Source: www.afn.kz – Insurance sector)

The mix of insurance organizations’ investment portfolio in 2009 shows the increase
in government securities of RK issuers (from 9,6% to 20,6%).

Concentration of insurance market

Over the reviewed period, the concentration of insurance market in terms of
insurance premiums and insurance payments is decreasing. Five top insurance
companies account for 43,5% of total insurance premiums and 52,8% of insurance
payments. The share of five largest insurance companies in total assets of insurance
market constituted 51,3%.

67
 (Source: www.afn.kz – Insurance sector)

This information is prepared by the Agency of the Republic of Kazakhstan on

regulation and supervision of financial market and financial organizations.

Conclusion

The local insurance sector has not proven immune to the state of the wider,
macroeconomic situation, and, having grown substantially during the "good" years,
has contracted by 10% in 2008 in gross premium terms, and has further declined by
30% in the five months to May 31, 2009, relative to the same period last year (see
table 2).
Prospectively, we believe economic growth in Kazakhstan will resume as
world commodity prices rise. We also think the eventual economic recovery will
likely result in increased levels of insurable activity. This will probably create long-
term opportunities for the dozen or so insurers with a long-term commitment to the
local insurance sector that can be identified among the 45 companies currently
established in Kazakhstan.
We expect that possibilities will also reopen for any new entrant to the sector
that can bring a combination of expertise, professionalism, and new products, in
addition to a reasonable capacity to underwrite risk. Foreign entrants already include
Allianz SE (which acquired ATF Insurance in 2007), and an AIG joint venture that is
40% controlled by local Kazakh interests.
Nevertheless, in our opinion, the Kazakh insurance sector is still immature to
the extent that probably three-quarters of the country's insurers lack a professional,
long-term commitment to the national insurance sector. This is reflected in the
significant concentration of total premiums with the country's leading insurers (see

68
table 2). We also see that many Kazakh insurers are eager to exploit legal or
accounting devices to generate short-term gains, even when these are bought at the
expense of the sector's long-term credibility and reputation. We observe an increasing
tendency for a surprising number of local insurers to resort to the courts before
accepting to pay what, from the outside, appear to be large but legitimate claims.
Current earnings can also be temporarily bolstered by an unwillingness to recognize
the likely full cost of outstanding but as yet unpaid claims, or the true level of
incurred but not yet reported liabilities. We therefore consider that many of the
country's licensed insurers are looking merely to gain the cash flows inherent in
insurance in order to make a profit by investing them, or else they exist for little more
than to act as a tax-sheltering mechanism for their corporate owners.
The tax-sheltering role of insurance is significant in Kazakhstan. In effect, we
understand that large Kazakh corporations and groups avoid the 20% (30% before
Jan. 1, 2009) tax on corporate profits by paying an amount of insurance premium that
can often appear disproportionately large to an in-house captive insurer, where the
artificially inflated underwriting revenues are then taxed at the special flat rate for
insurers of 4% of gross premium income.
The fragile nature of the Kazakh economy in the years immediately following
independence in 1991 may have meant that such mutually supportive group structures
were a desirable buttress to the development of the country's commercial and
financial services sectors. However, what may have been advantageous to the
creation of a thriving insurance sector in the country's early years is almost certainly
less so today, in our view. The distorting effects of the tax regime are widespread
and, we believe, have served to undermine the creation of an open insurance market,
particularly in the country's most profitable commercial and industrial line sectors.
Irrespective of service quality or technical competency, we see that the desire to
minimize taxation has caused the majority of the Kazakh corporate sector's insurance
spending to be directed toward related, captive insurers.
While on the one hand creating a barrier to new entrants, this over-reliance on
captive business has on the other hand encouraged insurers to become complacent
over time, and often slow to adapt to the developing needs of the marketplace, in our
opinion. Meanwhile, company staff will often direct their own personal insurance
requirements, particularly the compulsory motor liability, to their employer's captive
insurer, thereby turning what could have been dynamic retail and corporate insurance
marketplaces into a series of blocks of business that are largely dominated by a
related insurance company, with very little turnover of clientele between competing
insurers from one year to the next. Standard & Poor's therefore considers that the
intention of the authorities, stated in the new tax code of December 2008, to do away
with the currently distorting fiscal environment for insurers by 2015 is a positive step
toward the development of more genuine insurance marketplaces.
Nevertheless, Kazakh insurance, like all markets has its strengths as well as
weaknesses, and opportunities as well as threats. A traditional SWOT analysis
(Strengths; Weaknesses; Opportunities; Threats) follows.

