"VOLUNTARY" GROWTH

Just a decade ago, insurance was popular perhaps only among motorists in Azerbaijan. Compulsory third party liability insurance was required by law, while "voluntary" insurance of private cars was carried out at the request of the bank providing a car loan. Today the situation is different - insurance has become part of everyday life for a majority of Azerbaijanis.

A record figure

The results in 2013 were favorable for the insurance market. The trends which prevailed on the market over the last couple of years continued in the past year too. Thus, in 2013, insurers increased the collection of premiums by 18.3 per cent compared to a similar indicator in 2012. However, the rate of growth was not as impressive as in 2012, when premiums rose by almost 61 per cent. Indeed, there were objective reasons for that: in 2011, Azerbaijan adopted the law "On compulsory types of insurance" which facilitated a sharp increase in the volume of premiums. In 2013, the insurance market was initially estimated to grow at a rate of 15 to 20 per cent, and eventually these estimates proved to be true to life.

Taking a closer look at the quantitative indicators of the insurance market, one can notice a number of interesting points. Thus, the amount of insurers' premiums has totaled 405.67m mantas and was in excess of a 500m dollar level for the first time.

However, the market growth was mainly associated with voluntary types of insurance for which the insurers increased their collections by 26 per cent, whereas for compulsory types of insurance the collections increased by as little as 5.6 per cent. At year-end 2012, insurers' premiums due to voluntary insurance increased by 33.5 per cent, while those due to compulsory insurance by a factor of 2.5. This was precisely due to changes in the insurance legislation.

Another interesting point consists in the development of the market for voluntary life insurance. In 2013, insurers' premiums in this segment grew by a factor of 2.9 and amounted to about 43.9m manats. This growth was associated with the introduction of products for endowment life insurance whose premiums tripled to equal 37.7m manats.

And finally, a gap between the first dozen insurers and all the others in terms of premiums collected has become even more apparent. For example, nine out of ten companies, which were among the top ten insurers in terms of premium collection based on the results in 2013, were also included in the top ten at year-end 2012.

It becomes increasingly clear that in the coming years, the greatest amount of premiums will be collected by the insurance companies that are members of the Compulsory Insurance Bureau which comprises 12 of the total of 28 insurance companies. These companies have the right to engage in the provision of services in four types of compulsory insurance - compulsory motor vehicle liability insurance (CMVLI), real estate insurance, insurance of civil liability in the operation of real estate, and passenger insurance. Thus, these companies have a certain handicap over the others since the collection of premiums for these four types of insurance amounted to almost 83m manats in 2013. As a result, seven out of the top ten companies in terms of premiums collected in 2013 were members of the bureau.

As for insurers' payments, their volume increased by 30.8 per cent in 2013 to reach 122.8m manats. In recent years, however, the main payments were determined by the same types of insurance - CMVLI, car insurance, medical insurance, mandatory personal insurance of servicemen, and property fire insurance. In 2013, the total payment based on these five types of insurance amounted to 111m manats, or 90.4 per cent of all payments made by the insurers.

What stands in the way?

Judging by the figures, one may get an impression that the insurance sector of Azerbaijan is moving in the open financial sea at full speed and with wind-blown sails. In fact, the situation is somewhat different and certain problems persist on the market. Of course, competition between market participants is a normal thing where a lot of money is involved. But this competition is not always contained within the rule of law. In 2012, when new rates were actively introduced to CMVLI, the insurers staged a real show called "Who gives the customer a more generous gift?" Potential policyholders were offered a supply of petrol, a fire extinguisher and other gifts so that they only got insured by a particular company. Meanwhile, all these incentives are prohibited by law and eventually, after a few months of the gift season, which we most often see in retail trading before holidays, the State Insurance Supervision Service instructed the insurers to stop all such actions. This has helped to a certain extent but today such actions are again gaining momentum, albeit with less aggressive advertising in the media. Similar problems related to unfair competition can be observed in other market segments too, particularly medical insurance, property insurance against fire and other risks.

