A GOOD FOUNDATION

In 2012, as in the previous year, GDP growth in Azerbaijan was shaped almost entirely by the non-oil sector, which rose by 9.7 per cent. And one of the fastest growing industries of this sector in Azerbaijan is insurance. In recent years, the insurance market was seriously reformed, which resulted in its impressive growth last year. This allows market participants and the market regulator to build long-term plans and look to the future with optimism.

In an interview with R+, the head of the State Insurance Supervision Service under the Ministry of Finance of Azerbaijan, Namiq Xalilov, gave more information about the situation on the market in 2012 and prospects for the future.

- How was 2012 for the insurance market?

- The past year was a year of mass insurance, a year of growth in agency sales and laid a good foundation for the further development of the insurance market in Azerbaijan. Thus, in 2012, we saw a dramatic increase in the insurance market. The total amount of premiums of all companies operating in the country was 342.52m manats in 2012 (annual growth of 60.8 per cent), and the payments made during the period totalled 93.86 million manats (growth of 52.45 per cent). This was partly due to the introduction in late 2011 of the new law "On compulsory types of insurance" and partly due to the development of different types of voluntary insurance. If before the insurance market was heavily dependent on the banking market, this year things began to change, and not only through the development of compulsory insurance. It is also connected with the development of voluntary insurance, which does not apply to the banking business. I think that this process will continue, although the presence of the banking business on the insurance market (this especially applies to mortgage and car insurance) is still significant.

- The introduction of the new mandatory liability insurance of vehicle owners seriously changed the market structure, fees from this type of insurance rose many times, and today this type accounts for over 20 per cent of fees of all companies. Do you think that this increase in fees from mandatory car insurance will continue and how will it change the structure of the insurance market in the future?

- Today, the mandatory car insurance market is covered by at least 90 per cent. There are factors that contribute to the increase and reduction of this market. For example, the fact that the number of cars is growing from year to year speaks in favour of the former, but on the other hand, with the use of the bonus-malus system, the cost of insurance for the majority of vehicle owners will decrease. So, I think balance will be obtained. As a result, we expect a growth on this market, but it will not be strong.

Meanwhile, at a certain stage the introduction of mandatory car insurance should lead to the development of voluntary car insurance as well. After the launch of mandatory car insurance people had more information about insurance and more experience in this area. The mass popularity of this type will reduce the load on CASCO and eventually reduce its cost, making it more affordable and broaden the customer base. CASCO can be expected to become cheaper this year.

With regard to changes in the structure of the insurance market, this cannot be expected soon, since there are no foundations for this process today. The structure will seriously change with the application of compulsory medical insurance. This will affect both the market and its structure. There is some potential for the development of voluntary agricultural insurance. Frankly speaking, we cannot say that today there is a great interest on the part of farmers, but on the other hand, the further development of the credit system for farmers will involve them in insurance relations. There are long-term programmes in this direction. In the first phase, it will be connected with loans (these are soft loans from the state, banks, non-banking credit organizations), but voluntary agricultural insurance can develop independently in the future. Mandatory health insurance and voluntary agricultural insurance are two segments of the market where we can expect significant growth in the next 3-5 years.

- Last year, the information system of the compulsory insurance bureau, through which CTP policies were registered, proved effective. What are the plans to expand its coverage?

- Now only mandatory car insurance agreements are concluded through the information system. After amendments to the existing insurance legislation come into force, it will be possible to use the information system while concluding insurance contracts for all types of insurance regulated by the law "On compulsory types of insurance".

Let me remind you that at the present time, the law regulates four types of compulsory insurance: mandatory car insurance, property insurance, liability insurance for the operation of real estate and personal passenger insurance. The draft law on changes and amendments to the laws "On mandatory types of insurance" and "Insurance activity" aims to include on this list compulsory insurance against accidents and occupational diseases. In the first stage, it is not planned to conclude contracts on compulsory life insurance, but later we will involve them too. The experience of the current information system is very good. Therefore, the initiative to conclude contracts through the information system for other types came from insurance companies themselves. This system is convenient for them to monitor their portfolio and their vendors. Given the mass sales for compulsory types, it is very difficult to control everything across the country without such a tool.