69
Strengths
The principal strength of the Kazakh insurance market is, in our view, the
likely burgeoning level of insurable activity once the economy resumes its expansion
after the current downturn. Moreover, the premium available to those insurers with a
long-term commitment to the sector will prospectively grow even further as currently
captive commercial business gradually becomes available to the whole sector as the
fiscal incentives for using captive insurers diminish ahead of 2015. This overall
expansion in insurable activity appears set to continue into the long term as the
country's mineral wealth is better exploited and exported further afield.
A second strength in our opinion is the quality of regulation. Insurance
supervision in Kazakhstan is managed in, we consider, an efficient way by the
insurance arm of the Agency of the Republic of Kazakhstan on Regulation and
Supervision of Financial Markets and Financial Organizations, commonly referred to
as the "AFN" from its Russian-language initials. We think the AFN's track record to-
date has been strong, having established a relatively clear, predictable, and
functioning framework for a domestic insurance sector in a country that is almost as
young in administrative terms as the local insurance sector itself.
Moreover, in our observations, the regulators have been reasonably
interventionist, and have not hesitated to suspend or withdraw the operating licenses
of those insurers, large and small, that have infringed upon regulations or whose
capitalization has fallen below prudent levels. They have also been pro-active in
introducing compulsory insurance for many aspects of motor and professional
liability (see chart 1 below), while simultaneously working to promote a supportive
infrastructure for insurance. In 2009, for example, initiatives have included guidelines
for co-insurance, for the certification of insurance agents, as well as moves to create a
local "Institute of Actuaries," and encouraging more local people to enter the
actuarial profession.
Meanwhile, Kazakh insurers have tended not to be directly affected by the
problems that have beset the Kazakh banking sector. Insurers are more typically
generators rather than users of liquidity. To us, the banks have proven over-reliant on
foreign currency funding, on scarce local liquidity, and vulnerable to still-growing
levels of bad and doubtful debts. However, many insurers have suffered reduced
financial flexibility (the ability to raise additional cash or capital relative to possible
needs) to the extent that many, indeed most of them, are part of a larger financial or
industrial group that also includes a bank. Furthermore, some groups and their
owners have been hit not only by banking losses but also on the commercial side by
the downturn in commodity prices and trading volumes. Together, these current
problems have sometimes significantly reduced the amount of surplus financial
resources available to groups and their owners. This has been detrimental, in our
opinion, to the financial strength of those insurers that are controlled by local
oligarchs and conglomerates.
Today, at least, it may perhaps appear fortunate that the captive nature of much
of the market does act as something of a barrier to entry by larger, more aggressive
international and global insurance groups. If the best business in the market is captive

70
to local incumbents – notably the commercial and industrial insurance requirements
of the large commodity, aviation, space, and transport groups – then foreign providers
cannot realistically hope to win this business during the few remaining years that the
current tax regime remains in force, we think. At present, it would seem that most
outsiders can only hope to gain access to this business indirectly by providing
reinsurance protection.

