While insurance in Mongolia remains in its nascent stages, important ongoing reforms may yet drive penetration, build local underwriting capacity and develop the first pool of domestic non-bank institutional investors. Admittedly, with total premiums as a share of GDP at a mere 0.44%, or $29.3m, in the first half of 2012, according to the Mongolian Insurers’ Association (MIA), the sector still has a way to go. While the aggregate sums involved remain modest, buoyant growth bodes well for the medium term.

MORE CAPACITY: As GDP per capita rises from $2300 in 2011 to a forecast $8000 by 2016, according to the newly established Ministry of Economic Development, underwriters expect the increase in disposable income to boost premiums further. With the average Mongolian wage standing at $1.50 per hour in October 2011, according to the World Bank, the government’s 53% increase in public employee salaries points to growing disposable income among potential clients.

The sector avoided the 2012 slowdown witnessed in other industries, largely thanks to a rapid expansion in motor insurance. Enforcing mandatory drivers’ third-party liability cover stimulated growth in retail lines in 2012, with industry premiums surpassing 2011 levels by September 2012 and MIA-forecast growth of 35% for the year as a whole. Yet promoting social acceptance of insurance cover will be crucial for longer-term growth: in a society long dominated by an all-encompassing Soviet state, private underwriters still have to overcome distrust of private cover. Reform of universal yet inefficient social insurance will be central to supporting this. Meanwhile, large mining projects expected in coming years, meant to be at least partly covered locally, will require growth in domestic insurance capacity through recapitalisation and the conclusion of reinsurance treaties with international players.

“Additional foreign capital will be crucial to back up larger-scale infrastructure and mining projects, as local insurance firms’ market capitalisation will not be sufficient,” CEO of Tenger Insurance, G. Tsogbadrah, said.

NON-LIFE PENETRATION: Insurance density – total premium per capita – remains in the lowest quintile of East Asian economies, although its steady growth in recent years, from MNT8675 ($6.10) in 2009 to MNT17,580 ($12.30) by the close of 2011, is encouraging. The number of products available has grown from 39 in 2008 to over 60 in 2012. The number of insurance clients has also risen steadily, by 14.9% year-on-year (y-o-y) in the first quarter of 2012, reaching 488,000 registered insured, according to MAD Investment. Some 62.9% of these were private sector staff and 37.1% public employees. Growth in private sector penetration has been the most pronounced, with the number of private sector employees insured growing 21.5% y-o-y in the first quarter of 2012. Coverage has so far remained concentrated on the more affluent capital city, with around 70% of premiums underwritten in Ulaanbaatar, according to market leader Mongol Daatgal (daatgal means “insurance” in Mongolian).

Annual growth in premiums and assets has remained above 30% since 2009: total assets grew by 40% y-o-y in 2011 to reach MNT81.2bn ($56.8m) by the end of the year, while total premiums increased by 34% to MNT47.5bn ($33.3m) in the same period.

Overwhelmingly dominated by property insurance, which accounted for 45.3% of premiums in 2011, and liability cover, which totalled 37.3%, according to the Financial Regulatory Commission (FRC), the key drivers of growth in recent years have been real estate, livestock, mining and drivers’ third-party liability. The largest single risk underwritten has historically been that of MIAT, followed by commercial property, drivers’ third-party liability and livestock. Yet coverage of domestic mining concerns like MCS Group’s Energy Resources and Mongolyn Alt Group have also been partly covered by local underwriters.

REGULATORY TWEAKS: The original Insurance Law of 1997 and two amendments covering distribution channels and setting capital requirements at $350,000 in 2004 provided the basic framework for the sector. The Mongolian Insurers’ Association, established in 2004, provided a voice for the industry as authorities looked to reform regulation of the financial sector. The establishment of the FRC, an independent agency, in 2006 provided stricter supervision of the sector and the regulator segregated products into two types, social insurance and commercial lines. The Ministry of Finance is the only institution able to propose new comprehensive legislation for the sector, meaning that the FRC can only issue decrees on capital requirements. It did so in June 2009, doubling capital requirements to MNT1bn ($700,000) from January 2011 and raised them again to MNT2bn ($1.4m) for non-life and MNT3bn ($2.1m) for life (as well as a MNT200m [$140,000] loss prevention fund held at the FRC) by the end of 2012. Underwriters expect the FRC to keep doubling requirements, to MNT4bn ($2.8m), within the next two years, and MNT8bn ($5.6m) thereafter. Higher capital requirements could prompt foreign insurers who have been eyeing the market for opportunities to actually invest.

