Interview: T. Batzul
What regulatory changes are needed to facilitate the investment of premiums? What could be done to increase insurance penetration rates?
T. BATZUL: Insurance firms are normally among an economy’s institutional investors, but current legislation prohibits this in Mongolia. Certain authorities are actively working to address this issue to permit insurance companies to enter the capital markets as institutional investors. One approach would be to convert insurance firms into stock or share purchasers. Implementation is not easy, however, and there are many questions that need to be answered. To be specific: What viable products can be purchased on the Mongolian stock exchange? Do joint ventures credibly and transparently disclose their information? Are stock prices being properly communicated? How are insider trading regulations handled? How advanced is the sector’s knowledge and practice of purchasing stocks and shares? Without answering these clearly, insurance firms could hurt the sector by simply purchasing stocks based merely on excitement in the market.
What impact will additional compulsory insurance have on the sector? Which segments most need it?
BATZUL: To introduce more compulsory insurance, detailed research and analysis will be needed. It is important to assess the social demand for such policies and accurately calculate realistic cost estimates of a particular risk based on multi-year risk and actuarial data. I think we can see social demand for insurance in fields like medical science, construction, fuel and lubricants, and mining. Fuel stations are rightly identified as high-risk assets which could cause direct danger to the community. It is unfortunate that permits to build them near residential apartments, schools and kindergardens are still being issued. If such permits are issued, it is fair to demand that they be insured. Recent accidents involving construction firms have put many people’s lives at risk and their capital at stake. Construction companies and employees suffer when they do not comply with safety standards, and the way to address this is through insurance. By providing coverage and monitoring standards, insurance firms could also minimise work for government institutions.
To what level should minimum capital requirements be raised in order to effectively change the sector?
BATZUL: In 2012 the Financial Regulatory Committee approved the regulation to increase the minimum capital requirements from MNT1bn ($700,000) to MNT2bn ($1.4m). The goal was to increase insurers’ abilities to underwrite risk, expand insurance activities and promote consolidation of smaller firms. However, when you look at the 18 firms that have met the requirement, this has not been the case. Only by increasing minimum capital requirements by two to three times in a short period of time could the committee achieve the desired objective. Firms’ risk-carrying and risk-sharing capacity would improve, and the change could divert some premiums from flowing to foreign insurers.
How are insurance firms coping with the lack of sufficient capital to back up larger scale projects?
BATZUL: Major mining and infrastructure projects, which are key to the economic expansion, are being insured via international brokers without any involvement of Mongolian firms. Domestic insurance companies are excluded for several reasons, including the dearth of risk-carrying capacity, size, inexperience and the lack of an international rating. To boost their prestige, many local firms are now starting to get insured under the internationally renowned reinsurance companies, on a per-risk and per-event basis. One of the main reasons is, of course, to get access to the premium fees of participation in large insurance programmes.
For example, some firms were insured under this portfolio insurance programme’s secondary level and thus expanded their risk-carrying capacity. Firms have also begun discussing the establishment of a national reinsurance firm that integrates domestic companies.
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