Weaknesses
With a surface area of 2.7 million square kilometers and a very thinly spread
population of just 15.5 million as of year-end 2008, any insurer attempting to set up a
truly nationwide network of branches or agencies will face significant logistical
problems, in our opinion. However, the preponderance of captive underwriting has
meant that few insurers have principally targeted the retail market, most preferring to
specialize in the corporate risks of their immediate parents, while perhaps
opportunistically writing some retail business in the main population centers in which
they are based. However, we think that because many of the commercial and
industrial risks are large and the insurers themselves are relatively small, a
disproportionate amount of the actual risk carrying is ceded to foreign reinsurers, as
is indicated by the difference between the country's gross and net premiums, notably
KZT62 billion relative to KZT35 billion, a retention ratio of 56% for the first five
months of 2009 (see table 4).

A further weakness we see is the relatively low GDP per capita at about $8,000
and, consequently, a very low level of expenditure by individuals, with on average
only about $60 per person spent on insurance premiums.
Similarly, we consider as an additional weakness of the sector a certain lack of
diversification across the sector by line of business. We see reasonable diversity
across the retail, commercial, and industrial non-life lines that most local insurers
write. However, there is only limited demand for the long-term lines of life
protection, life savings, and pensions that constitute much of the premium volume of
so many insurance groups elsewhere in the world (see table 5 for a breakdown of
premiums by line of business).
We believe that because of the relative lack of diversity in the business
available, prudent insurers have had to resort to the substantial use of foreign outward
reinsurance to help ensure the stability of their earnings. We regard the dependence
on external reinsurance capacity to some extent as a sector weakness, although the
inward reinsurance revenues may bring diversification if written professionally.
Aware of these issues, the regulators have recently introduced new legislation
whereby the long-term disability benefit that insurers pay in the event of an industrial
or motor liability claim must now be paid as an annuity by a life insurance company.
As we understand it, this means that the non-life insurer that has provided liability
cover must, in effect, pay any successful indemnity claim by means of a lump sum
cash payment to a life company, and the life company will then in turn set up and
manage the regular annuity payments that have to be paid to the insured. It is possible

71
that these new regulations will act as a stimulus to the development of the life
assurance sector over time.
However, we think the final problem still remains – whether for life or non-life
companies – of finding suitable investment assets in which to invest cash-flow and
the funds covering the technical and shareholders' funds. Many companies opt for
local equities, which are few in number and which display highly volatile valuations
given the lack of depth in the local equity markets. Alternatively, insurers place their
funds with banks, which then brings into play the considerable credit risks associated
with some of the banks whose very weakness obliges them to offer the most
attractive deposit rates.

Opportunities
Although Kazakhstan has been severely affected by the recent global economic
downturn, its financial center, Almaty (as opposed to the new capital, Astana),
remains a clear leader in terms of insurance activity, in our opinion. The gross
premiums written split by region demonstrates this gap (see chart 2). In our view,
Almaty is in a better position than most regional rivals to become the de facto hub of
Central Asian insurance, reinsurance, trade, and finance, as it connects the Russian,
Turkic, and, to some extent, the Korean and Chinese-speaking worlds. At the same
time, we expect Kazakhstan – and Almaty within it – can contribute the volume of its
own large and prospectively dynamic economic activities to give substance and depth
to its capital markets. We consider Almaty-based insurers and reinsurers to be able to
create a regional (re)insurance center in Kazakhstan, even if we would consider it
unreasonable to expect them to take more than a minority share of the region's overall
(re)insurance requirements. In our observations, insurable risks in Kazakhstan,
including commodity-based industrial risks, exposure to severe and catastrophic
losses through extremes of temperature, or earthquakes are often too large for
domestic insurers to take on at this point and risk premiums are often ceded to
international reinsurers.
The opportunity is also seen to retain more risk premium within Kazakhstan by
having Kazakh insurers set aside their mutual rivalries and distrust and try to develop
a more active market for co-insurance. The AFN has this year introduced new
regulations to facilitate the development of co-insurance. Additionally, we think the
larger, better-managed Kazakh insurers could also develop the capacity to write local
inward reinsurance, following the example of the market leader, Eurasia Insurance
Co. (BB-/Stable/–; Kazakhstan national scale rating 'kzA-'), which is already
extremely active on the local, regional, and Commonwealth of Independent States
(CIS) reinsurance scenes.
Finally, insurers generally have the potential to strengthen their balance sheet
in order to increase their own capacity for risk retention, enabling them to keep more
of the good, profitable business that is available in Kazakhstan (see table 6). We
believe that all of these initiatives, whether singly or jointly considered, have the
potential to reinforce the long-term development and profitability of the Kazakh
insurance sector.

