On 2 July 2018, Kazakhstan adopted a number of amendments to the country's insurance legislation, including the Insurance Law,1 the Civil Code of Kazakhstan and a number of other insurance-related laws (the "Insurance Amendments"2). Most of the Insurance Amendments came into effect on 15 July 2018, while some of them will become effective from 1 October 2018, 16 December 2018, 1 January 2019 and 16 December 2020.
1. New Types of Insurance
(i) Professional liability insurance
With effect from 1 January 2019, the Insurance Law will provide for a new class of insurance -- professional liability insurance, which is intended to protect professionals who carry out their business on the basis of a specific license or permit, and/or who have expertise or qualification in a specific area (e.g., accountants, lawyers and physicians). This new class was added because general liability insurance policies do not usually offer protection to professionals against claims arising out of business or professional practices such as negligence or malpractice.
The coverage focuses on errors or omissions in the service provided or product sold by the policyholder. Coverage will include damages caused to third parties, but will not include defense costs in a related lawsuit. The legislation will require certain professionals to obtain professional liability insurance (e.g., starting from 1 January 2020, advocates and "legal counsel" must obtain professional liability insurance3).
(ii) Insurance of space objects and liability of their owners
The Insurance Amendments also provide for two additional new classes of insurance: (a) insurance of space objects (e.g., satellites), and (b) insurance of civil liability of owners of space objects.
(iii) Mandatory insurance of tourists
Currently, travel agents are required to arrange for insurance of tourists travelling abroad only if such insurance is required by the law of the destination country or by an international treaty. Thus, this type of insurance is voluntary, rather than mandatory.
Starting from 1 January 2019, the Tourism Law4 will require travel agents to arrange for insurance of each tourist travelling abroad, and, pursuant to the Insurance Amendments, tourist insurance will become a mandatory type of insurance.
This mandatory tourist insurance will cover accidents causing death or injury and/or sudden acute illness or health deterioration that requires emergency medical assistance.
Presumably, tourists travelling abroad without the participation of a travel agent will not be obliged to obtain insurance policies (unless such policies are required by the law of the destination country). Also presumably, travel agents will not be required to arrange for this insurance for persons travelling abroad for reasons other than tourism.
2. Blacklisted Foreign Insurers
The Insurance Amendments authorize the National Bank of Kazakhstan (the "NBK") to maintain a list of "blacklisted" foreign insurance/reinsurance companies, and prohibits local insurance companies from reinsuring risks with those blacklisted re/insurers.
The NBK may include a foreign re/insurance company on the list if it:
- fails to pay the insurance proceeds to the insured following a court order ordering payment; or
- fails to provide information, or provides incomplete or misleading information, to the NBK with respect to reinsured risks, premiums and other material terms of a reinsurance contract.
The list will be posted on the NBK's website. As of the date of this Legal Alert, the NBK has not yet posted it.
3. Use of Foreign Brokers in Ceding Insurance Abroad
(i) Use of Foreign Brokers by Kazakhstani Insurers
Prior to the Insurance Amendments, foreign insurance brokers were able to provide insurance brokerage services to Kazakhstani insurance companies on a cross-border basis without restrictions.
As of 15 July 2018, a local insurance (reinsurance) company can cede insurance to a foreign reinsurer through intermediation of a foreign insurance broker only if that foreign insurance broker has a subsidiary in Kazakhstan which operates as an insurance broker on the basis of a license issued by the NBK.5 This effectively restricts a foreign broker from providing services to Kazakhstani insurance companies unless the foreign broker has a licensed broker subsidiary in Kazakhstan.
The NBK explained the need for this change by the fact that the overwhelming majority of reinsurance contracts were concluded with the participation of foreign insurance brokers (who are not Kazakhstani taxpayers). The change is intended to increase the role of local brokers in ceding insurance abroad.
Thus, a local insurance company has effectively three options to cede insurance abroad: (a) directly to a foreign reinsurer without participation of a broker; (b) with participation of a foreign broker, but only if the foreign broker has a licenced subsidiary broker in Kazakhstan; or (c) through a local broker (who in turn can engage a foreign broker).
(ii) Use of Foreign Brokers by Kazakhstani Insurance Brokers
Previously, Kazakhstani insurance brokers were allowed to engage any number of foreign insurance brokers in ceding insurance to foreign reinsurers. Using several foreign brokers is often necessary where a risk is being ceded to reinsurers located in different countries.
The Insurance Law, as amended by the Insurance Amendments, now prohibits local brokers from ceding insurance to foreign reinsurers through more than one foreign insurance broker.