STRUGGLING TO KEEP PACE: The rapid growth in the number and types of products being introduced in Mongolia has outpaced regulations, with around 20 minor amendments in the past four years alone. It usually takes roughly three months for licensing of a new product, according to underwriters. The closure of five underwriters in recent years has strengthened the argument for wholesale reform through a new Insurance Act. Indeed, the FRC has indicated its willingness to make more types of insurance mandatory, such as professional liability and construction insurance.

Meanwhile, the current law does not specifically regulate life insurance other than requiring insurers to set up a separate subsidiary for the life business (see analysis). Yet slow progress in passing legislation through the Grand Khural, Mongolia’s parliament, makes underwriters sceptical of the timeframe for any dramatic, but necessary, reform. Indeed, it took four years of deliberations for Finance Ministry-backed legislation making drivers’ third-party liability insurance compulsory to finally be passed by parliament in October 2011.

Solvency margins applied from 2010 require underwriters to maintain solvency ratios (of allowable assets to liabilities) of 125% or higher, lest they be placed under receivership by the FRC. Concerns remain over the adequacy of solvency rules, in contrast to a risk-based capital framework, since risk provisioning takes place on an aggregate rather than risk-weighted basis.

In the face of this relative regulatory vacuum, different insurers have moved at varying speeds in establishing their own internal automated risk management mechanisms. Although the number of actuaries has grown from nine in 2008 to 15 in the first half of 2012, underwriters speak of a shortage of actuarial talent on the market. “We are worried that many underwriters still have not implemented strong internal risk management systems,” U. Ganzorig, the president of Mandal Daatgal, told OBG. “Part of the reason is the absence of significant time series of risk and a lack of sufficient actuaries, but insurers must start establishing their own records.” In 2011 the FRC sought to empower the MIA through new rules requiring underwriters to pool information and client data in order to reduce inefficiencies and acquisition costs. Underwriters will thus have a more complete picture of clients.

The industry has also called on the FRC and the Ministry of Finance to play a more promotional role, in addition to their regulatory responsibilities. The association and private players have run their own education campaigns, but calls have emerged to pass new tax incentives for individual insurance lines. Although the planned new tax code is not expected to include tax deductions for retail policies, underwriters have argued that such tax breaks would reduce the impression of insurance as a tax itself. “The government should extend tax deductibility for insurance policies to encourage more individuals to take cover,” Ganzorig said.

FRAGMENTED MARKET: Following the Soviet system’s collapse, the Ministry of Finance’s State Insurance Agency, in existence since 1934, was split into two parastatals in 1991 – Mongol Daatgal for non-life insurance and Tushig Daatgal for agricultural insurance.

The Ministry of Finance began awarding private licences in 1994, attracting interest from emerging local conglomerates. The two public insurers were privatised in 2003, which ended the government’s direct intervention in the sector, although the state maintains limited equity stakes in smaller insurers like Gan Zam Daatgal and Ulaanbaatar Daatgal (since renamed Monre Daatgal). Although foreign insurers are allowed full ownership of underwriters in Mongolia, the market has attracted only limited foreign participation – mainly from Russian investors – through equity stakes.

The market is fragmented among one life and 17 nonlife underwriters as of mid-2012, whose aggregate capital base was only MNT97.6bn ($68.3m), according to the FRC. Despite the proliferation of underwriters in the past decade, the market remains dominated by eight firms, which together accounted for 88.9% of total non-life premiums in first-half 2012. Three underwriters alone, with more than 10% market share each, account for 53.7% of the market. Smaller underwriters like Monnis Daatgal exist as captive insurers linked to diversified conglomerates, in this case Monnis Group.

CONSOLIDATION: While only limited consolidation has taken place so far, with ARD Daatgal’s acquisition of Grand Daatgal in 2011 and four other insurers closing following a hike in capital requirements, underwriters expect more in the coming years, seeing the potential for only up to a dozen viable insurers, given the size of the market. Additional licences were awarded to Mandal Daatgal in 2011 and Khaan Daatgal in 2012.

