IMPRACTICAL OBLIGATION

Compulsory Motor Third-Party Liability (CMTPL) insurance is one of the most popular insurance products in Azerbaijan, attracting the attention of almost all insurance companies in the country.

As of today, 13 of 21 local insurance companies have the right to provide CMTPL services. Statistically, the product is one of the top three products in terms of collected insurance premiums. Last year, the share of CMTPL reached 49.8% of all premiums on compulsory insurance and 13.1% of total company premiums.

Market saturation

Statistics also show how limited the CMTPL market in Azerbaijan. In 2017, the growth of premiums amounted to 14.5%, while in 2018, the growth rate decreased to 3.1%. But insurance payments show another dynamic: the growth rates were 8.4% and 19.5 in 2017 and 2018, respectively.

What do these numbers mean? They mean that the market begins to saturate, increasing the unprofitability of this product for insurance companies.

Everything would be fine if the tendency was not long lasting - the unprofitability of CMTPL has grown continuously over the past five years. If in 2014 it reached 50-60%, now it reaches almost 90-100%, and in some companies even 120%. Certainly, insurance companies are not happy with the situation, and they have already begun sending alarming signals.

If we look at the reasons for such growth, it becomes obvious that commissions paid to insurance agents are rather high. Although according to the legislation, the amount of commissions should not exceed 15%, many agents get 25% and sometimes 35% commission. That is why insurance agents do not hesitate calling several times a day their clients a few weeks before the expiration of contract's term advertising the benefits of obtaining a CMTPL policy from insurance companies they represent. Judging by the feedback of clients, this advertisement campaign often has opposite effect, causing hostility not only to a specific insurer, but also to a product so necessary for all car owners.

The second reason, as mentioned above, is the saturation of the insurance market. The number of new insurance contracts reduces gradually, since the product has already covered almost the entire country, and new insurance policies are issued only to owners of new cars.

There is another unpleasant moment for insurers: companies providing CMTPL services transfer a certain part of their fees to the Bureau of Compulsory Insurance and Financial Market Supervision Chamber as membership fees. Currently, contributions are 5% and 0.5%, respectively. But as of next year, according to changes in legislation, the amount of transfers on CMTPL premiums to the bureau will increase to 10%.

Divide and collect

Association of Insurance Companies of Azerbaijan (AICA) has already seriously thought about the issue of reducing unprofitability. There are several possible solutions to the problem. For example, it is possible to increase tariffs and reduce commissions paid to insurance agents, or even completely refuse their services.

Last year, AICA proposed to the regulator (chamber) a revision of CMTPL tariffs, not only in terms of raising but differentiating them.

According to the then head of AICA, Mustafa Abbasbeyli, CMTPL insurance is more unprofitable in large cities than in the rest of the country. It would be more prudent therefore to introduce different tariffs. AICA offered the regulator to differentiate tariffs through applying the system used in compulsory real estate insurance, where insured real estate is divided along territorial lines of Baku, Ganja, Sumgayit and Nakhchivan, as well as real estate in other cities. The same was proposed for CMTPL: to raise tariffs in Baku by 20%, in Ganja, Sumgayit and Nakhchivan - by 10%, and to leave the same rate in other places.

In this case, the basic tariff in Baku would be ₼60, and in Ganja, Sumgayit and Nakhchivan – ₼55. In other regions, it would have remained at the current level of ₼50. But, unfortunately, this proposal did not receive any specific response from the chamber.

It is a shame, as the proposed solution seems a good one. The differentiated tariff approach is actively used, for example, in Russia. At the same time, Russia applies differentiation not only by territory, but also by driver's age, individuals and legal entities, and a separate tariff is applied for taxi drivers. Therefore, it would be better to analyse unprofitability by various categories of persons now and take appropriate measures.

Insurance companies are going to seriously deal with insurance agents. A few months ago, two options were considered - reducing commission payments to agents or completely abandon their services, as has already been done in Georgia. But now insurers seem to have decided on the first option.

According to the head of the association Azer Aliyev, from July 1, AICA plans together with FMSC to tighten control over the payment of commissions and ensure that it does not exceed 15% established by law. In the future, according to A.Aliyev, it is planned to reduce the size of commission payments to 5%.

Solutions

What else can be done? To answer this question we need to look at insurance markets of other countries. In today's increasingly digitalised world, Azerbaijani insurance companies should not lag behind the trend. Many companies already offer some types of insurance products online, but the scope of these products should be expanded. The growth of online sales in the future can significantly reduce the costs of companies on the agent base, which is important in terms of reducing losses.

Another possible solution would be the introduction of franchises, same as in voluntary motor insurance (hull insurance), but this most likely will not significantly affect the profitability, since franchise volumes will be very small.

It is also interesting to introduce, instead of a single tariff, a tariff corridor, within which insurance companies will be able to set the cost of CMTPL insurance policy. This method has its advantages - it will increase competition in the market. Yes, the cost of the policy may increase, but this step will allow some insurance companies to assess the risks prudently.

There is also an option to make motor third party liability insurance voluntary. There is no serious reason to assume that in this case it will cease to be in demand. The presence of a large line of insurance products that are successfully in the interests of both the insured and the insurer operate in the market indicates that the CMTPL can survive on market conditions. Most consumers recognize the need and importance of this insurance tool, understanding that CMTPL protects them from liability to third parties in the event of an accident. In addition, the risk of getting into an accident is one of the most probable risks in insurance.

Regulation of CMTPL only through market methods is a global trend. If currently tariffs are set by the state, insurance companies, in fact, cannot apply preferential tariffs for trouble-free drivers and set higher rates for unreliable car owners. With a market system, this will be possible. Azerbaijan already applies the Bonus Malus system, which automatically makes discounts to drivers who have not had accidents during a year. But work in this direction needs to be continued. Only then we will be able to see how, in a competitive struggle, insurance companies will start offering us the most interesting options and conditions for compulsory motor CMTPL insurance. The only condition that should remain common to all market participants is the limits of payments.

So, what should owners of cars expect in the near future? Firstly, there may well be an increase in tariffs for CMTPL. Reduction of commission payments to insurance agents will definitely reduce the CTPL unprofitability for some time, but saturation of the market forces the regulator to think about revising the tariff scale upwards. As a best-case scenario, we can talk about the differentiation of tariffs. In fact, tariffs for CMTPL were last changed in 2011, after which the market faced two devaluations of the national currency, rising prices for cars, their parts and components, which also led to increased costs.

Reducing agent commissions will finally solve the problem of annoying calls to potential customers. “As a result of high commissions, insurance agents have almost a separate telemarketing department that deals with calls. Decrease in their income will make the maintenance of a whole staff of operators unprofitable, respectively, there will be fewer calls," Azer Aliyev believes.

In a word, one of the most popular insurance products in Azerbaijan will soon be reformed. The main thing is to find a compromise version of reforms that would suit both the regulator and insurance companies, and especially their clients.