BEFORE LIGHTNING STRIKES

Mother Nature often loves to show her less than motherly side. Earthquakes, tsunamis, storms, floods and heavy snowfalls often lead to loss of life. But even without all those things people can lose their homes and cars, everything they have acquired all their lives, at one stroke. But a system of insurance, which works quite effectively in the world's developed countries, can compensate for all this.

Although in recent years Azerbaijan has shown a very high rate of economic development, the people have a very cool attitude to insurance. This applies particularly to property insurance. The very nature of market relations demands the minimization of the role of the state in the country's economy. Incidentally, in many spheres of the economy this shows through very clearly and it is not without reason that over 80% of the country's GDP is formed in the private sector. When it comes to protecting their property people prefer to rely on the state, demanding material compensation for damage caused by man-made disasters and domestic incidents.

When the law "On compulsory types of insurances" was adopted two years ago, debates and discussions were mainly about just one of four types of insurance for which this law was designed - compulsory motor vehicle liability insurance (CMVLI). However, the document also contained a type of insurance which kept abreast with CMVLI in its potential reach and significance. I am talking about compulsory private property insurance. All apartments and private dwellings for which there are registration certificates, or "deeds", come under this law.

This would be the right moment to point out that Azerbaijan was virtually a pioneer in compulsory property insurance after the collapse of the USSR. The practice of compulsory property insurance already exists abroad and in the countries of the former USSR but it is mainly applied when purchasing an apartment on a mortgage. If a property is not on credit then voluntary insurance is applied, which is not very popular abroad and less popular in the former Soviet Union for such objective reasons as the not very high level of household incomes and a low insurance culture.

Only Belarus, back in 1998, adopted compulsory property insurance before Azerbaijan among the former USSR countries.

Discussions are now underway in Russia and Kazakhstan on the subject of introducing compulsory property insurance, but for the most part our neighbours want to restrict it to insurance against natural disasters. Whereas in Russia the debate is so far about the advisability of this type of insurance, in Kazakhstan a draft law "On compulsory property insurance against disasters" will be tabled for discussion in the government in July this year. The insurance rate is expected to be fixed at the level of $10 annually, but it is not planned to bring this law into force until 2015.

In Azerbaijan, on the other hand, compulsory property insurance extends not just to natural and man-made disasters, but also to domestic incidents. These include, for example, short-circuit faults, fire, gas explosions, water- and sewage-pipe bursts, and so on.

An analysis of nearly 18 months' application of compulsory property insurance in Azerbaijan shows that, basically, the anticipated difficulties regarding its application have been justified and at the moment this type of insurance is struggling to catch on, as statistics prove. In 2012 the insurance companies that were members of the Bureau for Compulsory Insurance concluded 125,195 agreements on compulsory property insurance in which they received premiums totalling AZN 11,393,000. Bearing in mind that 12 insurance companies have licences for this type of insurance, on average each of them concluded 10,400 insurance agreements annually, or 900 agreements a month. That's not many when you consider that about 480,000 apartments and houses come under this type of insurance in Azerbaijan. At the same time, not all the agreements signed last year were instigated by the people themselves: the state undertook to insure - out of its own pocket, so to speak - the apartments of citizens who receive subsistence allowance. Last year there were 22,300 such agreements. In other words, if you subtract them from the total number this means that last year a little over 100,000 people insured their property. Thus, in 2012, the proportion of people taking up this type of insurance was about 26%.

The situation has not changed appreciably in 2013. For example, in January-April members of the bureau concluded 31,425 agreements on compulsory property insurance, in the context of which they received AZN 3,713,500 in premiums. That said, the situation in April was a bit better than in the first quarter. For example, whereas in the first quarter insurers concluded 21,356 agreements on this type of insurance (including over 7,000 with persons receiving subsistence allowance), or a little over 7,000 agreements on average a month, in April 10,069 agreements were concluded. But still it turns out that in the first four months of this year each insurance company concluded on average a little over 2,600 agreements - an average of 650 a month. These figures, as we can see, are a little below those of last year.

