SURVIVAL OF THE FITTEST

The global recession has had an impacton the insurance sector and its clients worldwide, thus putting to the test the existing methods of doing business. The crisis was followed in Japan by the planet's fifth most powerful earthquake and tsunami, which brought the amount of insurance compensation to $30 billion. All this, beyond doubt, has generated a degree of pessimism in the insurance sector worldwide.

The crisis has also exposed problems in Azerbaijan's insurance market, leading to the appearance of new rules of the game. And the way local insurance companies have been managing the change and uncertainty is a sign of their likely future success. This has been crowned by the period of adaptation that set in after the enactment, in March 2008, of a new law "On insurance".

Although, in contrast to other countries, no cases of bankruptcy have been registered in Azerbaijan's insurance market in the wake of the global economic downturn and local companies are not involved in covering the Japanese damages, the business has declined. But the situation is gradually getting back on track, which is evidenced by the indicators in 2011.

Adaptation starts

Azerbaijani companies have had time to fully refine their management system. Profound changes have taken place in the corporate governance of insurance companies - all of them have become open-type joint-stock companies, they have fully-formed governing bodies, including boards of directors, supervisory boards, audit committees, internal audit services, etc.

Second, the current assessment of insurance companies' financial stability is based on international experience, on a system used in countries with developed insurance markets and financial systems.

Third, the rights of policyholders are better protected now, becausethe provisions of the law "On insurance" and the Civil Code specifically describe the many issues related to insurance contracts, the rights and obligations of parties, etc.

Along with these changes, the insurance market has received a major boost by the enactment of two other highly important laws: "On compulsory insurance against loss of occupational ability as a result of industrial accidents and occupational diseases" and "On mandatory types of insurance". The legislative innovations have had a positive impact on the domestic insurance market and led to an increase in insurance premiums.

Last year was one of the adaptation of the insurance market to the new conditions. This process consisted in a revision of companies' development strategies in line with the changing market conditions, i.e. the introduction of new insurance products, revitalization of the retail market segment, changes in the technology of sales of insurance products, the introduction of information technology, etc.

And although there was some decline in the insurance market in 2010, a large number of insurers have shown steady growth, indicating that these companies have chosen the right development strategy and quickly adapted to the new conditions. Therefore, the decline in 2010did not reflect the problems of the entire market but only of individual companies.

Further evidence of that is the fact that starting from February 2011, the total volume of insurance premiums has been on an upward trend. At the end of the first seven months, the insurance market had grown 31.5 per cent compared with January to July 2010. The total value of the insurance market has reached AZN 116.468 million. Disbursements in the said period were worth AZN 32.61 million (growth of 21.6 per cent). At the same time,the top 10 insurance companies command 69.62 per cent of total insurance premiums and 75.87 per cent of total payments.

As can be seen from the table, the only state commercial insurance company Azersigorta maintained its leadership in terms of premiums in July, registering a 43.05-per-cent growth in premiums compared with the first half of 2011, i.e. by AZN 5.08 million. Azersigorta's share in the total volume of premiums of Azerbaijani insurance companies has grown from 12.01 to 14.49 per cent over the last month.

The top 10 companies in terms of premium collection has not changed. Apart from the fact that IpekYolu Insurance (formerly known as AzalSigorta) has dropped from third to seventh position (an increase in premiums of 1.5 per cent), the top 10companies have seen little change.

Of the three companies that have the right to offer life insurance in Azerbaijan, the top 10 includes only the recently created (in 2011) OJSC, Pasha Life Insurance. The company increased its premiums in July by AZN 0.73 million, or 11.74 per cent, and has retained sixth position.

Life insurance on the increase 

Along with the growth of the country's insurance business, the number of participants in the insurance market is also on the increase. And this is due to a number of factors.

According to international practice, in 2011 Azerbaijan completed a division into two types of insurance business: life insurance and insurance other than life insurance. The adoption last year of the law "On mandatory insurance against industrial accidents" stimulated to a degree the creation of new life insurance companies. Today, the country has three specialized life-insurance companies (Ateshgah Life, Qala Life and Pasha Life), but interest in this business is obvious, and we may see the emergence of several other companies this year.

The activities of the specialized companies will lead to the development of voluntary life insurance, i.e. compulsory insurance can play the role of a catalyst for the development of the life insurance market as a whole. Proof of this is the fact that the share of compulsory insurance has already reached 90 per cent.

About 500,000 people in Azerbaijan have compulsory insurance against disability resulting from occupational diseases and industrial accidents, according to the chairman of the board of Ateshgah Life, Akbar Madatli. About 14,000 enterprises have selected this type of insurance for their employees. We recall that these services were introduced only in December 2010.

According to official statistics, as of 1 June there are 1.362 million people employed under contract in Azerbaijan by 400,000 registered businesses.

