VOLUNTARY OBLIGATION

In the last ten years, Azerbaijan's insurance market has grown four-fold, while the insurance premiums are still twice lower than the existing potential. However, despite the positive value dynamics, the role and significance of the insurance industry in the national economy has not changed even despite the economic, social and political transformations. The share of insurance in Azerbaijan's GDP does not exceed even 1%, whereas in European countries it is 11-24%. Azerbaijan still lags far behind the Organisation for Economic Co-operation and Development (OECD) average of 10%.

First steps

Reduced demand for insurance services from households and businesses inevitably increases the social responsibility of the state, hence putting an extra burden on the state budget in the event of anthropogenic or natural disasters. The key to real changes in this case was the introduction of compulsory types of insurance thanks to the adoption of the respective law at the end of 2011.

Notably, the development of the insurance market through the introduction of compulsory insurance is not a new practice. European countries have applied it much earlier. For example, there are about 300 types of compulsory insurance in Spain (including exotic ones like an insurance of bullfighters or owners of dangerous breeds of dogs); in France, Poland, and Germany this indicator is about 100, 40, and 30, respectively. In Azerbaijan, there are no more than seven types of compulsory insurance, of which five are classical types based on the fees of the general insurance market, including state personal accident insurance for military personnel.

The first step towards the introduction of compulsory insurance in Azerbaijan was Compulsory Motor Third Party Liability (CMTPL), which has solved many problems on the roads. Introduction of CMTPL provided the drivers a guarantee of compensation and improved the road safety in general. Today almost everyone would agree that the introduction of CMTPL was a positive factor for the development of the insurance culture in Azerbaijan. CMTPL has also boosted the development of other types of insurance, including Comprehensive and Collision (CNC) and home insurance and, as well as the development of insurance companies, including the efficiency of their work, technology and products.

Unexploited potential

CEO of the Central Bank of Azerbaijan (CBA) Ziya Aliyev believes that 97% of cars are not insured against property risks, which is not a good sign. "According to statistical data, there are 1.2 million cars in operation in Azerbaijan, but only a tine fraction of them, 36,000, have voluntary insurance, which is about 3% of all the cars,” Aliyev said.

He also complained about the situation in the compulsory real estate insurance market: only 100,000 apartments and residential buildings (10%) of more than 1 million residential properties in the country are insured. In the business sector, property insurance covers only 30% of properties. These indicators show that there is a large percentage of property risk and that insurance for these risks needs to be increased.

Therefore, Mr. Aliyev believes that there is considerable potential, in particular in property insurance, including compulsory insurance of real estate, vehicles and business risks.

According to Azer Aliyev, Chairman of the Supervisory Board of the Azerbaijan Insurers' Association (ASA), the most popular and the most unprofitable type of compulsory insurance in the market is CMTPL. Unfortunately, it is impossible to solve this problem quickly, but the relevant authorities are working hard to find the best way forward.

There have been no changes to the insurance tariffs since 2011 after the adoption of the Law on Compulsory Insurance. The main reason was the frequent change of the supervisory body, says Azer Aliyev. "The law was adopted when insurance activities in Azerbaijan were supervised by the Ministry of Finance. In 2015-2016, these functions were handed over to the Financial Supervision Chamber, and later in 2019 to CBA. With each new replacement of the supervisory body, it took time to understand the situation in the insurance market, which took at least a year, in some cases even more. In the meanwhile, the situation with some types of insurance was getting worse," Aliyev explained.

Tariffs, he said, should be changed definitely. "But we need to understand how we can do it in the best way possible. It would be wrong and unfair to raise rates for everyone. Fair-play has always been a main principle in the insurance industry. For example, it is fair to encourage the one not involved in an accident with a discounted insurance policy, while increasing the tariff of an insured individual who is frequently involved in traffic accidents. I think this is the direction we need to consider the perspective changes.

“In many countries the approach is almost the same. They try to control the behaviour of drivers by increasing insurance premiums, through surcharges on various coefficients. As this issue is still under discussion, it is difficult to say exactly how much the premium will increase," added the head of ASA.

But he believes that CMTPL is now the biggest problem of the insurance market in Azerbaijan, while the other insurance types do not need changes.

Today some insurance companies refuse to insure the applicants, explaining this by technical reasons, when in fact they expect the rates will be increased. And since the drivers with no CMTPL insurance are fined, the situation is getting worse. The regulator, on the other hand, claims that it is ready to punish the insuring companies should they do so.

The Bureau of Compulsory Insurance (ISB) made it clear: the insurance sector in Azerbaijan plans to introduce a risk-based method of calculating insurance premiums.

This method is widely used around the world. For example, the date of manufacture of the vehicle, its age, driver’s experience or statistical indicators on the location of the accident will be taken into account when calculating the insurance premium. In other words, the introduction of a risk-based method of premium calculation can contribute both to a fair premium charge and to a positive trend in the collection of general insurance premiums, ISB believes.

