Investment activity of insurance companies

In 2016-2019, the growth of insurance premiums averaged 150%, in 2020 a decrease of 94% compared to 2019. The main reasons for the decline are the introduction of quarantine regulations, the lack of remote work of some companies and a decrease in the income of the population during the quarantine period. Investment activity from 2016 to 2020 increased by 287%. At the same time, deposits increased 4.6 times, real estate –

6.2 times, loans – 5.8 times. For 9 months of 2021, the total investment amounted to 3 609.6 billion soums. Nevertheless, the growth of assets and equity capital of the insurance market could perform much better, and this is hindered by three main problems of the insurance market:

1. High acquisition costs (commission fees), preventing the insurance companies from actuarial reserves accumulation. I am of opinion that those high costs are caused by a deep corruptness of voluntary insurance market.
2. Extremely high level of cross-border reinsurance as to the types of voluntary insurance. On the one hand, reinsurance problems are connected with partially uncontrolled drain of monetary resources abroad. On the other hand, the insurance companies’ undercapitalization and their inability to handle high risks become apparent, when any restrictions are imposed on reinsurance.
3. Practically complete lack of competition in the insurance market in terms of insurance through banks. Banks and financial-industrial groups have established affiliated insurance companies, in this way they eliminate access of other insurance companies to their clients, pursuing exclusively their own economic interests so the clients leave the most part of money in such groups. This is entirely sensible and justified act if there is a competition. Other way, when there is no competition it greatly affects on the qualitative development of the insurance sector.

Despite the above problems and their high relevance, one should pay tribute to the Agency for the Development of the Insurance Market of Uzbekistan in terms of regulation and making especially recent changes to domestic legislation, in particular, the development and implementation of a new edition of the Law on Insurance Activities, the adoption of the Resolution of the President of the Republic of Uzbekistan No. PP -5265 “On additional measures to digitalize the insurance market and the development of the life insurance sector”, the capital requirements of insurance companies have been increased, the principles of insurance intermediation have been significantly revised. We believe that all these measures will lead to long-term growth, reasonable concentration and increased transparency of insurance companies as full-fledged players in the financial market of Uzbekistan.

 The list of investment instruments available to insurers and reinsurers includes:

• bank certificates;
• government securities of the Republic of Uzbekistan and foreign states;
• movable and immovable property;
• share participation in the authorized capital of legal entities;
• corporate bonds, in accordance with the legislation of the Republic of Uzbekistan;
• loans to leasing organizations;
• other objects of investment activity that do not contradict the legislation.

Insurers today have limited investment opportunities. If we expand the list of investment instruments, this will enable us tomorrow to participate in budget financing and private investment projects. Insurance companies will be able to act as founders of investment funds, this will serve the development of the capital market.

Investments differ in the degree of profitability and degree of risk, for high profitability you have to pay with increased risk.

Stocks are the most risky, but also the most profitable instrument in the securities market. The advantage of shares is the ownership of a part of the company; income depends on the growth of the fundamental value of the company; and you can also receive a fixed (dividend) income.

Bonds are one of the most suitable instruments for insurance companies, providing optimal returns with a low level of risk. The advantages of bonds are simplicity; transparency and stability: most often, the remuneration is known in advance and is fixed for the entire circulation period of securities; the ability to earn on price increases and regular coupon payments.

The least risky investment instruments that exert minimal pressure on the capital of insurance companies according to the standards are government securities (GS). GS is a highly liquid instrument with the lowest risk level. It can be used as collateral for bank lending, as well as to attract short-term financing through repo. The credit rating of the government securities of the Ministry of Finance of the Republic of Uzbekistan is BB- (Fitch, S&P). In accordance with PP-5265, from July 1, 2022, government securities are expected to be issued linked to inflation.

The most liquid investment instrument is bank deposits. However, often placing deposits in banks does not guarantee high returns, but rather is an entry ticket for providing bancassuarnce products.

In order to ensure financial stability, the insurer monitors the quality of assets and is obliged to place its assets on the principles of repayment, liquidity, diversification and profitability.

The insurer is obliged to comply with the following basic conditions when carrying out investment activities:

1. competent management of investments and associated risks;
2. ensuring information transparency and confidentiality

Competent management of investments and associated risks is ensured by the insurer (reinsurer) by:

• approval of the investment policy, which specifies the main areas of investment activities of the insurer (reinsurer);
• analysis of investment objects and periodic assessment of the resulting profitability, etc.

Ensuring information transparency and confidentiality is carried out by:

• disclosure of information in accordance with the requirements of the legislation;
• an annual report to the founders on the investments made.

In accordance with the investment policy developed by each company, all employees have a responsibility to make the most efficient use of the company’s capital and liquid resources. All employees are encouraged to propose strategies to improve the efficiency and effectiveness of the deployment and use of these resources.

Below are the main principles that are included in the investment plan using the example of Azimuth Insurance Company:

• Deposits should only be kept in institutions approved by the Investment Plan;
• Placement should only take place if the receiving bank or institution complies with regulatory requirements, as evidenced by prudential indicators;
• All fixed income securities purchased must have a local credit rating (if any);
• All foreign fixed income securities purchased must have an international credit rating from at least one recognized rating agency. The minimum acceptable international rating is BBB;
• The placement is carried out only if the bank or the receiving institution does not have serious reputation or legal problems or is not involved in any problematic or controversial asset transactions that could negatively affect the company’s investment portfolio.

The investment plan of companies must at least contain:

• Key assumptions and key considerations;
• Requirements for capital and liquidity;
• Expected profitability;
• Target distributions by asset class, grouped by duration, profitability and degree of risk;
• Confirmation of Compliance with Applicable Laws and Regulations.