While still a minor player, Mandal Daatgal’s equity of $5m makes it the highest-capitalised underwriter on the market. Established by Canadian-listed property investor Mongolia Growth Group (MGG) and Mongolian advisory firm UMC in July 2011, the underwriter started by covering the property developments of MGG, which had not found sufficient capacity on the market. MGG sold its stake in Prime General Daatgal (PDG) in 2009 and attracted PDG’s former management to the new underwriter. Aside from its large property portfolio, Mandal is expanding in niche segments such as retail and commercial lines dedicated to the influx of wealthy expatriate workers linked to the mining industry, as well as professional liability insurance. Though only accounting for 1.3% of total premiums in the first half of 2012, the insurer has launched an asset management firm, two pension funds (one for small and medium-sized enterprises [SMEs] and one for larger corporates such as Newcom and Khan Bank), a private equity firm and a money market fund, providing it with a more aggressive investment strategy. Signing a bancassurance deal with Khan Bank in 2012, Mandal expects to aggressively expand its market share by systematising and automating its underwriting system, already surpassing 50% q-o-q growth since inception.

TOP PLAYERS: A consortium of Russia’s Angara Insurance and Russian-controlled Chinggis Khaan Bank acquired Mongol Daatgal for $5.8m in 2003. While still the largest underwriter on the market, its share of industry premiums slipped from 75% in 2003 to 25.1% in the first half of 2012. Although its assets grew from MNT2.77bn ($1.94m) in 2005 to MNT19.99bn ($13.99m) by the close of 2011, the underwriter has not kept up with the industry’s growth. A change in management in 2010 following the suspension of top management for ethical misconduct brought a restructuring of the business. With around 60% of its 2011 premium from retail clients, the underwriter has sought to drive its retail business by concluding a bancassurance deal with market leader Khan Bank in August 2012, while its branch network is the largest, at 29 outlets of which 20 are outside the capital. Its premium has grown steadily from MNT6.8bn ($4.76m) in 2009 to MNT11bn ($7.7m) in 2011, with forecasts of MNT16bn ($11.2m) in total premiums in 2012. Following two years of negotiation, Mongol Daatgal signed Mongolia’s first excess-of-loss reinsurance treaty with HannoverRe in June 2010 for coverage of losses above MNT300m ($210,000) up to MNT6bn ($4.2m) and expects to sign the second layer of the agreement in 2012. Treaty reinsurance will allow the underwriter to compete on rates while expanding its capacity for larger corporate risks.

OTHER PLAYERS: While still much smaller than Mongol Daatgal, Bodi Daatgal, MIG Daatgal and ARD Daatgal have been growing rapidly.

Set up as the second private insurer in 1995, Bodi, part of the diversified Bodi Group that controls Golomt Bank, is the second largest insurer with 17.3% of total premiums in the first half of 2012 and is the largest Mongolian-owned underwriter. With a lead in the corporate segment, Bodi started a push into retail in 2010 through a bancassurance deal with Golomt and has expressed interest in a national reinsurance venture, although no details have been announced.

MIG Daatgal, established in 1997, is the third-largest insurer, with 11.3% of premiums in the first half of 2012, up from 7.8% in 2007. With equity participation from then-Mongol Post (now Savings Bank), the underwriter has particularly focused on corporate policies.

ARD was the first private insurer, established in 1994, and is now the fourth-largest underwriter, with a 9.6% market share in the first half of 2012. In 2004, following its failed bid in the Mongol Daatgal privatisation, British insurer Omni Whittington acquired a 26% stake in ARD, making it the first foreign-invested insurer. ARD acquired Grand Daatgal in 2011 following the FRC’s intervention, which made it the largest underwriter of retail policies with 28 branches (of which 21 are outside Ulaanbaatar), close on the heels of Mongol Daatgal. Following a doubling of its total premiums in 2011, the insurer has worked with global broker Marsh on training and capacity development, moving towards an international credit rating in 2012. ARD expects yo-y growth in premiums of 60% in 2012 to $5.95m, having collected $2.8m in the first half of the year.

MIDDLE GROUND: The other four mid-sized insurers are, in order, Soyombo, Practical, Nomin and Tenger. Privatised in 2003, Tushig Daatgal was renamed Soyombo Daatgal and continues to provide agricultural cover while expanding its urban reach, with 7.4% of the market in the first half of 2012. Practical Daatgal, established by the Ochir Undraa Group (also called Mera Holding, active in energy, mining and construction) in 2003, accounted for 6.2% of premium in the first half of 2012. Nomin Daatgal, part of the Nomin Group and also active in trading and manufacturing, was close behind with 6.1% market share, up from 5.4% in 2007.