Table Insurance premiums for light vehicles:

Amount (in manats) Engine capacity

For individuals:

₼50 - 50 cc to 1500 cc

₼75 - 1501 cc to 2000 cc

₼100 - 2001 cc - 2500 cc

₼125 - 2501 cc to 3000 cc

₼150 - 3001 cc to 3500 cc

₼175 - 3501 cc to 4000 cc

For legal entities:

₼60 - 50 cc to 1500 cc

₼90 - 1501 cc to 2000 cc

₼120 - 2001 cc to 2500 cc

₼150 - 2501 cc to 3000 cc

₼180 - 3001 cc to 3500 cc

₼210 - 3501 cc to 4000 cc

Increased control

In general, the head of ASA believes that the insurance market of Azerbaijan is developing, the volume of premiums is growing and the population has a better understanding of this type of financial service. CBA, ASA and ISB are actively working to improve and raise the level of service and awareness among the population.

The works to promote insurance awareness among the population has been actively conducted for more than a year. Since the transfer of supervisory functions to CBA, a lot of work has been done to monitor and analyse the compliance of insurance market participants with prudential norms and to develop mechanisms to update the regulations governing insurance relationships.

However, it is important that outreach activities are carried out regularly, not after a specific natural disaster or emergency. Like the explosion that took place in a nightclub in Baku on April 3, 2022 and the damage it caused to the health and property of others. The incident made urgent the issue of introducing compulsory third-party insurance on the operation of immovable property.

Emil Aghabaghirov, expert of ASA, said that this type of insurance covers only non-residential premises. It covers losses of ₼100,000 for fire, explosion, flood and other events related to the operation of non-residential facilities. Of this amount, ₼50,000 is payable for damage to health and ₼50,000 for damages to property. But the fee for damage to the health of a single person is a maximum of ₼5,000. So, if five people are injured, they will be paid ₼25,000, not ₼50,000. But there is no limit on payments for property damages.

According to Aghabaghirov, those who want to insure civil liabilities associated with the operation of a real-estate should pay ₼30-120. The specific amount depends on the type of activity of the real-estate. For example, because of high risks at petrol stations the insurance fees are high. But a petty-trade facility or the one providing legal or accounting services has lower premiums.

According to the Law on Compulsory Insurance, only legal entities can take advantage of this type of insurance.

Expert Ilkin Ibrahimov said that if companies owning such facilities do not purchase this type of insurance, they are liable under the Code of Administrative Offences and pay a fine. The process is monitored by the Ministry of Emergency Situations and its relevant bodies.

Although public liability insurance is compulsory, some insurance companies offer voluntary insurance, as it is then also available to private individuals. For example, if your neighbour floods your apartment, this type of insurance guarantees compensation to you for this damage.

Let’s wait for another year

As for expectations regarding the development of the insurance market, the head of ASA is very optimistic: "Today we see quality work and a full understanding of all participants in the insurance market. We need to wait a little, and I am sure that in a year after the implementation of the expected reforms the insurance market in Azerbaijan will become both larger in terms of collected premiums and much better in terms of popular services," Azer Aliyev said.

In particular, radical changes are planned to the legislation on CMTPL insurance. The most significant will be the introduction of a mechanism for the direct settlement of insurance claims.

For example, drivers injured in road accidents will no more need to claim compensation from the insurance company of the person responsible for the accident and who has a CMTPL policy, but from their own insurance company, who will then claim the paid amount as a subrogation.

All these measures will eliminate the negative phenomena in this area, which cause dissatisfaction among vehicle owners, such as delays in assessing damage, attempts to underestimate the amount of damage, etc. In the new realities, the insurance companies will be directly interested in the quality and speed of customer services.

These changes will increase confidence in compulsory insurance and popularise voluntary insurance, especially CNC insurance, since the CMTPL insurance is limited by law.

There is no doubt that compulsory insurance will continue to drive the development of the insurance market in Azerbaijan. More new types will be introduced, especially in the area of insurance of various types of third-party liabilities.

However, the strategies of market leaders should not be focused on forcing the use of insurance services, but at studying and meeting the current needs of policyholders. This is a more difficult and costly development path, but it is the only one possible. After all, the key reasons why the public interest in insurance is low, while potential consumers of insurance services are unstable in terms of solvency is the mistrust in the insurance companies caused by the unwillingness of some of them to consider the interests of their customers. Should this approach continue, the sale of insurance services threatens to create new contradictions in the insurance market.

CBA considers digitalisation as a key priority in the development of the insurance business, which will help to increase the efficiency of services and respond quickly in the event of insured events.

In short, Azerbaijan's insurance market follows a path of fundamental changes. In light of the recovery of economic activity in Azerbaijan in the post-pandemic period, we hope that local insurance companies introduce new products and solutions necessary for both the business community and ordinary citizens in the new economic realities.