In addition, the presence of an information system for concluding CTP insurance policies in Azerbaijan will eliminate the need for future CTP forms. Technically, we can do it today, but issues of control, etc. have yet to be resolved. After this system is integrated with the database of the State Traffic Police, its employees can check through computers in their cars if a car has insurance. Also, there will be no need to provide a form for car inspections. In general, forms are a waste of time and money. Furthermore, the presence of forms carries certain risks - they may be counterfeit or not be put into the system. It will be possible to stop using forms in a year and a half.

This information system will also be a good platform for the organization of online sales of insurance products. For example, in Latvia 70 per cent of CTP policies are sold through the Internet. In Azerbaijan, the sale of CTP policies through the Internet and mobile communications will start after changes to insurance laws.

- Last year the State Insurance Supervision Service implemented a number of measures in order to inform local insurance companies about Solvency II international standards of solvency. To what extent is the Azerbaijani market ready for the implementation of these standards today?

- As you know, with its third Solvency II Directive, the EU created a modern, risk-sensitive basis for regulating insurance. It is believed that the new structure will have sufficient influence and significantly change the conditions of insurance in Europe.

On the implementation of these standards, I should note that it requires a certain amount of professionals and actuaries, because all these models are created by actuaries. Today we do not have the required capacity of actuaries. In January, in conjunction with the Association of Insurance Companies of Azerbaijan, we began to provide actuarial courses and try to get more young people to attend them. Today, the courses involve about 40 people who are mostly students. In order implement these standards, there must also be some potential in supervision and in companies. Now we are building this potential. In parallel, we plan to continue to cooperate with the European Union within the framework of various programmes and ask for workshops on narrower subjects in the future so that our experts easily learn the nuances of the new system. We can begin to implement some elements of Solvency II immediately. After the EU introduces these standards in 2014 and the system is up and running, we will be able to set ourselves the goal to implement these standards after a while. In addition, we may ask for technical assistance in the future to start twinning programmes, etc., so that the EU helps us with the practical implementation of this system.

After the introduction of Solvency II standards in Azerbaijan, it will be possible to vary regulatory requirements for the total capital of insurance companies. Today we have the same approach to all insurance companies. Under the current legislation, from 1 January 2013, the capital of insurance companies in Azerbaijan should not be lower than 5 million manats and reinsurance companies - 10 million manats. However, the Solvency II international standards include a variety of approaches to insurance companies, depending on the size and structure of their portfolios. Requirements for total capital, depending on these factors may vary. There, everything is based on the risk assessment of the insurance portfolio, investment portfolio, etc., and depending on these factors, there are special requirements for every company.

We are exploring the possibility of introducing these standards in Azerbaijan in the future, but the question of the full-fledged introduction of Solvency II in Azerbaijan is not a matter of a few years. Most likely, it is expected to be solved in the medium-term, as this process is very complicated.

- How effective is the conservation of the restriction on the share of foreign companies in the total volume of the authorized capital of local insurers?

- The 30-per-cent limit on the share of foreign companies in the total statutory capital of insurance companies, which has been valid since 2008, is not a problem today, since the participation of foreign capital actually does not reach 10 per cent yet. However, in the future, it is planned to increase this level first and then completely lift the restriction on the participation of foreign capital in the local insurance market. As you know, Azerbaijan has 28 insurance companies and one reinsurance company, and foreign companies are involved in the capital of five insurance companies.

- And finally, how much do you expect the insurance market to grow in 2013?

- Frankly speaking, in 2013, we do not expect such a significant growth as in 2012. The fact is that we do not see such strong incentives of growth this year as, for example, the introduction of compulsory insurance last year. By deepening and expanding coverage on the market, we expect premiums to grow by 15-20 per cent.