This restriction appears to apply both where the local broker engages several foreign brokers (i.e., horizontally) and where the local broker engages one foreign broker who in turn engages other foreign brokers (i.e., vertically).
4. Representative Offices and Branches of Foreign Brokers
The Insurance Amendments permit foreign insurance brokers to open representative offices in Kazakhstan. No consent from the NBK is required for this. However, the representative office must submit to the NBK, within 30 business days after registration, a number of documents, including a confirmation from the financial regulator in the foreign broker's home country that the foreign broker has a valid insurance brokerage license and that the foreign regulator does not object to its opening a representative office in Kazakhstan. A representative office is not allowed to carry out insurance brokerage business.
Starting from 16 December 2020, foreign insurance brokers will be entitled to open branches in Kazakhstan, subject to obtaining consent of the NBK. They will be allowed to carry out insurance brokerage business. Local insurance companies will be permitted to cede insurance to foreign reinsurers either through a foreign broker (which has a licensed subsidiary broker in Kazakhstan) or through a Kazakhstani branch of a foreign insurance broker.
The NBK will determine qualification requirements for foreign brokers who wish to register their branches in Kazakhstan, as well as regulations regulating the insurance brokerage business of their branches.
5. Receiving Brokerage Fees from a Parent Foreign Broker
Prior to the Insurance Amendments, the Insurance Law provided that where an insurance broker provided intermediary services to a Kazakhstani insured, the brokerage fees must be paid only by that insured.6 Accordingly, the broker was not entitled to receive fees from any party other than the insured. It further provided that in the event an insurance broker and/or its local or foreign affiliate arranged both insurance and reinsurance of the same risk, the brokerage fee must be paid to the broker and/or its affiliate only by the insured.
This, however, was not in line with the business practices of many international insurance brokers. It is often the case that international brokers have global clients who pay a single fee to that international broker for servicing their business world-wide, which fee is then divided and distributed to subsidiary brokers which are located in other countries and undertake local servicing of such global clients. In such cases, the local insurance broker may not receive any fees from the local insured, but only a portion of the fees paid by the global client offshore.
The Insurance Amendments have changed this to provide that where an insurance broker and its local or foreign affiliated broker arranged insurance and/or reinsurance of the same risk, the local insurance broker and its affiliated foreign broker are allowed to determine how to distribute brokerage fees between themselves.7 Thus, it is now possible for a Kazakhstani broker (a subsidiary of an international broker) to receive brokerage fees from its parent international broker for the local broker's work in Kazakhstan.
In the event the broker has arranged only for the insurance (or reinsurance) of a risk without participation of an affiliated broker, the general rule will still apply, i.e., that the broker can receive fees only from the insured (or the cedent, as the case may be).
6. Prohibition on Participation of Insurance Brokers and Agents in State Procurements
The Insurance Amendments prohibit insurance brokers from participating in state procurements under the State Procurements Law8 for insurance contract brokerage services. The State Procurements Law applies to procurements of goods, works and services by state bodies, state-owned enterprises, legal entities in which the state owns 50% or more of the shares and their affiliated entities. Thus, those entities will need to seek insurance coverage directly from insurance companies without participation of insurance brokers. However, insurance brokers can still provide services to those entities other than intermediary services (e.g., advisory services).
The State Procurements Law does not apply to procurements by Samruk-Kazyna, national holdings, national management companies, their affiliates, the NBK and its subdivisions and subsidiaries, and certain other state-owned entities, which carry out procurements under specific regulations or their internal rules. As of the date of this Legal Alert, insurance brokers are not prohibited from participating in procurements carried out by those entities and providing insurance brokerage services to them. It is impossible, however, to rule out that those entities would also adopt internal regulations prohibiting brokers from participation in procurements for insurance brokerage services.
A stronger restriction applies to insurance agents, who are expressly prohibited from participation in procurements carried out not only under the State Procurements Law, but also in procurements carried out by state-owned entities that are not subject to the State Procurements Law, including Samruk-Kazyna and its group members, the NBK and its subdivisions and subsidiaries, and a number of other state-owned companies.
7. Minimum Capital and Shareholders Equity Requirements for Insurance Brokers
Previously, the Insurance Law and subordinated NBK regulations established the minimum amount of charter capital of an insurance broker (KZT10 million). The Insurance Amendments provide that the NBK will determine not only the minimum amount of the charter capital, but also the minimum amount of the broker's net capital (shareholders equity).
