BENEFITS AND CHALLENGES OF INSURANCE

The ongoing hype in the insurance sector of Azerbaijan, which unexpectedly emerged at the end of last year after the announcement of the alleged "period of penalties" for people who did not insure their property, significantly revived the market. As the head of the Central Bank Elman Rustamov noted, the main goal for 2020 is to increase the performance of the entire industry and ensure that companies cover the risks of both business and the public. In other words, the government has instructed the companies to solve problems on their own instead of expecting solutions from the state.

Therefore, the use of existing potential in insuring real estate property could seriously improve the profits of insurance companies.

By the way, only 12 insurance companies in Azerbaijan are licenced to provide compulsory real estate insurance services, but only 4-5 of them hold a portfolio of premiums.

We discussed the low public interest in compulsory insurance and the main reasons for the poor development of the sector with the head of the Association of Insurers of Azerbaijan (ASA), Azer ALIYEV. 

"The 2011 law on compulsory insurance prescribes penalties for owners of uninsured property. But hardly anyone would remember the existence of this provision until recently. It also turned out that there is no special mechanism for levying these penalties. Do not you think that the time has come to improve the statutory base?"

"Any law is sort of a living organism that must constantly change and get updated to be in line with the new challenges of the society and industry it is applied in. Ten years ago the public society in Azerbaijan, as well as its demands were different than now. The 2011 Law on compulsory insurance met the requirements of that time. Unfortunately, no serious improvements have been made with respect to this law since then. Therefore, the answer to your question will be: 'Yes, we need to change many things.'

"Many experts indicate the need to expand insurance risk coverage, to add third party liabilities insurance, and to switch to electronic insurance policies. By the way, the existing law also covers the Compulsory Third Party Insurance (CTP), which has many drawbacks with a very high rate of loss. Insurance companies have to sell it without making any profit from the sales. Moreover, in its present form, CTP sometimes becomes the main reason forming a negative image of insurers, whereas initially all types of compulsory insurance had been developed to promote the insurance culture among the population.

"With the current situation and international practice in mind, we understand that innovations in the statutory base are inevitable. Azerbaijan Insurers Association (ASA) has already prepared and submitted a package of proposals to the relevant authorities. Our recommendations are related not only to the Law on Compulsory Insurance, but also affect the Civil and Tax Codes in insurance matters."

"The law is definitely outdated and needs to be updated. But unlike CTP, property insurance somehow did not work well in Azerbaijan. Is it because of the absence of a proper penalty mechanism?"

"I think the majority of population is not ready to manage risks such as fires, natural disasters, damages caused by third parties independently, on a voluntary basis... Unfortunately, we still do not understand how important insurance is in our daily lives. After all, it is the insurance that helps to minimise financial losses. It is quite possible that for insurance on a voluntary basis, one needs to have a certain level of education or financial culture.

"Unfortunately, the purchase of an insurance policy is not in the list of 'essential goods' for a typical consumer. That is why the compulsory implementation of certain insurance products comes to the rescue. To make them truly 'compulsory', penalty mechanism is a must."

"So, you think that penalties should be applied…"

"Definitely. We just need to develop and implement a more appropriate and most objective way of collecting penalty fees. For example, in Turkey, the owner of property without compulsory real estate insurance cannot have gas and electric power in that property. In Azerbaijan, it is impossible to obtain a document on the right of ownership of property without insuring it first.

"Although it will be much better both for participants and customers of the insurance market if they purchase insurance products deliberately, without fear of penalties. That is why and upon the instruction of President Aliyev, a special program will be developed and implemented to promote insurance among the population and businessmen.

"Another challenging issue is the issue of public confidence in insurance companies. We understand that the level of trust to insurance companies is not satisfactory. This year we will focus on disseminating information in the media about real stories with insured people who received insurance compensation.

"Our main goal is to let the people know that the compulsory insurance is in their interest. Paying only ₼50 per year, they receive insurance coverage against a number of risks. By the way, maximum insurance coverage for real estate property in Baku is ₼25,000, in Ganja, Sumgait and Nakhchivan - ₼20,000, in other settlements - ₼15,000."

"To what extent can we blame insurance companies for the weak public interest in this sector? Is this the result of frequent negative consequences of communication between the victims and insurance companies?"

"We know and admit that there are discontent people. People are very demanding of the actions of other people, government agencies, and the private sector. This is OK. But when you start investigating the case, it becomes clear that the problem is not that the insurers refused to pay, but that the client’s expectations did not coincide with a real assessment of the specific damage and the compensation.

"For example, according to the insurance policy for one of the popular and mostly criticised types of insurance, CTP, it covers the damage caused by the owner of the vehicle as a result of his driving to property or health of third parties. In the early years of the introduction of this product, we had customers demanding the insurance company to repair their own cars, although they were to blame for accidents which brought them to us. After clarifications that they actually paid only for their responsibility before the third parties, we do not have practically such claims any more. But they still require us, say, to replace the original old part on the car with a new one. In fact, the responsibility of insurance company is to ensure the financial condition in which the insured was before the incident, not to improve it. I repeat once again: insurance is not a way of enrichment, but a tool of compensation for the damage caused.

"Please do not get me wrong, as if I am trying to whitewash the insurance companies with these examples and deny the shortcomings in our work. There are companies or their individual employees whose activities are far from ideal. But it is unfair to claim that the insurance business is not working and developing in Azerbaijan only because of these individuals or companies.

"In 2018-19, the volume of CTP premiums reached more than ₼100 million with about ₼75 million paid to the insured individuals, excluding the costs of doing business, discounts and bonuses to customers. As I said, insurance companies continue to fulfil their obligations to customers despite the loss incurred from CTP (110-120%).

"You mentioned an impressive amount of insurance coverage for real estate property. Can people be sure that insurance companies are able to cover their losses without facing bureaucratic difficulties and delays in this process?"

"Of course! If the insurance process is nationwide, then real estate insurance fees can cover all damages in full. As for global cataclysms, state support to insurance companies is required, just like in other countries. But even in this case, insurance companies take a certain part of the compensation for damage.

"As for bureaucracy, a lot depends on the professionalism and quality of work of the insurance company. There is competition in the market today, when each company is trying to attract customers in different ways, which is a perfectly normal procedure.

"How can customers make the right choice? It is enough to have at least some financial knowledge literacy, as company indicators are regularly published in the press and the Web, with reviews for each insurance company. Read, compare and draw conclusions."

"So where should we call if the apartment was flooded by neighbours?"

"Call the insurance company in which the property was insured. Any time of the day. Experts will come, assess the damage and begin the process of compensation. If all the documents are in order, the compensation will be on your bank account maximum within a week."

"Do you think the year of 2020 will be a landmark year for the insurance sector of Azerbaijan?"

"As I said, the existing legislative base requires changes, which will definitely take place soon or later. Azerbaijan's insurance sector has a huge potential. According to our estimates, this is not less than ₼1 billion. After all, insurance is a very important tool not only for ensuring the social and financial security of the population, but it is also one of the best sources of cheap money for the country's economy. The collected funds can be reinvested through various investment funds and banks, thus ensuring the development of various sectors of the economy.

"I am sure that the challenges of 2020, the transfer of supervisory functions to the Central Bank of the country will initiate a new stage in the development of the insurance sector. This will also affect compulsory types of insurance."