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Threats
One of the most immediate threats for Kazakh insurers, in our view, is the
deteriorating financial strength of significant elements of the local banking sector. As
Kazakh insurers often invest in the equity of local banks in addition to holding their
often sizable cash deposits with them, we see them as particularly exposed to the
market and credits risks associated with the banks. This is further exacerbated at
those insurers who also invest in the banks' bond issues. Consequently, we expect the
insurers' actual level of credit exposure to the banking sector to be almost certainly
significantly higher than the 39% shown in chart 3.
In our view, Kazakh banks are continuing to experience high credit and
liquidity risks in deteriorating domestic macroeconomic environments, as they endure
the impact of the weakening of the international economy, global banking sector
stress, and a sharp squeeze on access to external liquidity. Moreover, we see few
current indications of banking sector recovery in Kazakhstan and we believe that the
resolution of the sectors' problems will be lengthy.
We consider the threats to the Kazakh insurance sector to be similar to those in
other developing markets of the world. Following in the footsteps of AIG and
Allianz, other major international (re)insurers will likely seek to incorporate locally.
Once the tax distortions discussed above have been removed, these big players will
probably target the larger, more attractive "big ticket" covers required by the
country's energy and minerals sectors. Arguably, however, this "threat" is merely one
of a genuine, competitive marketplace being created in Kazakhstan, which should
ultimately be to the benefit of both efficient insurers and cost-conscious, risk-aware
insureds.
Meanwhile, we expect the existing threat of opaque group accounting to also
diminish with the removal of the current tax distortions. The absence of these
distortions will likely allow the introduction of more economically based
underwriting that will likely help make the published accounts a better guide to the
real value-added nature of an insurer's activities. Also, the removal of the fiscal
distortions should, we believe, also encourage the large corporate groups to relax
their current 100% ownership of their insurance subsidiaries, and to allow a more
widely spread shareholder base. Generally, these prospective new shareholders, albeit
from the likely position of minority interests, would probably demand greater
transparency of the companies in which they have invested.
The Kazakh government itself is not expected to become directly involved in
the fortunes of its local insurers, although its agents, the AFN, will likely continue to
maintain close supervision both of industry trends and of the individual insurance
companies themselves. Indirectly, however, we anticipate the authorities will have a
significant influence on the sector, most significantly by the nature and timing of its
reforms to the tax regime, but also by the degree of support that it gives to the local
economy generally, which will impact insurers through their investment activities.
We see that the government's ability to control interest and exchange rates has