Tenger Daatgal was established as Bat Daatgal in 2001 by Mongolia’s largest integrated petroleum company Petrovis, and rebranded under the name Prime General Daatgal (PGD) in 2004. Tenger Financial, the owner of XacBank backed by donors and private investors including MCS Group, acquired a 50% stake in PGD in June 2010, renaming it Tenger Daatgal. The change in shareholding has focused the underwriter’s strategy on low- to mid-market policy lines, complementing XacBank’s focus. With some 20 branches and a bancassurance agreement with XacBank, Tenger hopes to expand its market share from 5.9% in the first half of 2012 (its share actually fell from 6.4% in 2007).

REINSURERS’ COMPETITION: A higher share of small risks is held on the books of domestic insurers than in other emerging economies, with underwriters usually ceding around 40% of risk to international reinsurers on a facultative basis. Global reinsurers have, however, captured the lion’s share of large-scale risks in both the property and mining sectors. While local insurers have written some larger policies, such as ARD’s coverage of the new Hyatt hotel development in Ulaanbaatar, most larger risks are ceded through reinsurance brokers. “Competition is intense for large-scale projects, which tends to push rates down,” D. Chuluuntsetseg, the CEO of ARD Daatgal, told OBG. “But as we expect a rise in the number of such large projects in coming years there should be enough to go around.” High-rise developments such as Central Tower and Blue Sky Tower have been insured through Hong Kong insurance syndicates in the Lloyd’s London market. Operational cover for the Oyu Tolgoi mining project is covered through Rio Tinto’s contacts with Lloyd’s market directly, while the World Bank’s Multilateral Insurance Guarantee Agency said in 2012 it would provide up to $1bn in political risk cover for the project.

FOREIGN COVER: Although the current mining and insurance laws require mining risk to be covered domestically, insufficient local capacity has allowed most of the sector’s risk to be covered offshore. “The law requires foreign-invested companies to be insured locally,” J. Bat-Orshikh, the president and CEO of MIG Daatgal, told OBG. “However, many companies are using insurers abroad, firms that are more experienced and have the necessary capital.” While the FRC retains veto power on underwriters’ reinsurance deals, in practice there are few restrictions on ceding business abroad. While Russian companies such as Ingosstrakh, KapitalRe, UnityRe and TranssibRe have moved to capture a share of the aviation risk, Germany’s HannoverRe, the fourth-largest reinsurer globally, has been the most successful in recent years. Mongol Daatgal was the first to conclude a reinsurance treaty with HannoverRe in June 2010. While facultative reinsurance agreements are concluded on a case-by-case basis for specific policies, treaties cover the whole of an insurer’s business and typically allow underwriters to negotiate better rates with global reinsurers. Practical and Soyombo have followed suit, signing their own treaties with HannoverRe, prompting SwissRe and MunichRe to step up their efforts at gaining Mongolian treaty business.

Authorities have in the past suggested forming a national reinsurer to aggregate domestic underwriters’ ceded risk and redress terms of trade with global reinsurers. An attempt by Russian investors to establish the first Mongolian reinsurer, Bolor Itgel Daatgal, in 2009 was ill-fated. The licence was revoked by the FRC in December 2009 when it failed to comply with the rise in capital requirements from $3.5m to $10.5m. Underwriters expect any future attempt to form a domestic reinsurer would require at least $50m in shareholder equity to be successful.

INVESTMENT INCOME: While life liabilities remain small, non-life underwriters have only been able to allocate their investments to a very narrow range of asset classes such as government bonds, property and bank deposits, reducing the opportunities for investment returns. The FRC has sought to insulate the sector by limiting to 30% the amount insurers can deposit per bank, 15% if the bank is affiliated by equity. International investments are also banned, although the MIA has been lobbying the FRC to allow for some limited allocations offshore. Meanwhile, the Securities Law under discussion in parliament in late 2012 will lift the ban on investments in equities once enacted – underwriters expect to be able to invest up to 10% of assets in equities. “The FRC needs to make investment policies more flexible, we need to be able to invest in more instruments,” Chuluuntsetseg told OBG. “We expect policies to change in 2013.” Linked to MGG and UMC, two investors in Ulaanbaatar property, Mandal has proved more innovative in its asset management. Beyond establishing money market, private equity and asset management affiliated firms, the underwriter allocates a portion of its investments to the UMC Alpha liquid real estate fund, which it says has yielded higher returns than the industry average.

