Author: Anvar MAMMADOV
Over the past few years, insurance market of Azerbaijan has shown steady growth. But there are still problems in this sector. At the end of June, Baku hosted another international insurance forum, where experts tried to understand the growth factors of the sector and the elements impeding the growth to understand how quickly it was possible to reach the existing market potential.
After two devaluations in 2015, the insurance market also faced certain difficulties. But this did not affect it as strongly as the banking sectors.
At the end of 2015, the market decreased by 3.2%. In the following year, the growth was about 10%. In 2017, growth reached 14%, and the market, overcoming the psychological threshold of ₼500 million of insurance fees, met the expectations. Last year, insurance fees exceeded ₼700 million, which is indicative of stable growth.
A more detailed analysis, however, shows that this visible growth was achieved mainly due to accumulative and mandatory types of insurance, which is considered an indicator of stagnation. Mandatory types of insurance are very limited, as after full coverage of the market they will grow only at a slow pace. However, apart from mandatory types of insurance in Azerbaijan, there is mandatory real estate insurance, where penetration is quite low, but more on that later.
In general, despite growth rates, the insurance market still does not show the expected potential. The share of the insurance market in the GDP structure of Azerbaijan is only 0.91%, which is also not a very good indicator. By the way, insurance fees also began to decline - in five months they reached ₼319.3 million, which is 9% less compared to the same period of last year. The amount of payments of insurance companies for five months also decreased - by 3.8% reaching ₼93.8 million. The regulator explains this by a reduction in accumulative insurance fees, which is caused by a partial limitation of funds allocated to this product.
As paradoxical as it may sound, the main problems of Azerbaijan's insurance market are insurance companies themselves. Some of them, lost public confidence by dishonest and incorrect actions in the market. Another problem, of course, is low financial literacy. These problems are global, and their solution will take several more years, and maybe even several decades. Trust and knowledge in the field of insurance come over the years, the development of an insurance culture is a rather complicated question and depends on not only insurance companies and the regulator.
On the other hand, there are problems that can be solved in the short term. The strong dependence of market participants on fees for a product such as life insurance already creates a real problem. Limitation of funds that the insured individuals could have channel to savings insurance resulted in the decline of insurance fees and premiums.
What can be done in this situation? Obviously, it is necessary to develop other types of insurance, such as mandatory real estate insurance. As noted above, the dependence on mandatory types of insurance products is not an ultimate solution but to accelerate the growth of indicators it is much easier to develop products that already exist in the country than to create new ones. This type of insurance is used in Azerbaijan by a rather small percentage of population, even though it is mandatory. The reasons are the same as those that existed with the CMTPL in the days when the policy cost only 10 manats — low level of awareness of potential customers, lack of an effective control mechanism and insignificant amount of penalties. As a result, only a few people insure their property today.
Another important problem of the sector remains high unprofitability on CMTPL insurance, which is growing every day. Old tariffs that have not been updated for a long time, high agency commissions, etc. In short, this product needs to be reformed.
In parallel, it is important to create new products, again mandatory. They have always been used as a good trigger for the development of voluntary insurance products - after the population gets used to the insurance mechanism, it more readily goes to the development of insurance portfolio.
For a long time, it was believed that the Financial Markets Supervision Chamber (FMSC) pays all attention to the banking sector, thereby leaving insurance behind. But the past insurance forum showed that the regulator is actively working in this direction. Recently, the chamber approved the rules of temporary administration, as well as drawing up a recovery plan in insurance companies. This shows that the regulator decided to tackle market participants who are far behind in fulfilling the basic requirements.
In the coming days, the Accident Management System will be fully operational in the country, allowing to automate the regulation of insurance claims for mandatory insurance types. The system presented by the Mandatory Insurance Bureau will greatly facilitate the actions of insured individuals in case of insurance claims, and will also minimize contact between them and officials in document processing.
For example, the insured individual will have access to a special mobile application that allows registering road accidents online, inform insurance companies, send them a photo of the incident and fill out an application form to receive insurance compensation. In addition, the system is fully integrated with the system of the Ministry of Internal Affairs, which makes it possible to solve another problem: to automate the process of issuing Form 4, necessary for insurance accidents - now it will take up to ten working days only.
This means the completion of shift to electronic CMTPL operations and significant progress in other mandatory types of insurance.
In addition, the bureau continues to work with the State Committee on Property Issues, as well as with the Ministry of Labour and Social Protection to improve the situation with mandatory real estate insurance and disability insurance due to occupational diseases and accidents at work.
Another good news is that the regulator and insurers have begun joint preparation of proposals for the revision of tariffs for the main types of insurance, since they do not meet the requirements of today.
New types of insurance were not left aside. The regulator decided to introduce as many as four new types of insurance. First, it is the liability insurance of doctors and construction workers. In addition, the regulator is interested in introducing mandatory insurance of liability of insurance agents and mandatory insurance of cargo against downtime in customs warehouses during export-import operations.
Human factor should also be considered one of the most important in the insurance business. To achieve greater efficiency, the regulator considers it necessary to apply a differentiated approach in relation to insurance agents. This is relevant for the establishing of both a cluster of insurance intermediaries and the institution of independent experts.
But there is still a problem of assessing the risk for each insured individually, which boils down to the absence of the register of the insured — sort of a centralized credit register, which stores information about each insured and his insurance incidents to facilitate the work of insurance agents in calculating risks and achieve a more personalized approach to customers. Representatives of the chamber noted that the model for the establishment of a similar registry in the insurance industry has already been chosen, technical conditions have been defined. This is of great importance for managing the risks of insurance companies.
All these actions indicate that the insurance sector is strictly controlled by the regulator, and we should expect fundamental changes. The measures taken so far are mostly quantitative but we can hope that the transition to a qualitative stage will take a little time.