Establishing Mandatory Disaster Risk Insurance in Kazakhstan

The Ministry of Emergency Situations of Kazakhstan reported that between 2018 and 2021, the country experienced 60,858 technogenic events and 7,711 natural events—some of which have led to the declaration of emergency, which happened in the spring of 2024. 

Earthquakes pose a significant natural hazard risk to the country, with a more than 20% chance of potentially damaging seismic activity occurring within the next 50 years. The ADB Country Risk Profile for Kazakhstan estimates the average annual loss due to earthquakes at $57.6 million. The highest risk is concentrated in the Almaty area, with the highest average annual loss at $46.8 million, followed by Turkestan and Zhambyl regions, with losses of $8.9 million and $1.6 million, respectively.

However, earthquake insurance penetration in Kazakhstan remains very low. Very few people add earthquake insurance as a supplementary coverage to their property insurance policies offered by the insurance sector.

Despite frequent earthquakes, earthquake insurance penetration remains limited with less than 5% of residential dwellings covered. Among the factors attributed to the low utilization of earthquake insurance include low awareness of such insurance, affordability concerns, and people’s perception that major damaging earthquakes are infrequent events.

Among the learnings from Kazakhstan’s study of possible mechanisms to undertake, it found that the structure and availability of earthquake insurance varies significantly across countries. Different insurance schemes have been established depending on a country’s seismic risk, economic conditions, and the maturity of its insurance market.

In countries with developed private insurance sectors and capital markets, but with extremely high earthquake risk exposure, governments partner with the insurance sector and capital markets to provide solutions as in the case of California and Japan. In countries with a low insurance penetration, government-led or exclusive government solutions are in place. Meanwhile, countries with high insurance penetration but are not at high earthquake risk exposure have exclusive private solutions, like those in the European Union.

When designing a successful earthquake insurance scheme, various challenges facing a country need to be addressed to gain acceptance. International insurance models in Spain, Turkey, Indonesia, and Japan have proven to be beneficial. 

Disaster risk financing strategy

The effect of climate change together with the rapidly growing economy and urbanization has made increasingly urgent the need to address the financial impact associated with devastations caused by natural hazards.

An effective disaster risk financing strategy uses a risk-layer approach to determine which financial instruments should be used. However, financial resilience begins with risk reduction to reduce losses.

Since risk cannot be eliminated, financial instruments need to be readily available to ensure sufficient financing to support timely relief, early recovery, and reconstruction costs. These instruments are ideally applied using a risk-layering approach, breaking risk down according to the frequency of occurrence of different types of hazard events, epidemics, and pandemics of varying severity and associated levels of loss and designing bundles of instruments targeting differentiated layers of risk.

Governments selects the most appropriate instruments for each layer of risk based on a range of factors, including the scale of funding needed, the speed of disbursement required, and the relative cost-effectiveness of alternative instruments for specific layers of risk.

Disaster risk financing instruments for residual risk begin with risk retention instruments for more frequent, less damaging events (Figure 1). These include annual contingency budget allocations, reserves, and contingent grant and credit arrangements, all of which are put in place before an event strikes. After an event, governments can reallocate budgets, increase borrowing, and raise taxes to provide additional resources.

Figure 1: Layered Approach to Disaster Risk Financing

Source: The Enabling Environment for Disaster Risk Financing in Sri Lanka: Country Diagnostics Assessment.

Market-based risk transfer solutions provide cost-efficient financing for medium-level risks, generating higher levels of loss but less frequently. These include insurance and insurance-linked securities, such as catastrophe bonds—taken in anticipation of potential disasters, epidemics, or pandemics. Following major events, governments also appeal to the international community for assistance.

Disaster risk financing is not only a government responsibility. The private sector and individuals should be encouraged and enabled to contribute to addressing this important and difficult challenge. Decisions on risk reduction, retention, and transfer should be made within the structure of this broader framework, selecting appropriate instruments for each layer of risk.

One of the key recommendations of a government-requested study is the creation of a dedicated government-run disaster risk insurance company, rather than relying on the private insurance sector. This will be complemented by the introduction of a mandatory universal disaster risk insurance to cover earthquakes, floods, landslides, and wildfires. This new approach aims to enhance accessibility and affordability, thereby increasing coverage and resilience against disasters. Together, these will help address the issue of limited demand for disaster risk insurance in Kazakhstan. The following points need to be taken into consideration when setting up the mandatory disaster risk insurance system: 

• The disaster risk insurance company’s capitalization should be adequate to assume disaster risks and operations according to international solvency requirements.
• Accumulated funds should be used to increase the level of the claim benefits and/or to reduce government financial costs.
• Premium rate should be simple, based on risk zones using three-levels of riskiness following actuarial calculations and established disaster risk models or internationally developed risk level assessment tools.
• Premium and benefit amounts may be linked to the paid property tax or the minimum tax collected in the district for social dwellings with lower and upper limits or to the invoices of the utility services provided to the property owner.
• Claim benefit should depend only on two levels of damage with a simple assessment questionnaire so it could be filled out by emergency responders after a few hours of training.
• The disaster risk insurance company should have an agreement to have access, when needed, to claims settlement experts to oversee and train emergency responders.

The proposed mandatory universal disaster risk insurance should be applied to registered, tax-paying dwellings and the housing of registered but tax-exempt low-income populations. The informal sector, which is not captured by the government in any form, will remain excluded from the scheme. When introducing mandatory disaster risk insurance, it is crucial to address the perception that this is merely another tax imposed by the government. The government needs to clearly communicate the benefits of disaster risk insurance, emphasizing how it protects homeowners from financial losses due to natural hazards. Additionally, transparent information about the insurance, including costs, coverage, and claims processes, should be made easily accessible and understandable.

Similar to the case of Kazakhstan’s car insurance market, voluntary disaster risk insurance would complement the mandatory insurance protection system. Mandatory insurance offered by the newly created disaster risk insurance company will promote awareness for the need for additional coverage beyond the mandatory level of protection. Thus, the mandatory disaster insurance law will not only protect the wider segment of the population, but will also increase the uptake of voluntary disaster risk insurance.

The government needs to guarantee the payment of claims beyond the capacity of the disaster risk insurance company. In the initial years, the financial capacity of the insurance company will only allow for a basic level of protection so government subsidies for claims will likely be needed for the first years. When the scheme has matured—after about 10 years of operation—the disaster risk insurance company will be able to cover emergency and recovery costs, as well as a percentage of reconstruction costs. Government financial support for reconstruction costs would be available for the low-income population. However, to avoid moral hazard, this support might need to be limited to a certain percentage (e.g., 90% of the total cost). Additionally, government budget should be protected with appropriate disaster risk financing instruments, both ex-post and ex-ante, including reinsurance policy and catastrophe bonds.

The disaster risk insurance company will become the center of excellence for disaster risk insurance in Kazakhstan. With a sole focus on disaster risk, the company will be tasked with continuously developing expertise in this field, accumulating disaster risk data, developing models, and creating public awareness. This will mirror the success of the Turkish Catastrophe Insurance Pool and Maipark, Indonesia’s disaster risk insurance model.

Asian Development Bank. 2019. The Enabling Environment for Disaster Risk Financing in Nepal: Country Diagnostics Assessment.

CIMA Research Foundation, Asian Disaster Preparedness Center, United Nations Office for Disaster Risk Reduction and the European Union. Resilient Central Asia: Country Disaster Risk Profile of the Republic of Kazakhstan.

Government of Kazakhstan and ADB: Knowledge and Experience Exchange Program.

Ministry of Emergency Situations of the Republic Kazakhstan.