COMPULSORY COVER: Implementing the country’s first compulsory insurance line, drivers’ third-party liability cover, has already generated strong growth in underwriters’ retail books. With only an estimated 5% of Mongolia’s 350,000 vehicles insured in October 2011, when the law was passed, the scheme’s roll-out in February 2012 – and enforcement from October of that year – spurred an immediate spike in motor cover. Motor has traditionally lagged far behind property insurance, accounting for a mere 37.3% of total premiums in 2011, in contrast to most other emerging economies, where it leads by a large margin.

However, motor premiums have already grown from MNT4.8bn ($3.34m) in 2009 and MNT6.7bn ($4.7m) by the end of 2011 to MNT8.7bn ($6.1m) by June 2012. By October 2012 total motor premiums reached MNT10bn ($7m), with Mongol Daatgal expecting MNT15bn ($10.5m) in new premiums in the first year of enforcement. Newer entrants, such as Mandal and Khaan Daatgal, were penalised by a clause in the legislation requiring underwriters of such policies to have at least one year’s operating experience. Mandal estimated that it held only 6% of the third-party liability segment by October 2012, when compliance to the new rules had already reached 85% of vehicles.

While enforcement of the new rules will be challenging in remote areas, underwriters estimate that 60% of vehicles circulate in Ulaanbaatar. The number of policyholders jumped from 15,000 in late 2011 to 40,000 by May 2012. FRC-determined premiums have constrained price competition, while the MIA has established a database of policyholders to establish clearer segmentation of policies and risks. The MIA expects to build a complete drivers’ record database by 2013, which would reduce annual premiums of $23 for category-B cars with a clean driver record to $11, for policies covering claims of up to $3500.

The regulatory push is also expected to have multiplier effects for other lines by educating the public and building trust in settlements. “With roughly half of Mongolians owning a vehicle, enforcement of compulsory lines will improve awareness of insurance and could support cross-selling of other policies,” B. Zolbayar, senior underwriter at Bodi Daatgal, told OBG.

LOW LOSS: The young sector has recorded very low loss ratios, with the industry average falling from 36.6% in the first half of 2010 to 30.1% in the first half of 2012, with a low of 20% for financial insurance and a high of 44% for motor, according to the FRC. Although underwriters must handle the impact of double-digit inflation on higher claims compared to premiums adjusted only annually. Part of the explanation for such low claims is the traditional mistrust of Mongolians for insurance, which has been seen as a tax by many. Uneven settlement of claims by insurers has also played a part, with the market constrained with only nine loss adjuster firms. The largest recent claim came in July 2012 when an MCS warehouse fire prompted a claim in excess of $700,000 from ARD Daatgal, although claims adjusters were still assessing the claim in October 2012.

Given the rate of accidents on Mongolian roads claims under third-party liability are expected to rise over the medium term, although FRC-regulated premiums have taken this into account. “Loss ratios have historically been low, particularly given poor awareness of insurance,” B. Batbayar, the business development director of ARD Daatgal, told OBG. “But in the near future we expect mandatory third-party motor liability will educate people about the benefits of insurance. Insurers must thus improve their claim processing and internal risk management procedures to anticipate the expected growth of moral hazard and fraud cases.”

OTHER LIABILITIES: Beyond this initial regulatory push, the FRC is contemplating introducing more compulsory lines. Studying the potential for medical malpractice, brokers’ and lawyers’ liability as well as other types of professional liability lines, the FRC and the Ministry of Finance have announced plans to propose new legislation to this effect. Following public outcry over a series of building collapses in 2012, the Ministry of Construction and Urban Development has also pushed for mandatory construction insurance, although underwriters do not expect this legislation to be enacted within the coming year.

In late 2012 the BOM, the FRC and Ministry of Finance were also discussing savings insurance as a possible alternative to the existing blank guarantee on bank deposits once it expires. Meanwhile, the new Company Law passed in 2011 and the Conflict of Interest Law of September 2012 have created the potential for new liabilities for company directors and board members. Mandal introduced the first dedicated professional insurance for directors in early 2012.

