INSURED FOR LIFE

Since quite recently a new entity - life insurance - has started to gain popularity on Azerbaijan's financial market. It has to be said that this segment is considered to be one of the most sought after in Western Europe and in other countries with developed insurance markets. In point of fact, life insurance could be considered a tried and tested means of resolving a number of difficult tasks which one might encounter and relieving a family of material problems in the event of the death of one of its members and providing a guaranteed sum of money when it is needed. In these countries the ratio of the premiums comprises on average 55-60 per cent of the overall amount of insurance contributions. In Azerbaijan this figure is barely one per cent, and so there is an obvious need to boost the development of the market through the state adopting a number of measures to increase the demand for life insurance.

Qala Heyat - an insurance fortress

The climactic moment in resolving this question came last year with the adoption of a law on compulsory insurance on loss of earning capacity through illness or accident at work, and also the tabling of amendments to the law "On social insurance" and in the Tax Code, providing tax relief (exemption of the amount of the insurance premium from income tax and social insurance contributions) on accumulative life insurance for a term of over three years. From the experience of other countries it is clear that the adaptation of a mechanism for the development of life insurance began with tax relief which at the first stage was quite substantial, but as the market developed was reduced to zero. 

The emergence on the market of specialized companies dealing exclusively in life insurance is destined to become another fairly powerful impulse, because according to the law "On insurance activity", from mid-March 2011 all companies currently providing life insurance services must divide their operations into life insurance and other areas of insurance. That said, from 2011 only specialized insurance companies with owner's capital of no less than 5m manats will be able to provide life insurance services. Since for such companies this will be the only means of making a profit, clearly one can expect a substantial increase in interest in this type of insurance and a widening of the network of agents and range of products.

This is supported by the fact that the first "swallow companies" in the insurance market began to emerge at the end of last year. For example, the Qala Heyat company announced the start of its operations in December after presenting fairly ambitious plans to develop their business The chairman of the company's board, Abbas Babayev, spoke in more detail about this in an interview for R+.

- Quite recently your company was dealing in non-life insurance. Where did the idea of redirecting your business towards life insurance come from?

- Yes, the insurance (reinsurance) company and the Qala Sigorta open joint-stock company obtained a licence at the Ministry of Finance to conduct insurance business on 31 July 2008. Since then we have succeeded in gaining the trust of both corporative and individual clients. In the middle of this year our company's shareholders instructed us to carry out research into the development of life insurance in certain post-Soviet countries, and also to study the potential for it in Azerbaijan. As a result of this analysis we came to the conclusion that there was big potential for development in this segment. At present the proportion of life insurance to the overall portfolio of insurance contributions is less than one per cent, but research has shown that this has been the trend in all the developing life insurance markets.

We therefore decided to redirect the company's business from non-life insurance to life insurance. We went through all the procedures required by our country's legislation, and on 30 November 2010 the Azerbaijani Ministry of Finance issued us with a renewed licence in the name of Qala Heyat, of which the only reinsurance company AzRe TekrarSigorta is a shareholder.

The company is currently permitted to offer five types of voluntary services (in the event of death, survival, loss of earnings, incurable illnesses and life insurance for mortgage borrowers), and also one type of compulsory services (from loss of earnings as a result of illness and accidents at work). The company's starting capital is 3.5m manats, and by 2013 it will reach 5m manats.  

- What share of the market is Qala Heyat counting on?

- It is too early to make any predictions on this score because the market has not completely taken shape. We still don't know how many companies will be involved in this segment and, accordingly, what products and level of services will be offered by our competitors. However, there is no doubt that the fact that we started our business before the other companies gives us a certain advantage which we hope we will be able to maintain in the future.

- How do you assess state support for the development of this type of insurance in Azerbaijan?

- Of course, the fact that the law "On compulsory insurance from loss of earnings as a result of accidents and illness at work" was adopted shows that the state is concerned about its citizens and precisely that category of citizens who most need this protection. Because, compared with corporations and juridical persons they are more vulnerable, and it is the family that suffers most of all from accidents and the death of a child. This is, first and foremost, a major state project aimed at real protection for families left without a breadwinner, because in this instance the family's level of income and, naturally, standard of living, are reduced. This law allows insurance against such a risk. Of course, we cannot make up the mental damage linked with the loss of a loved one. But as an insurance company we can help a family from the material standpoint. In short, this law provides an opportunity to provide social protection for the lower-income sections of the population, and here the insurance companies will play a key role.

This will give a boost to the development of the insurance market in general and life insurance in particular. Such a practice has occurred in Azerbaijan and in other countries when, in order to develop a type of voluntary insurance, the state takes steps to introduce compulsory insurance. I believe that the adoption of the law "On compulsory life insurance" will give a boost to the long-term development of voluntary life insurance. But to achieve this the insurance companies will have to win over the trust of the people so that they can see that this segment of the market is really working.