In January-July 2011, the premiums of Azerbaijani insurance companies for compulsory insurance against disability resulting from occupational diseases and accidents were AZN 14.53 million, which represents a 12.3-per-cent increase over the first six months. In June, the fees increased by 8.35 per cent compared with January-May, in May by 37.12 per cent compared with January-April , in April by 46.13 per as compared with January-March, while in March the figure for January-February was exceeded threefold. Over the first seven months,companies paid AZN 106,590 in this type of insurance, which is almost twice as much as the amount paid in the first six months of the year.

A share of 0.6 per cent of the life insurance market, which corresponds to AZN 85,000, falls to thelife-insurance portfolios of companies that provided these services before the expiry of a three-year moratorium in March this year. According to the moratorium, only specialized companies can offer life insurance (according to the law "On insurance", the permits for non-life-insurance companies to sign contracts for life insurance expired in March 2011).

The total volume of premiums for voluntary life insurance in the said period totalled AZN 1.52 million. If we add to this the premiums of Azerbaijani insurers for compulsory insurance against disability resulting from occupational diseases and accidents at work and take into account that the potential market for compulsory insurance is estimated at AZN 30 million, we can see that the three existing companies have occupied almost half of the market in six months.

A marked slowdown in the collection of premiums for compulsory insurance against accidents was seen in June this year. Thus, in June the premiums exceeded the amount for January-May by 8.35 per cent, while in May they had risen by 37.12 per cent compared with January-April, in April there was a 46.13-per-cent growth compared with January-March, while in March the figure for January-February was exceeded threefold.

According to VagifHasanov, the chairman of the board of Qarant Insurance, whose agents also sell the products of Qala Life, the peak level for life insurance premiums collected by Azerbaijani companies has been passed. "First, insurance companies began to insure the employees of large companies. Now it is the turn of smaller companies employing several dozen people, but it is the latter that are the titbits", Hasanov said.

According to him, the more differentiated the portfolio, the more comfortable the insurance company feels. There is no dependence on major customers which constitute the bulk of the portfolio, as this is fraught with very serious consequences.

The head of Ateshgah Life, Akbar Madatli, believes that three companies will cover no more than 70 per cent of the potential market of compulsory life insurance by the end of this year. Specifically, Ateshgah Life counts onsecuring 30 per cent of the life insurance market.

They are at risk of losing a part of the market after the creation of new life insurance companies. Policyholders may terminate their contract at any time by sending a prior 30-daywritten notice and choose another insurer. Each company will have to fight for its clients and adhere to quality standards in the provision of services, make payments in a timely manner and maintain the service at the required level so that customers do not run away.

The State Insurance Supervision Service is currently considering applications from Azersigorta, Alfa Sigorta, Ata Sigorta and Standard Insurance to establish life insurance companies. The International Insurance Company and the Azerbaijan SanayeSigorta Insurance Company have similar plans.

Road to success

It is obvious that in order to compete successfully Azerbaijani insurance companies have to continuously expand the range of their products and services, develop the infrastructure and distribution channels.

Insurance should be one of the most important elements of the state's industrial and trade policy, including the sphere of support for small businesses, subsidization of certain economic sectors and protection of the financial interests of the state.

To do this, insurance companies should restructure their distribution channels: open new offices, set up branded kiosks and invest in training their agents. For insurers, this means new costs which not all market players can sustain.

The chairman of the board of the Azerbaijani company PashaSigorta, NofelRzayev, believes that the Azerbaijani insurance market needs 12-10 major insurance companies. "The more non-serious companies there are that can pay their employees decent wages, develop their staff, create material and technical infrastructure and provide customers with normal services, the more they will discredit the bigger companies,"Rzayev says.

Today there are 28 insurance companies (five with a share of foreign capital), one reinsurance and six brokerage firms (five with a share of foreign capital) in the country. However, if you look at the ranking, 10 companies gather less than AZN 1 million in insurance premiums, the next 10 companies get from AZN 1 to 3 million. In 2010, a total of 51 per cent of the premiums collected by all companies fell to the top five insurance companies, 78 per centto the top 10 and 92 per cent to the top 15.

Deputy Finance Minister AzarBayramovthinks that 15-20 insurance companies are sufficient for Azerbaijan's insurance market. According to him, they must come to understand that they should merge with other companies. Despite low capitalization, there has been no precedent in the country's insurance market, unlike the banking sector, when insurance companies decided to consolidate. Therefore, the State Insurance Supervision Service is taking steps in accordance with the law, ranging from issuing injunctions to the revocation of licences to provide insurance.

The Ministry of Finance embarked on specific action in April 2010. One of the companies to be denied a permanent licence to provide insurance was AzinvestSigorta, whose capital did not even reach AZN 1 million while the norm is AZN 2 million. This requirement has now been raised to AZN 3 million.

Of course, competition between companies will only grow tougher in the future, which will provide an incentive for market development. And this is the main purpose of all manipulation.