PROPERTY: While housing and credit insurance will not be made compulsory, government efforts to promote housing purchases through a mortgage subsidy scheme for low-income earners will likely stimulate growth in this segment. While MIA and FRC data indicates that property insurance accounted for 45.3% of industry premiums in the first half of 2012, this included livestock index policies, mining and industrial risks, and commercial and residential property cover. The MIA estimated that less than 5% of homeowners held insurance in 2011, but this should grow substantially if the government is successful in supporting the development and sale of 100,000 residential units over the medium term. Home insurance and life insurance are likely to be prerequisites for bank mortgages, which will extend to between 15 and 20 years under the scheme.

The majority of local corporates remain uninsured, as do all but the largest property developments in Ulaanbaatar. Larger underwriters tend to compete aggressively for larger policies, adding to intense price competition. Yet penetration is expected to grow as foreign investment expands in the medium term. “Foreign investment is a key driver of growth in the corporate insurance market: all foreign-linked corporates are covered, whereas only 30% to 40% of large local corporates are covered,” Zolbayar told OBG. “Meanwhile, SMEs by and large do not buy insurance.”

HERDERS’ RISK: In an economy so dependent on herding – for roughly a third of employment and 17% of GDP in 2011 – the protection of livestock has proven to be the most successful public-private partnership in the insurance sector. The world’s first Index-Based Livestock Insurance (IBLI) is still in a World Bank-backed pilot phase until 2013, but has already demonstrated its resilience. With an estimated 44m animals for a population of 3m, livestock represented 63% of rural household assets in 2010, according to the World Bank.

In a harsh climate with regular dzuds (summer drought followed by an extremely cold winter), Mongolia has been plagued by livestock loss, but the frequency of extreme winters has increased over the past two decades. For 1999-2003 some 11.2m livestock died during dzuds, killing 12,000 households’ assets.

In 2005 donors from the US, Switzerland and the World Bank supported the trial of a livestock insurance scheme centred on an index approach based on rural district-level mortality figures. It covered the four main livestock types: cattle and yak, horse, goat, and sheep. The aim was not only to insulate herders from the consequences of cattle loss, but also growth in livestock numbers. In the shift to a market economy that has taken place since 1990, centrally planned livestock cooperatives were replaced by herders’ individual decisions to expand their stock, contributing to overgrazing.

The National Statistical Office (NSO) has compiled the mortality time series for the four main animal types. By structuring the scheme at district level, the World Bank expected to reduce moral hazard and preserve incentives for herders to work hard to save their livestock. Although costs of new client acquisition have been reduced by standardisation of policies, insurers have been able to pool their risks across wide geographies. The sales period was set from mid-March to mid-June, before herders could predict the next winter’s intensity. While herders can insure between 30% and 100% of the value of their livestock, MunichRe has found that they typically opt for the lowest coverage of 30%.

LIIP: The syndicate of commercial insurers pools premiums in the Livestock Insurance Indemnity Pool (LIIP), which is ring-fenced from the rest of the insurance sector. The herders shoulder losses of up to 6%, while excess loss up to 30% is covered by the pool (the Base Insurance Policy). The government’s Disaster Response Product (DRP), covered by a contingent loan from the World Bank, covers losses in excess of 30%. This sovereign coverage of extreme risks of above 30% has also kept premiums low: annual premium varies from 3.25% to 5% of the value of livestock insured, depending on the potential for drought. Once the pilot phase ends and the project is commercialised from 2013, the government is expected to cover the DRP.

GROWING POPULARITY: Four underwriters –Mongol, Bodi, Nomin and Tenger – participated in the pilot scheme from March 2006. Policy sales grew rapidly from 2400 in 2006 to 3700 in 2007 and 4100 in 2008, or 14% of herders in the three pilot provinces of Bayankhongor, Khenti and Uvs. By the 2010-11 season, the World Bank estimated that 10.5% of herders in the targeted districts were insured with minimal coverage. The NSO started publishing mid-year animal census figures in 2010, adding to its December calculations to promote faster payment of compensation, given that most losses occur in the first quarter of the year.

The pilot project was extended to nine provinces in 2010/11, with an additional $10m in funding from the World Bank and around 7000 herders participating. By mid-2011 the project had been extended to 15 of the 21 provinces, and was generalised to all provinces in 2012. There has also been a multiplication of products on the market since 2009, with higher premiums being charged for lower claims thresholds, for instance.

