FEAR IN THE EYES... IF THEY ARE NOT INSURED

Insurance has always been, and will continue to be, the most reliable financial means of protecting our property.  At times of crisis, the major insurers can only consolidate their positions in the market, while smaller insurance organizations often go under.  Everyone thinks about tomorrow, about how to improve the family fortune, how to protect loved ones against difficulties and how to maintain decent standards of living after retirement.

One of the main problems in the development of the insurance market is financial weakness of insurance companies.  The insurer's "oomph" is conveyed most effectively by the size of its incorporation capital and, particularly, by the size of its accumulated assets.

Insurance company bankruptcies occur a certain time after the active phase of a crisis. In Azerbaijan, even while the global crisis was expanding, nothing like this happened and this can be attributed to the effective measures taken to support the insurance sector.

In contrast to banks, which can be hurt at any moment by customer panic, insurance companies can only suffer a liquidity crisis as a result of actions taken by their management or owners.  This is precisely why, in most cases, insurance companies do not require measures to maintain liquidity (unlike banks, which are in desperate need during acute phases of crisis).  However, the insurance companies do need support:  after all, the main bases of an insurers' business are all affected by a crisis.

Quality rather than quantity

Last year the Azerbaijani Finance Ministry helped insurance companies by extending the time table for them to bring their capital to the required level.  In addition, to stimulate insurance companies and banks into increasing their capital, revenues spent on capitalization have been exempt from taxation since 2009.  These measures will remain in force for three years.

By the end of 2009, the insurance companies and banks had used AZN 145 million for recapitalization, using these tax benefits.  As a result, the total incorporation capital of all Azerbaijani insurance companies increased by 8% in 2009, reaching AZN 89.8 million.

According to Namiq Xalilov, head of the State Insurance Supervision Committee at the Azerbaijani Finance Ministry, the capitalization of insurance companies is already improving this year.

At present, the State Insurance Supervision Committee is completing its analysis of annual reports but, at the same time, work on increasing companies' capitalization continues.  Despite the trend, the insurance market has companies which have handled well the request to meet the capitalization requirements and companies which are experiencing difficulties in increasing their incorporation capital, said Xalilov.  The minimum capital requirement for insurance companies, as of 1 January 2010, is AZN 2 million.  By 2011, they must increase their capital to AZN 3.5 million, and by 2012 - to AZN 5 million.

"The State Insurance Supervision Committee will be taking steps against violators of the minimum requirements for capitalization, in accordance with the law, starting with the issuing of instructions and ending with the revocation of licences to operate as insurance companies," Xalilov continued.  The measures taken against companies will depend on their particular circumstances.

The Finance Ministry began to take concrete action back in April.  One of the companies denied a perpetual insurance licence was AzInvest Sigorta.  Despite numerous notifications, the company did not take steps to increase its total capital to the required level.  AzInvest Sigorta's capital was less than AZN 1 million, when the minimum requirement was AZN 2 million.

"The total capital is the total value of assets owned by the company.  Accordingly, by failing to meet the capitalization requirements, AzInvest Sigorta violated the solvency provisions specified by law," Xalilov commented on the reason for denying an extension to the licence.  The discontinuation of AzInvest Sigorta's licence resulted in a shortening of the list of insurance companies operating in the country to 27.

However, even before a month passed, the licences of the companies Gunay Sigorta, Azal Sigorta and Amrah Sigorta to carry out insurance activities were suspended on an order by the Finance Ministry dated 7 May 2010.

Based on current legislation, Azerbaijan's Finance Ministry gave the insurers - Azal Sigorta, Gunay Sigorta и Emrah Sigorta - six months to to eliminate problems that caused the suspension of their licences, said Mahir Abdullayev, deputy chairman of the Azerbaijani Finance Ministry's State Service for Insurance Monitoring.

Shareholders in Azal Sigorta are ready to make additional investments in capital to resume the operation of the company. The volume of the investments is being reviewed currently.

Amrah Sigorta expects their licence to be resumed already in late in May. The company has already appealed to Azerbaijan's Finance Ministry to resume their licence. The company believes that there were misunderstandings when the results were being summarized of checks at the insurance company for conformity with requirements for aggregate capital, as the company's capital was increased to 2m manats as of 1 January 2010, according to schedule.

Gunay Sigorta actuary Iskandar Karimov says that company founders have already started to eliminate problems revealed and the company intends to increase its aggregate capital to the required level. "The aggregate capital will be increased within the six-month period given," Karimov said.

The supervisory body's decision is understandable and should serve as a lesson to those still maintaining a low level of capitalization. The company's own capital is a buffer protecting the insurance company and, naturally, its customers, from possible bankruptcy.  The availability of adequate capital enables the company to invest in improvements to its services.  Experience shows that companies with capitalization problems usually find it difficult to pay out indemnities.  During State Insurance Supervision Committee inspections at six insurance companies last year, instances of unjustified refusals to pay out indemnities were discovered, and the companies were forced to pay AZN 80,000.