But what is needed to achieve this? We believe that first of all the public must be informed about the advantages of life insurance, and so our company has already begun to do this. The company will also hold educational workshops in the field in various parts of the country as part of a propaganda campaign to promote life insurance.

The point is that the employees of any organization, company or structure need to know that if their employer does not insure the lives of his employees then the law says that he is fully responsible for them. And if an employee has an accident at work, he will have to pay him compensation out of his own budget commensurate with the sum provided by the law on compulsory insurance.

And so everyone benefits from this segment of insurance: the insurance companies, because this opens up an additional segment of business; the state, because the social protection of the population is strengthened; and the employers, because otherwise they risk losing 150-250,000 manats depending on an employee's earnings. I don't think any company would want to operate with this risk, and therefore they will include employees' life insurance in their list of the things they must do.

- Don't you think that this law is a bit late - why has it been adopted only now and not, say, five years ago? 

- You have to realize that on the whole the insurance market in Azerbaijan has only begun to take shape over the past 15-18 years and that is not very long for such a vast sphere of activity. And a general legislative base has been created over this period of time and continues to be created. In the developed countries this process took dozens of years, and so it is unrealistic to expect this process to be completed so quickly in our country. For example, in Britain the whole legislative base of insurance was created over a period of 200 years. Of course, we need rather less time for this, but still we need it. I would like to emphasize that the state is taking all necessary steps in this direction, but the process of adopting laws is a very lengthy one on the whole and this law, in particular, went through many channels before it was passed. Apart from everything else, society, too, had to, as it were, mature. Perhaps five years ago the insurance companies themselves were not ready for this, either. After all, more than trust is needed for such types of insurance which are not considered to be physical forms. And winning over trust also needs time for the insurance companies to travel the necessary path of development.

- Is Qala Heyat planning to attract a foreign investor to develop its business?

- This question is not on the agenda, at least not at the moment. The company has sufficient resources and our main shareholder, AzRe TekrarSigorta, also has sufficient funds. But this does not mean that we have no international links. We are developing relations with all international organizations and we intend to use the most advanced experience that there is in the world.

- How will the money received from the sale of compulsory life insurance policies be used?

- I would like to assure everyone who in the future will be insured with our or some other company: the money or insurance premiums received by insurance companies are not squandered. A great part of these funds goes towards creating reserves. That is a requirement of the law, and the Finance Ministry, as the controlling body, keeps a close watch to see that this point is fulfilled. These funds are stored either in the most prestigious banks in deposit accounts or are invested in state securities. In other words, we do not carry out any risky operations with the money of our clients. After all, the company has been set up not for two or three years, but for at least several dozen years, and therefore business is planned for 5-10 years hence, and the policy for the investment of the accrued money is also in line with this.   

Incidentally, the need for this type of insurance is also shown by the fact that Qala Heyat already has potential clients who have a vested interest in insuring their employees against accidents and illness at work and they are currently studying the conditions of insurance. Furthermore, we have already signed a large number of contracts. So we have already embarked on a path of development and I think it will be a successful one.

The start of the path

The government, too, has no doubts that life insurance is gaining in popularity in Azerbaijan. The Finance Ministry expects that several more specialized life insurance companies will emerge on Azerbaijan's insurance market in 2011.

Namik Khalilov, the head of Gosstrakhnadzor (state insurance watchdog), believes that the start of this process has been a tough one, as has been the case in other countries, but once this mechanism gets going it will develop rapidly. It will start to "snowball" and at a certain time the size of the premiums for this type of insurance will exceed those of non-life insurance. After all, as life insurance is a long-term agreement, a person signing a contract pays contributions over many years, leading to a build-up from year to year of the overall volume of premiums for this type of insurance.

This type of insurance has a whole number of advantages. First of all, an insured person is confident that, in the event of illness, death or some other painful circumstance, his loved ones will not be left without the means to exist. Life insurance provides the opportunity not only to share possible risks with a company, but also to pass them fully onto the shoulders of the insurer. What can be better than the feeling of protection? When the time comes the insurance company will render the citizen material assistance at precisely the amount which he himself chose and decided on in the contract. It will also hand over the agreed sum of money to his family and children if the worse happens.

In short, life insurance is not only a means of material support for oneself in the event of unforeseen events, but also an excellent way of multiplying one's own income.

It is true that today work on improving the system and mechanisms of insurance is still continuing and there are a whole number of gaps in the law which need to be filled now if we are to avoid problems in the future. For example, there are questions linked with preventing wilful actions on the part of insured persons in order to obtain compensation, and other things, but, as has already been stated, work is underway to resolve them, and this process will accelerate as the market develops. And the range of projects offered by companies in the life insurance sphere will also expand with time.

The main thing is that there is a demand in the market, and that will also engender supply, new people will emerge to carry it into effect and new mechanisms of marketing will also appear.