Total premiums grew from $58,600 in 2006 to $90,300 in 2007 and $305,000 in 2011, according to the MIA. The World Bank estimates that cumulative premiums reached $750,000 up to 2010/11. A major milestone was achieved in 2011 when a first international reinsurance cover was secured for the IBLI, a hopeful sign for the project’s eventual commercialisation.

The 2009-10 winter brought the worst losses from a dzud on record, killing 10.7m livestock (22% of the country’s total, worth an aggregate $477m) and totally destroying the livestock of 8711 herders spread over 80% of the country, according to the World Bank. This triggered the payment of MNT1.8bn ($1.26m) in paid claims to some 4706 herders, proving the resilience of the scheme drawing on the DRP. Mongol Daatgal and Soyombo were the two most affected by claims under the scheme, paying in excess of MNT600m ($420,000) each in 2010, while Bodi and Tenger paid roughly half due to their more limited exposure. Cumulative pay-outs under the scheme had reached $1.9m by 2011.

While not profitable for private insurers, the LIIP was also meant to widen access to formal financial services. Beyond insulating herders from the most dire consequences of dzuds, the scheme was also designed to facilitate access to financing from banks traditionally conservative in the face of climactic risk, as well as to facilitate the cross-selling of other insurance products such as property, motor and third-party liability by participating underwriters. “The livestock index programme has not been that profitable, but it is an opportunity for underwriters to build databases of rural clients and risk, while seeking to cross-sell other policies,” C. Munkhtogoo, the vice-president of business development of Mongol Daatgal, told OBG. “However, crossselling has not yet been very successful, partly because of the low disposable income of rural Mongolians.”

While the scheme has been replicated in northern Kenya, reinsurers raised doubts in 2012 as to whether the scheme could be replicated in non semi-arid zones. A more pressing concern for Mongolia is the recent drop in enrolment by herders in 2012, following a dzud-free winter in 2011. Underwriters estimated the drop at up to half for the 2012 season, although statistics had not been published at time of press.

Some larger insurers, such as ARD, have remained on the sidelines pending the end of the donor-funded scheme by 2014 and its subsequent commercialisation. The government announced in its four-year platform in September 2012 that it would work to generalise the system of livestock insurance, yet underwriters argue that it will need to make policies compulsory for herders to sustain stable enrolment levels.

SCALING DOWN: Based on the livestock scheme’s success, underwriters have been looking at scaling products down to cater to a higher share of the population. While not called micro-insurance, niche policies that covering gers (Mongolian tents) have been on the market for several years, provided by smaller underwriters such as Ger Daatgal. Yet given funding challenges for the social insurance scheme, opportunities should grow in the health and personal accident (PA) segments as underwriters scale policies down to micro-products for low and mid-income earners (see analysis).

HEALTH & PERSONAL ACCIDENT: Private health premiums grew from $44,000 in the first half of 2011 to $58,000 in the same period of 2012, while PA rose from $1.79m to $2.17m. Relatively low premiums reflect the concentration of cover among the more affluent segments of society. As disposable income grows, insurers see potential in these segments. “We are focusing research on PA and health products,” said Munkhtogoo. “We successfully launched a high-end health policy in 2011 and are looking to scale it down for the middle class.” There is significant pent-up demand for coverage that would supplement or supplant existing public coverage: a 2011 Asian Development Bank (ADB) survey of micro-finance clients found that health-related problems posed the single biggest risk (51.5% of those surveyed) to loan repayment.

Supported by a $1.5m grant from the UN Development Programme and the Luxembourg government, the regulator launched a micro-insurance health product in four provinces (Uvs, Khuvsgul, Selenge and Dornod) in 2008. With limited cover of health costs up to MNT400,000 ($280), the product has been sold by four of the largest insurers, including Mongol, Bodi and Nomin. However underwriters have complained of high loss ratios on the policy, which they claim was not designed to reflect local conditions. “Previous attempts at launching micro-insurance products have been unsuccessful given high loss ratios,” Batbayar told OBG. “We do see potential in this product class, but only with government support in a PPP type model.”