The NBK indicated that it may increase the minimum amount of the charter capital to KZT 100 million, presumably not earlier than in 2019.
8. Investment Portfolio Management
Starting from 1 October 2018, life insurance companies will be entitled to receive investment portfolio management licenses. This will allow life insurance companies to enter into insurance contracts with insureds providing for the participation of the insureds in investments, pursuant to which the insurance company will be allowed to manage assets composed of certain portions of insurance premiums received for purposes of investment.
9. Direct Insurance by Foreign Insurers(i) New Exceptions
Kazakhstani law generally prohibits Kazakhstani individuals and legal entities from obtaining insurance coverage from foreign insurers with respect to risks located in Kazakhstan.9 As a result, Kazakhstani entities have to first obtain insurance coverage from local insurers, which, in turn, may reinsure the risks with foreign reinsurers.
Starting from 16 December 2018, the Insurance Law will allow Kazakhstani entities to obtain insurance coverage directly from foreign insurers with respect to commercial aviation, launching and freight of space objects (including satellites), sea transportation (except with respect to vessels providing coastal shipping services) and risks relating to transportation of goods by ground and related liability.
This will allow local air carriers and maritime and ground cargo transportation companies to obtain insurance policies directly from foreign insurers, without the need to first engage a local insurance company.
(ii) Payment of Insurance Proceeds from Foreign Insurers
As noted in the preceding section, Kazakhstani law generally prohibits Kazakhstani residents from obtaining insurance policies from foreign insurers with respect to risks located in Kazakhstan. In order to enforce this prohibition, the Insurance Law prohibited Kazakhstani banks from (a) transferring insurance premiums from Kazakhstani legal entities and individuals to non-resident entities, and (b) transferring insurance proceeds payable under insurance policies from non-residents to Kazakhstani legal entities and individuals. The restriction made it impossible for Kazakhstani companies and individuals to receive insurance proceeds from foreign insurers under life and other insurance policies via Kazakhstani banks.
This provision has been amended by the Insurance Amendments so that local banks are now permitted to transfer insurance proceeds from foreign insurers to Kazakhstani residents. Thus, even if the insurance policy was obtained from a foreign insurer in breach of the Insurance Law, local insureds will nevertheless be able to receive insurance proceeds thereunder.
Local banks are still prohibited from transferring insurance premiums to foreign insurers, which is not in line with the right of certain local companies (air carriers, maritime and ground cargo transportation companies) to seek insurance coverage directly from foreign insurers, as discussed in the preceding section.
10. Separate Licensing of Insurance and Reinsurance
Currently, the NBK issues licenses permitting the carrying out of "insurance activity," which includes both insurance and reinsurance on specific classes of insurance. Starting from 1 January 2019, the Insurance Law will provide for two separate licenses, one permitting carrying out insurance business and the other permitting carrying out reinsurance business.
Similarly, the Insurance Law currently provides for a single insurance brokerage license which allows an insurance broker to arrange both insurance and reinsurance policies for its clients. Starting from 1 January 2019, there will be two separate types of insurance brokerage of licenses: (a) for insurance brokerage and (b) reinsurance brokerage. An insurance broker can obtain one or both types of licenses.
11. Concluding Insurance Contracts Electronically
Starting from 1 January 2019, insurance contracts may be concluded electronically. The Insurance Law and a number of laws relating to mandatory insurance were amended to provide for the general mechanism for entering into insurance contracts electronically, while more detailed requirements and procedures will be adopted by the NBK before the amendments enter into force.
1 Law "On Insurance Activity" dated 18 December 2000 (the Insurance Law).
2 Law "On Making Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Insurance and Insurance Activities, Securities Market" dated 2 July 2018 and Law "On Making Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan Relating to Currency Regulation and Currency Control, Risk-Oriented Supervision over Activities of Financial Organizations, Protection of Rights of Consumers of Financial Services and Improving the Activity of the National Bank of the Republic of Kazakhstan" dated 2 July 2018.
3 Articles 36 and 77 of Law "On Advocate Activities and Legal Support" dated 5 July 2018, which Articles become effective from 1 January 2020. For purposes of this Law, "legal counsel" is a member of a local bar association.
4 Law "On Tourism Activities in the Republic of Kazakhstan" dated 13 June 2001 (the "Tourism Law").
5 Article 9.9 of the Insurance Law.
6 Article 17.7 of the Insurance Law.
7 Article 17.8 of the Insurance Law.
8 Law "On State Procurements" dated 4 December 2015 (the "State Procurements Law").
9 Article 5-1.1 of the Insurance Law.