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affected local banks. We consider this intervention to be less of an issue for insurers
as they tend not to use debt finance.
Long-term insurance prospects in Kazakhstan remain good, based on positive
economic fundamentals.
In our view, the Kazakhstan insurance sector in the summer of 2009 remains
one of possibilities, but also of some serious current contradictions. We think that
strengths such as prospectively growing levels of insurable activity as well as
effective regulation are likely to reinforce the position of the insurance sector in the
country. However, we also see weaknesses in the form of much of the country's total
premiums being, in effect, captive to a number of industrial-banking-insurance
conglomerates. This is increasingly hindering the development of a truly open,
competitive marketplace, and has led to a lack of maturity in the sector, in our
observations. Many smaller providers allow themselves to become reliant on
privileged access to shareholder-related business.
Life assurance remains a very small element of total market premiums, taking
only 1% of gross premiums written at present. We expect the local population will
have to become much more insurance aware, and the state less welfare orientated
before retail customers see the need for voluntary life assurance and related
protection products, including health covers. However, most banks already require
mortgage and other large loans to be covered by a borrower's term life cover, notably
a policy that will pay off the loan in the event of the borrower dying before it has
been fully repaid. Meanwhile, we think it is too soon to tell whether the recent
requirement that long-term liability payments be paid out as an annuity by a life
company will be enough in itself to galvanize the fortunes of the life sector. The
history of liability cover remains a checkered one in Kazakhstan, with some
employers in the past having themselves pocketed the insurance payouts without
passing on the benefit to the injured employee. Similarly, we observed that it was a
frequent occurrence for no claim to be submitted either by the injured employee or by
the employer, as liability cover remains such an alien concept for those who grew up
under the old regime. We understand this mentality also applies to health insurance,
and many other forms of cover and protection, where insureds simply do not bother
to make even legitimate claims.
Nevertheless, in our opinion, driven by powerful and positive long-term
macroeconomic factors, the prospects for a vibrant insurance and reinsurance sector
in Kazakhstan appear reasonably bright for the best of the country's existing insurers,
notably those that have the technical expertise as well as the management capability
to keep pace with what promises to be an increasingly competitive, increasingly
transparent marketplace. The medium-term prospects for many of the less good, less
efficient, and less committed among today's insurance institutions inevitably seem
considerably less attractive, and we expect most will likely close to new business
over the medium term.

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List of used literature:

1) www.invest.com - Kazakh Insurance Sector;

2) www.amulet.kz – Insurance broker company information;
3) www.centrasinsurance – Company profile;
4) Mehr and Camack “Principles of Insurance”, 6th edition;
5) Feldstein, Sylvan G.; Fabozzi, Frank J. (2008). The Handbook of Municipal
Bonds;
6) Dickson, P.G.M. (1960). The Sun Insurance Office 1710-1960: The History of
Two and a half Centuries of British Insurance. London: Oxford University
Press;
7) Porteous, Bruce T.; Pradip Tapadar (December 2005). Economic Capital and
Financial Risk Management for Financial Services Firms and Conglomerates.
Palgrave Macmillan;
8) Schoppmann, Henning (Edit.); Julien Ernoult, Walburga Hemetsberger,
Christoph Wengler (September 2008). European Banking and Financial
Services Law - Third Edition. Larcier;
9) "Two Elderly Women Indicted on Fraud Charges in Deaths of LA Hit-Run,"
Insurance Journal, June 1, 2006
10) Cooper, Robert G.; Scott J. Edgett, and Elko J. Kleinschmidt (1998).
Portfolio Management for New Products. Reading, Mass.: Addison-Wesley

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11) Hubbard, Douglas (2009). The Failure of Risk Management: Why It's
Broken and How to Fix It. John Wiley & Sons.
12) Dorfman, Mark S. (2007). Introduction to Risk Management and
Insurance (9 ed.). Englewood Cliffs, N.J: Prentice Hall
13) Alexander, Carol and Sheedy, Elizabeth (2005). The Professional Risk
Managers' Handbook: A Comprehensive Guide to Current Theory and Best
Practices
14) Hopkin, Paul "Fundamentals of Risk Management" Kogan-Page (2010)
15) Flyvbjerg, Bent (August 2006). "From Nobel Prize to Project
Management: Getting Risks Right" (PDF). Project Management Journal
(Project Management Institute)
16) Crockford, Neil (1986). An Introduction to Risk Management (2 ed.).
Cambridge, UK: Woodhead-Faulkner. p. 18.
17) Covello, Vincent T.; Allen., Frederick H. (April 1988). Seven Cardinal
Rules of Risk Communication. Washington, DC
18) www.articlebase.com – What is insurance;
19) www.investopedia.com – Insurance agent.
20) www.afn.kz – Insurance sector.

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