DO YOU HAVE INSURANCE AGAINST CRISIS?

The current crisis has hit the world's economy like a volcano, and it is not clear if it has "fallen asleep" forever or is likely to erupt again. In Azerbaijan, the crisis has affected some sectors of the economy - construction, finance, especially banking, securities markets etc. The crisis had its most serious impact on insurance, a market which cannot exist in isolation and which is largely dependent on the condition of other sectors. Indeed, the crisis had a devastating effect on some of the world's insurers.

In principle, analysis of the Azerbaijani insurance market has shown that it is not yet completely hardened and is not sufficiently robust for some difficult circumstances. This may be attributed to several factors, in particular to the low volume of the insurance market, the limited number of insurance products and weak interest in insurance for objective and subjective reasons.

We are our own masters...

Analyzing the state of the insurance market, we first need to assess the situation, based on the volume of premiums received. The statistics reveal an unimpressive picture. 

The table above shows that the bulk of premiums are traditionally collected in a few areas of insurance. This was true a year ago, and the same applies this year. But we would like to draw your attention to the collection of premiums in 9 types of voluntary and compulsory insurance, which comprise the lion's share of insurance premiums.

The decline is marked and accounts for almost 20 per cent of the volume of fees for this period. Given that in nine months of this year, the total premiums collected on the market decreased by 11 per cent, the value of these nine types of insurance increases. Simply put, if insurers had been able to maintain the collection of premiums in these types of insurance at last year's level, we would be able to say now that there is no crisis on the market.

The situation is worst in car insurance. Premiums from this insurance have halved, that is, we can say that revenues in this segment were most vulnerable to crisis tendencies in the market. Here, perhaps, it is appropriate to speak of two reasons for this situation: the first and main reason is the revision of banking policies for consumer lending, namely their tightening. A year ago, the picture was the opposite: banks rapidly built up their portfolio of car loans, people were buying cars and insurance companies consistently received large premiums. But from the third quarter of last year the situation began to change - banks began to limit consumer lending, and some even stopped it altogether. At the same time, people had not yet felt the impact of the crisis and continued to buy vehicles, while insurance companies, as a result, continued to receive their premiums. The picture deteriorated this year: the volume of car loans fell sharply as people no longer got themselves recklessly into debt in order to buy cars. Thus insurers' portfolio premiums from this source fell rapidly. And so the fall in premiums in this case, objectively and to a large extent, is due to the effect of the global crisis.

The second reason for this situation is rather more subjective and originates from policies pursued by insurance companies for several years. As you know, cars were mostly sold on credit over a period of three to five years. All responsibility for insurance, in contrast to the current situation, lay on the borrower's shoulders. This seemed logical and correct, had it not been for the fact that the borrower had to pay in advance for insurance covering the whole period of the loan. Thus insurance companies derived the greatest benefit in this credit triangle, as they received the entire insurance premium for three to five years ahead. As lending for the purchase of cars was very active last year, insurance companies were in the black. But, on the other hand, having collected the premiums for several years ahead, insurers forgot that the market for car loans also has its limits and, as it became saturated, it was impossible to maintain the previous levels of premiums. It had already been predicted that in 2009 or in 2010, this means of collecting premiums from buyers would fail. Unfortunately, the crisis made things even worse. We may conclude that insurers backed themselves into a tight corner and have become hostages of this situation. Moreover, the market for car loans, which has slimmed down significantly, does not allow insurance companies to recover all their losses on this type of insurance. 

In what other types of insurance can decline be linked to the crisis? Perhaps, most of all this applies to voluntary fire insurance and cargo insurance. In the first case, the reason is probably a modified approach to business spending and, in the second case - a decrease in foreign trade operations and, accordingly, in the volume of cargo transportation, makes itself felt. In such cases, insurance is seen, for the most part, as unnecessary spending. Also, you buy mandatory fire insurance and thus do not need voluntary insurance.

In other types of insurance the changes are not so significant and are often associated with objective causes. For example, the growth in premiums for voluntary health insurance may be linked to some appreciation in their cost and, for aircraft insurance, to companies' expanding fleets and a number of other objective causes.

Mirror of trends

In general, the current situation fully reflects trends in the insurance market. The market in Azerbaijan is less diversified, most companies focus on 5 to 10 types of insurance, and some companies have become quite specialized. On the other hand, the insurance culture of the population remains at a low level, and peoples' thinking gives no reason to expect additional sources of income for insurers. It's no secret that few entrepreneurs or citizens will buy an insurance policy of their own volition - we are not accustomed to giving money without receiving something in return. In addition, people are sometimes not prepared to pay for insurance because they do not have the financial resources to do so. So in 80 per cent of cases, a contract with insurers is a mandatory or forced measure, even if the insurance is called "voluntary". For example, when buying a car on credit, many Azerbaijanis would not pay for voluntary insurance several years in advance if banks did not oblige them to do so.

So the crisis has helped to identify more fundamental problems in the insurance sector, namely the weak utilization of capacity (now at 25-30 per cent). Therefore, insurance companies need to change their approach to the market. The practice of acquiring instant income from several key types of insurance has, to a large extent, not paid for itself. Insurance companies must provide services for more types of insurance, even if few are actually in demand on the market. But we need to start somewhere, especially given the conservatism of our citizens with regard to spending money and safeguarding their property, capital, life and everything else. In any case, the cost of services provided by insurance companies should be in tune with people's resources.

If we leave aside almost all types of compulsory insurance (except compulsory motor vehicle liability insurance) and certain specific types of voluntary insurance (such as insurance of air and water vessels, owners' liability for these vessels and other types of liability insurance, which cannot be categorized as popular), the collection of premiums for basic types of mass insurance amounts to 92-96 million manats. Thus insurance companies need to expand their insurance portfolios with new products and introduce combined products. It is also important for them to lobby for their interests. This could be in the acceleration of adopting certain laws, tax and other benefits. Ultimately, it all may affect the market, and the insurers themselves, favourably.

Still to come!

So what can we expect from the market in 2009? Given the performance over three quarters, it is highly likely that insurers will finish the year in the red, that is, compared to 2008, the volume of premiums will fall. In the light of the above, the situation is not surprising, since it will be impossible to eliminate all the negative consequences so quickly. If we turn to the figures, it is most likely that this year insurers can count on a total volume of 150 million manats in premiums, and under more favourable conditions - 155 million manats. Thus, the annual decline on the market will amount to 14-16 per cent. At the same time, it should be noted that the situation on the insurance market of Azerbaijan has already stabilized and is now much better than in early 2009.

Setting figures aside, insurers themselves and their governing bodies should also examine other aspects. One of the main tasks is the formation of an effective system of insurance. To achieve this, it is necessary to continue to improve insurance legislation, to ensure the financial stability of insurers, to increase the effectiveness of state supervision of the insurance industry and to simplify documentation procedures in the event of insurance claims. In addition, it is necessary to expand the spectrum of insurance services and to open branches in the regions. Initially they may be less effective, but the situation will not remain so forever. Sooner or later, insurers and policyholders will find a compromise: when the former will be able to satisfy the latter, and the latter, in turn, will evaluate the work of the former and cooperate with them. But to do this, you need to continue to develop existing potential. Such opportunities exist in life insurance and medical insurance, both voluntary and compulsory. Untapped opportunities also exist in banking risk insurance, property insurance, as well as other areas.

So, in the coming years we can expect many innovations on the insurance market, and it will be very interesting to observe these processes, let alone participate in them...