In December 2000, Kazakhstan took another major step to reform its financial sector by adopting a modern insurance law. In a region where the concept of insurance and the need for it are still widely misunderstood, Kazakhstan's Law on Insurance Activity aims to create the type of domestic insurance industry that is necessary for any market economy to function smoothly.
While the Civil Code continues to govern basic principles of insurance relations among parties, the Insurance Law sets forth the basic framework of the insurance industry, in particular the formation, regulation and operation of insurance companies, reinsurers, brokers and other related parties. With the National Bank of Kazakhstan as the designated regulatory body, the supervision and regulation of the insurance industry is likely to parallel that of the country's banking industry.
Two basic types of insurance are authorized: life insurance and general insurance. The latter includes most types of property and casualty insurance, including business risk and contractual liability insurance.
The new law states that all property interests located in Kazakhstan belonging to a local entity or a resident of Kazakhstan may be insured only by a licensed Kazakhstani insurance company. However, a domestic insurer may reinsure risks with any non-resident reinsurer having a certain minimum rating (under a rating system to be established by the National Bank), provided that the premiums paid to the reinsurer (minus commissions) are not more than 85% of the of the total commissions paid by the insured.
Formation and control of insurance companies
Kazakhstani insurance companies must be formed as joint stock companies. But unlike other joint stock companies, an insurance company may only have common (voting) shares; it may not have any preferred shares or 'golden' shares. The minimum capitalization is to be set by the National Bank.
Founders of an insurance company may be both legal entities and natural persons. No founder may own more than 25% of the voting shares, unless the insurance company is a subsidiary of another Kazakhstani company or of a non-resident insurance company having a specific rating (under a rating system to be established by the National Bank).
The acquisition of an interest in an insurance company which would result in the ownership of more than 25% of the company's voting shares requires the prior approval of the National Bank. Furthermore, any acquisition of 5% of the voting shares is subject to National Bank approval if that party is a non-resident or if the acquisition would result in any party owning more than 25%.
Non-residents (both legal entities and natural persons) are permitted to own shares in an insurance company, but legal entities formed in an offshore zone (as determined by the National Bank) may not be founders of a newly formed insurance company. In addition, a non-resident legal entity formed in such a zone may not subsequently own more than 5% of the voting shares of a Kazakhstani insurance company. However, the charter capital of general insurance companies which have foreign participation (as defined by the new law) cannot exceed 25% of the aggregate charter capital of all general insurance companies. In the case of life insurance companies, the aggregate charter capital of all such companies having foreign participation cannot exceed 50% of the aggregate charter capital of all life insurance companies.
Management and operation of insurance companies
The managerial employees of an insurance company (chairman and members of the management board, chief accountant, etc) can be elected or appointed to their positions only with the consent of the National Bank, and compliance is necessary with requirements to be established by a qualification commission. Among other requirements, managerial employees are required to have had certain amounts of prior experience in the financial sector. For a company with foreign participation, not less than one-third of its board of directors and its management board must be citizens of Kazakhstan.
While the National Bank is given broad powers to regulate investments of insurance companies, the new law sets forth certain basic restrictions. Among other restrictions, an insurance company cannot:
- invest more than 10% of its equity capital in other legal entities (with the exception that it may invest without restriction in other financial organizations and it may acquire not more than 15% of the shares of an entity traded on a stock exchange);
- become a partner in certain types of partnerships; or
- take out loans in excess of 10% of its equity capital (or any loan having a term of more than three months).
The National Bank is authorized to set limits of liability (the insured amount or the deductible amount) that an insurance company may incur. An insurance transaction is deemed a "major insurance transaction" if those liabilities are exceeded. A decision to enter into a major insurance transaction must be approved by the company's board of directors based on a preliminary opinion of an actuary.
A somewhat controversial provision of the Insurance Law allows the National Bank to effect a compulsory purchase of an insurance company's shares if the National Bank determines that the company's assets exceed its obligations. The National Bank may sell them to a new investor who will guarantee performance under all insurance agreements. If the price at which the National Bank sells the shares exceeds the price it paid for them, the difference is passed on to the shareholders.
Curtis Masters and Mariya Gekko