Tenger Daatgal rolled out two micro-policies for health and PA in 2010 catering to self-employed workers in Ulaanbaatar and has started developing a micro-pension product in conjunction with NGOs. Tenger sold 419 micro-policies in the first half of 2011 through an initial four XacBank branches, generating net premium of MNT4.3m ($3000) and average premiums of MNT43,500 ($30). The loss ratio in the first year of rollout has been disappointing at 114%, with 18 claims worth MNT4.87m ($3406), according to Tenger’s financial reports. The imperative is therefore to control costs, and Tenger has been discussing the potential for rolling out such micro-policies through the fuel station network of its shareholder Petrovis to achieve quick economies of scale. In 2012 the Ministry of Health rolled out a new social health insurance line with support from the ADB, although the preliminary results had not been published at the time of press.

DISTRIBUTION CHANNELS: The sector’s 191 branches and 2180 agents as of June 2012 have historically focused on business in the capital and provincial centres. Although larger underwriters such as Mongol, Bodi and ARD have spread to virtually every aimag, the most profitable branches remain those in Ulaanbaatar. Alternate distribution methods, such as telemarketing, have not yet been introduced, although an increasing number of underwriters have launched sales websites, starting with Mongol’s “e-daatgal” in 2009. While some underwriters, particularly Tenger, have been studying the potential for selling insurance products through a mobile banking platform, current rules prohibit the selling of insurance without an agent licence.

Driving premium growth has remained overwhelmingly the business of individual agents, which have grown in number from 690 in 2007 to 1676 in 2009 and 2180 in the first half of 2012. Mongol has by far the largest force in the country, with 800 agents, followed by Bodi and ARD, which have a quarter of that number. Intermediaries to only one underwriter at a time, agents are required to pass FRC certification after a daylong training and test, along with an annual fee of a mere MNT10,000 ($7) in Ulaanbaatar and MNT5000 ($3.50) in the aimags. “The regulator should pay more attention to mandatory insurance coverage education during the certification process of agents, because agents still have a lack of knowledge about new mandatory products,” Batbayar told OBG.

BROKERS: While the number of brokers has grown from two in 2007 to 13 in 2012, underwriters derive only a small share of the premiums from this channel. The largest are Asimon, the first to be established, and Loyalty Solutions. The majority are corporate brokers covering either blue-chip firms or broking for international reinsurers: the only providers of direct broking are Loyalty Solutions, Achit Undarga and National Agency, the latest to receive a licence in 2012.

The FRC enforced minimum capital requirements of MNT10m ($7000) in June 2010 and compulsory professional indemnity cover of at least MNT50m ($35,000), although these amounts have been too modest to spur consolidation in the market. Underwriters have called for clarification of the role of brokers, and the fees and taxes charged by them, in any new legislation.

Distribution through banks has the most far-reaching potential to drive retail policies. In June 2010 the revised Banking Law opened the door for bank staff to act as insurance agents. Banks have proved particularly receptive to the idea, given the erosion of their net interest margins wrought by high inflation and intense competition. Bodi Daatgal was the first to move immediately, signing a bancassurance deal with the affiliated Golomt Bank in July 2010, although underwriters underplay the significance of the deal as Golomt’s 89 branches were already referring clients to Bodi beforehand, given their common shareholder. XacBank, which has traditionally focused on microfinance, concluded a similar deal with Tenger Daatgal following its purchase in June 2010, rolling out low-income policies through its network of 91 branches – this is the only exclusive bancassurance deal on the market, with other banks open to representing a variety of underwriters.

Khan Bank concluded deals with Mongol, ARD and Mandal over the summer of 2012, testing product rollout in the capital in 2012 and planning a roll-out through its 510 branches from 2013. This will likely pose stiff competition for insurers focusing on the retail market, particularly for simple product lines such as drivers’ liability, motor and property insurance. “The priority in bancassurance is to sell standardised products that are easy both for clients to understand and for the banks’ staff to sell,” Munkhtogoo told OBG.

OUTLOOK: Despite its humble beginnings, the sector’s growth prospects are underpinned by the gradually strengthening regulatory oversight, enforcement of compulsory insurance and the expected high mining-driven growth in corporate segments such as natural resources, construction and property. New entrants, such as Mandal, are spurring competition with established players, driving innovation in both product development and distribution channels. This rapid market growth has outpaced regulatory reforms, which will have to be updated in a new wide-reaching law in order for the sector to sustain its development. New rules for private insurers will have to be matched by wide-ranging reform of the state’s social insurance system.