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One of the guidelines of the new draft law "On compulsory insurance", which is about to be adopted by the Milli Maclis, provides for the introduction of the principles of compulsory property insurance in the country. The adoption of this document has been discussed by the insurance community and the public at large. Despite some wrangling about the wording of some sections of the bill, deputies and insurance experts believe it will create a fundamentally new situation in the country's insurance market. 

People's document

At the end of the last century experts were linking prospects for the development of the country's insurance market with laws that had been adopted comparatively recently on compulsory types of insurance and the further development of their legal framework. This meant, among other things, drawing up the legal documents and mechanisms for adapting them to compulsory insurance against fire, blanket distribution of the regulations of compulsory insurance against accidents in the work place and loss of earning power as a result of occupational injury or illness.

However, the adoption of the law "On compulsory insurance" should give added impetus to the country's insurance market. The new draft law regulates four types of insurance - real estate, responsibility of vehicle owners (compulsory drivers' insurance), passenger insurance and public indemnity insurance in the handling of real estate. At the same time, the forthcoming changes in the sphere of compulsory property insurance are causing special interest.

"The law 'On compulsory insurance', first and foremost, meets the interests of ordinary citizens. From time to time, the country is hit by both natural and man-made disasters. Without housing insurance owners get nothing if they lose their property. With the new law, by paying a small annual sum to the insurance company, property owners will be able to receive tangible material compensation against an accident," Samir Sarifov, the Azerbaijani finance minister, said recently.

There is clear evidence for such a claim. One only has to recall what happened after the mud-slides and floods last April and May which left hundreds of people in the Kura-Araz lowlands homeless, not to mention the colossal damage caused to agriculture. The desperate situation in the Aran area was rectified because of the prompt actions of the government, which sent equipment and building materials to the disaster area, and the head of state's decision to allocate about 300m manats from budget funds for the victims. The tragic events of last year revealed one regrettable fact - with one rare exception, none of the inhabitants in the devastated region had a voluntary insurance policy covering damage to homes or businesses by the elements or agreements covering risks in horticulture and stockbreeding.

The natural and climatic peculiarities that exist in our country mean that mudflows, floods, fires, landslides and high seismic activity are a very frequent occurrence, and all kinds of man-made disasters can pose a serious danger to property owners. That said, the lion's share of the burden in clearing up after such disasters lies with the state which, incidentally, does not always take account of today's realities. In the context of a market economy, virtually all homes in the country are now privatized, not to mention commercial property, whose owners derive sizeable profits. In these circumstances, one needs to ask - in a case of force-majeure why should the state pay for the damage caused to people's private property?

Model experience

Unfortunately, one cannot count on people's awareness and their readiness to voluntarily insure their property. The development of the insurance market over the last 15 years has clearly shown that the voluntary property insurance segment has been represented by the corporate sector alone and to an extremely restricted extent. The number of individuals who have acquired a voluntary property insurance policy can be counted on the fingers of one hand. However, our country is not alone in this - voluntary property insurance is just as unpopular in most of the countries of the post-Soviet space. For similar reasons the Russian State Duma drew up and is preparing to adopt much the same draft law on compulsory housing insurance.

Abroad, the situation is a more positive one: a compulsory property insurance system has long been operating successfully in a number of countries in Europe and North America and perfectly clear criteria for imposing compulsory property insurance have been introduced worldwide. If insurance companies do not accept a certain group of risks for insurance on a commercial basis because they are uneconomical, or the cost of commercial insurance is too high for the insured party, or the insured party underestimates the degree of danger and the possible consequences of an insurable occurrence, and there is a public demand for insurance protection against such risks, then the state imposes compulsory insurance.

For example, in the world's most developed market - the US - there are about 8,000 insurance companies that are involved in one way or another in the compulsory housing insurance sphere. The insurance of buildings and structures is compulsory in virtually all the states and payments are included in regularly collected contributions to the Home Owners Association (HOA). That said, compulsory insurance packages vary a great deal depending on the region. For example, in California, insurance against floods or tornados is not essential, but compensation for earthquake and forest fire damage is extremely desirable, whereas in Florida, especially in the coastal areas, protection against floods is vital.

There are a number of basic differences in compulsory property insurance in European countries. For example, in Britain, Germany and Spain, it is taken out if a property is mortgaged. Furthermore, in Germany, housing insurance is included in a policy (Haftpflichtversicherung), which provides for compulsory insurance of legal liability to third parties. But in France, where the social protection of citizens system is more developed, compulsory property insurance applies only to landlords. Abroad the cost of an annual compulsory property insurance policy for individuals ranges from 200 to 400 euros, but for the corporate sector this amount is much higher.

Against this background the draft law "On compulsory insurance" provides for appreciably lower estimates for the payment of property insurance services. According to the draft law, irrespective of the market value of property, a fixed sum of insurance is imposed at a level from 250 (the lower amount of damages is not deemed to be a loss occurrence) to 25,000 manats for people in Baku - with an underwriting rate of 0.2% the insurance contribution is only 50 manats annually. For Sumqayit, Ganca and Naxcivan the maximum insurance sum is 20,000 manats (minimum 200 manats), and for the other regions 15,000 manats (minimum 150 manats). In the event of a loss occurrence, the sums set by law will be paid out irrespective of the real market value of the insured property.

Compulsory real-estate property insurance will be extended to all types of buildings - private homes and individual apartments, as well as offices of juridical persons, and state property. At the same time, instances where damage has been caused to a property as a result of fire, natural gas explosion, storm, a short electricity circuit, damage to the sewerage or water-supply systems, and even damage caused to buildings from a crashed aircraft or a road transport collision, will be deemed a loss occurrence. Of course, a large number of natural disasters - floods, earthquakes, and so on - are also deemed to be a loss occurrence.

The draft law also includes a number of occurrences that exclude compulsory real-estate property insurance. This applies, in particular, to property where a decision on demolition is taken by state bodies or the local authority. This also applies to uncompleted buildings, buildings in a dangerous condition and those erected in unsuitable sites.

At the same time, in certain circumstances the draft law excludes payment of compensation and recognition of a loss occurrence; for example, in a case of wilful damage to property, damage caused to property by use of fire sources (during manufacture or repair of buildings) in an outbreak of fire. An accident caused by a leakage of old pipes and reservoirs, as well as damage caused as a result of theft of property during the course of an accident and after it, will not be deemed a loss occurrence. 

It is quite possible that following the adoption of the new law the state will absolve itself of the responsibility for compensation of damage during natural or other disasters to property owners who refuse to insure their property on the basis of the new regulations.

Representatives of the insurance community believe that the law will help to increase the safety of the country's housing sector, lead to effective use of state funds and protect citizens against risks. However, at the same time, they declare that, in protecting the interests of insured persons (the population), the provisions of the law at the same time should meet the requirements of the insurance companies. The latter should be protected against wasteful economic pressure caused by disproportionate insurance tariffs, a lack of significant franchises and the principles of recurrent indemnity for damages already paid.

And then the law will work for the benefit of all the interested parties…