When capitalization is low, there is a greater risk of sanctions being imposed on the company - suspension or annulment of the licence - which again is bad for customers.

By the end of the first quarter, there were 5 insurance companies in the market (including AzInvest Sigorta) which did not meet the minimum level required.

Insurance during the crisis

International statistics for insurable events show that during difficult financial periods the number of insurable events increases considerably.  There are several reasons for this; for example, driving under stress or companies' saving on their own safety.  Unfortunately, when the financial situation gets difficult, the level of protection falls dramatically.  Premiums of Azerbaijani insurance companies declined by 8.9% in 2009, while their insurance indemnity payments rose by 6.5%.

The majority of Azerbaijani citizens have apparently already realized that insurance is a necessary means of protecting property, especially during crisis.  This explains the increase, albeit insignificant, in demand for insurance products in recent months.

The first quarter of 2010 showed a 3.6% annual growth rate in Azerbaijan's insurance market.  In the opinion of the head of the State Insurance Supervision Committee, there has been some recovery this year in the country's insurance market and, by the end of 2010, insurance premiums are expected to exceed the total amount of insurance premiums collected in 2009 (that is to say, at least AZN 163 million.

Insured life

As the reliability of the Azerbaijani insurance market increases, it would be appropriate for the state to take steps to increase demand for its products.  Experience shows that many companies which did not consider the development of alternative sales channels a priority found themselves in a vulnerable position.  In a stable situation, this is not always apparent, but during the crisis, companies which accumulate revenues only through banks and car dealerships began to develop liquidity problems.  This is because during crisis, the customer's attitude to money changes, the question of buying a policy becomes a difficult one for them, because they want to save on everything.  People save money first on voluntary forms of insurance, although they cannot dispense with mandatory insurance.

In the mean time, life insurance is increasingly relevant in Azerbaijan today.  This is a tested method of resolving the many difficult problems that may beset anyone.  This includes freeing the family of financial problems in the event of the demise of one of them and a guaranteed accumulation of the required amount by the time it is needed.  At present, life insurance accounts for less than 1% of the insurance market.

Namiq Xalilov believes that life insurance policies are difficult to start up, as the experience of other countries shows, but once the mechanism is wound, it develops very quickly.  Because life insurance is a long-term policy, the insured pays premiums over many years, which results in the accrual of the total amount of the premium stated in the policy.

Life insurance, says Xalilov, works by a "snowball" effect and at some point the premiums paid on this type of policy will exceed those paid on non-life policies.

In Western Europe and other countries with developed insurance markets, life insurance premiums account, on average, for 55-60% of the total.  "I think that we too will experience this trend when accumulative insurance contracts (for employers and individuals) become tax exempt in the country," said Xalilov.

Experience of other countries shows that promotion of life insurance started with tax benefits, which at the initial stage were quite considerable but, as the market developed, were reduced to zero.

At present, four companies in Azerbaijan - Pasha Sigorta, Atesgah Life, Standard Insurance and Ata Sigorta - are licensed to provide life insurance.

Xalilov added that, today, insurance companies focus mainly on non-life insurance.  The situation can only change, in his opinion, when specialized life insurance companies are created, because only then will interest in this type of insurance increase, branch networks expand and the product range broaden.

For these companies this will be the only way to make profits, and therefore, in Xalilov's opinion, the emergence of specialized companies will in itself give impetus to the development of this type of insurance.

The Finance Ministry expects that by late 2010 or early 2011, at least two to four specialized life insurance companies will enter the Azerbaijani insurance market.  This year, an increase in premium payments for life insurance is expected and next year this process will accelerate.

No application has been filed yet with the Finance Ministry for a licence to found a life insurance company, but keen interest in this type of insurance is growing, Xalilov continued.  Today, only one specialized company, Atesga Heyat, founded by Atesgah Sigorta, operates in the market.

The desire and interest in starting up this type of company is expressed informally at present, and people continue to familiarize themselves with the law.

The appearance of specialized insurance companies might result in an increase in the number of insurers.  Experts believe that the current number of insurance companies is not sufficient for the Azerbaijani economy.  Taking account of the fact that movable property, real estate and even people's lives are insurable, 27 companies is not that large a number when the demand for insurance services in a country is great.  And 11 of these companies were founded by banks so, naturally, the banking institutions are interested in expanding the business of their subsidiaries.

But still, say the experts, for the next 5-7 years it will be appropriate to maintain tied (i.e. insurance sold with banking products - the insurance of mortgage loans, credits and collaterals) and mandatory forms of insurance as the main drivers of the market development.