Yet another point is associated with the division of insurance companies in Azerbaijan into those which are members of the Compulsory Insurance Bureau (12 companies) and those which are not (16 companies). This division is based on the company's performance indicators that impact on its financial stability. Of course, nobody argues that not all insurers are financially transparent and have an adequate amount of capital. But because of such a division, certain companies have an advantage over others. It is far from certain that we, the customers of the insurance companies, benefit from such an advantage, and in no sense it implies improvement in the quality of insurance services to customers.

It seems to be in order to make an analogy to Azerbaijan's banking sector, which has the Deposit Insurance Fund. Membership in this fund is held by all Azerbaijani banks that are licensed to take deposits. This is the only limitation imposed by the regulatory body.

Another drawback is the limited number of insurance services offered by insurers. The bulk of the premiums are collected on the basis of four types of insurance - CMVLI, voluntary health insurance, car insurance and insurance against fire and other risks. For these types of insurance, insurers' premiums exceeded 239.2m manats in 2013, or nearly 59 per cent of all premiums of insurance companies.

What to expect in 2014?

Further growth of the insurance market can be anticipated in 2014. As is known, the challenge for the next five years is to reach a level of premiums of 1bn dollars, which is twice as much as was collected in 2013.

In 2014, the rate of growth of the insurance market is expected to be in the range of 10-15 per cent, which will allow the insurers to collect from 450m to 470m manats. It is most likely that a major part of the premiums in the market will once again be collected on the basis of CMVLI, voluntary health insurance, car insurance and insurance against fire and other risks. There is no clear reason thus far to expect a sharp increase in premiums for other types of insurance. Furthermore, the growth of the market will again to a greater extent depend on voluntary insurance.

However, certain new products can expect to appear on the market in 2014. First of all, this concerns the approval of a new regulation on the minimum equity capital for insurance and reinsurance companies. According to preliminary plans, it will be 10m manats for insurance companies and 20m manats for reinsurance companies. The only remaining issue is timing. It can be assumed that the Ministry of Finance is unlikely to prefer a long-term program in increasing the minimum capital. For insurers, the toughest deadline that may be imposed by the Ministry of Finance on the implementation of a new regulation on capital is the end of 2015, while a more flexible deadline is the end of 2016.

Moreover, insurance companies in Azerbaijan interested in reinsurance activity will be required, as of 1 March 2014, to obtain a separate license for this activity. Such a requirement is stipulated in the amendments to the law "On insurance activity" which entered into force in December 2013. Currently, a license for insurance activity in Azerbaijan allows insurers to provide reinsurance services as well. According to estimates of the State Insurance Supervision Service of the Ministry of Finance of Azerbaijan, the necessity to separate the insurance business from reinsurance activity relates to the provision of financial stability of the professional participants in the insurance market. Besides, the capital requirements for the insurance and reinsurance activities differ.

Other amendments to the law "On insurance activity" provide for the liberalization of access of foreign capital to the insurance market. Earlier, according to the law, only foreign insurance companies could become shareholders in insurance companies in Azerbaijan. Now access to the insurance market has been liberalized for foreign individuals and legal entities which are not professional insurers. In particular, the share of one foreign individual in the capital of an insurance company in Azerbaijan may not exceed 10 per cent while the maximum collective share of foreign individuals in the capital of an insurance company may not exceed 30 per cent at that.

In addition, the share of a foreign legal entity (other than a professional insurer or foreign institutional investor) in the capital of an insurance company in Azerbaijan must be below 50 per cent.

One way or another, almost everyone may be required to use the services of insurance companies in daily life. Such relations should be mutually beneficial. At the same time, we must not forget that the foundation for all relations is mutual respect and the ability to compromise. Anyway, we should seek such relations and hope that for us, insurance will be a reliable protection rather than a cause of headache or hassle.