At the same time, the Finance Ministry has noted progress in this type of insurance in 2013 and they believe that the situation here will be rather better than it was last year. Generally speaking, the ministry expects that this year about 150,000 agreements on compulsory property insurance and real-estate insurance will be concluded with citizens, i.e. the level of potential clients could reach 33-35% (bearing in mind that the number of apartments liable for insurance will also increase).

There are a number of reasons for such a depressing picture in compulsory property insurance. First of all, the population is given little information about this type of insurance. When the insurance companies began to introduce the law "On compulsory types of insurance" at the beginning of last year, virtually all the advertising was linked with CMVLI, whereas property insurance remained in the dark. There was nothing surprising about this because the insurance companies were competing for easier money. As a comparison - in 2012 the insurance companies collected AZN 72.1m for CMVLI compared to only AZN 11.4m for compulsory property insurance.

Second, there is no legal framework that provides for penalties for not having a compulsory property insurance policy. With CMVLI, for example, there are fines and tough requirements of the law, and vehicle owners must insure their cars, although they are not always happy with the size of the insurance contribution. Although the insurance companies are in favour of imposing sanctions against those who fail to insure their property, fines alone will not solve the problem. The people themselves must take up insurance and tough action will only lead to an increase in the lack of confidence in insurance companies. That is why other, more civilized and effective methods of persuasion are called for.

Third, the agents are not doing enough. In the past five years over 600 people have been handed licences to operate as agents. The introduction of such types of insurance as compulsory property insurance and CMVLI means that agents must be active because it is agents who play the most important role in selling policies targeted at broad sections of the population, as well as being the link between the insurance companies and the people. At the moment agents are not doing their job as well as they can. They are trying, in the main, to sell more insurance policies in order to get the commission. Often agents don't bother to explain to people the benefits of different types of insurance. So people concluding agreements through agents don't properly understand what they are paying for. As a consequence, complaints arise that the insurance companies have deceived them and have not paid them what they are entitled to.

In other words, despite the growth of the insurance market and the volume of insurance company premiums, generally speaking people's understanding of insurance remains at a low level. The increase in premiums mostly comes from compulsory types of insurance, especially CMVLI. For example, in 2012 CMVLI premiums, as already stated, amounted to AZN 72.1m, which was almost 16.7 times more than the previous year! This is first and foremost linked with the change in CMVLI rates which increased from AZN 10 to from AZN 50 to AZN 250, depending on the vehicle engine capacity. But still, the level of knowledge of insurance, its importance and work principles remains low among the population at large.

Basically, the rates for compulsory property insurance are not that high. The average citizen in Azerbaijan can easily afford to pay for an insurance policy based on such a rate once a year. But many people find it hard to part with such a sum, especially when insurance-related events occur very rarely and that means that their money is cast to the wind.

Perhaps the size of insurance contributions could be reduced and at the same time the amount of coverage could also be reduced. Then, when most of the population gets used to this type of insurance, tariffs could be returned to their initial level.

For the moment the main conclusion is that property insurance has not been fully sold to the people and much more needs to be done in this regard. Above all, more active work needs to be done with the population to ensure that they encounter the positive effect of property insurance in their everyday lives. For example, insurance companies very rarely provide information about payments for compulsory property insurance. And so people may get the impression that all they are doing is collecting the money and no-one gets paid anything and this does not inspire confidence in the insurance companies. 

The insurance companies, along with their agents and the relevant state structures, should canvass the population on a regular basis and explain all aspects of insurance to them. This option is a guarantee of future insurance agreements and company premiums. Besides, it will allow people not only to expect that at a difficult time the state will extend a helping hand but will itself provide a definite guarantee of reparation of damages.

The article was prepared as part of a competition conducted by the State Insurance Monitoring Service of the Azerbaijani Finance Ministry and the Association of Azerbaijani Insurance Companies.