LIFE INSURANCE

Which particular type of insurance is in greatest demand across the world, bringing in the highest revenues for insurers? The answer is very simple, it is life insurance. In general, insurance falls into two categories: life insurance and all other insurance. But whereas in countries with developed insurance markets, some 90% of the population have life insurance policies and premiums account for 55-60% of the total premiums paid, the situation in Azerbaijan is exactly the opposite. According to the year-end results for 2007, Azerbaijani insurers collected life insurance premiums worth AZN 2.2 million, just 1.5% of all premiums, and insurance indemnities amounted to AZN 200,000 (0.5% of all indemnities).  In other words, the world's most popular type of insurance is not yet popular in Azerbaijan.

"Life" at level zero...

In the opinion of experts, there are several reasons for this. Let us note at the very beginning: previously, experts have cited more reasons, now the list of reasons is shorter.  But alas, the nature of the problem has not changed as a result.

One of the main reasons, for example, was the low national average salary, under $200-$300 a month, which was below the limit at which a dynamic development of the life insurance sector usually begins. In other words, when people start receiving decent salaries, they can allocate some of the money to pay insurance premiums. We can see that the required salary levels have been achieved now, but life insurance still remains effectively at level zero.

The second reason is the inadequate level of capitalization of the insurance companies.  Obviously, companies with higher capitalization can win greater trust from potential clients.  In addition, requirements for insurer's capitalization lag somewhat behind current trends in the insurance market, as in the financial sector and the economy in general. For example, the high growth rate of the Azerbaijani economy has resulted in a considerable growth in insurance premiums and the risks which insurers have to run. In 2007, the premiums collected by insurers increased by 60% to AZN 150 million. This was124% more than the figure for 2004. And estimates for the end of 2008 are AZN180-200 million. This is why there is a need to revise the minimum capital requirements for insurers; increases are necessary to ensure their solvency and, ultimately, to better protect their customers' interests. The new law 'On insurance' was designed to address this situation. The law was enacted in March 2008 and the Azerbaijani Finance Ministry began to draw up new requirements for the minimum incorporation capital of insurance and reinsurance companies operating in the country; they were adopted in July.

According to these new requirements, by 1 January 2009 the minimum capital of insurance companies should be AZN 1 million, and for reinsurers - AZN 2 million. By 1 January 2010, insurance companies' capital should be at least AZN 2 million, and reinsurers - AZN 4 million; by 1 January 2011, these amounts should increase to AZN 3.5 million and AZN 7 million respectively, and by 1 January 2012 - to AZN 5 million and AZN 10 million respectively. According to the government decision, insurance companies founded after 1 August 2008 should have incorporation capital of at least AZN 5 million, and reinsurance companies - at least AZN 10 million. For existing companies, however, the process of increasing their minimum capital requirement will be gradual. The Finance Ministry maintains that the majority of insurers will be able to meet these requirements. In addition, the ministry is certain that new companies will also be created, offering life insurance policies among other services.

But even this is not all. Yet another reason is the very nature of life insurance: it is a cumulative, long-term system. People need to be sure that the insurance company will remain in the market for the next 15 years. During that period, they should pay the company insurance premium and expect that it will be able to pay them back the entire amount when the policy expires. Secondly, life insurance revenues should be accumulated separately from the revenues from other types of insurance, because this type of insurance involves different types of activity. And if some companies want to provide life insurance services, they should first of all set up a subsidiary, or a different company, which will deal only in life insurance, because this type of insurance has different rules and even different styles of accountability.

In the past, insurance companies were issued 5-year operation licences. Of course, the development of life insurance was out of the question in such conditions because the insurance companies' reserves for life insurance services should remain in operation for at least a 10-15 year period. What if the company were denied a licence in 5 years' time?  Not only customers, but also the insurance companies, were in no position to sign long-term agreements. In addition, the Azerbaijani insurance market is not so well developed as to enable an insurance company to open a subsidiary to run life insurance.

These problems, too, were addressed in the new law 'On insurance'. According to this document, the insurance companies can now count on permanent licences. And, beginning from March, a number of the country's insurance companies have already received such licences.

Already from this year, insurance companies are obliged to separate life insurance-related transactions from those dealing with other types of insurance, as is required by the best international standards. The Finance Ministry has given insurance companies operating in the republic three years to accomplish this. In other words, by 2011, only specialized insurance companies will be able to provide life insurance services.

"The three-year moratorium aims to pave the way for the long-term development of the insurance sector in Azerbaijan," we were told at the ministry.

At the same time, the minimum capital requirements are the same for insurers providing life insurance and for those providing other insurance services. But if, during the transition period, a company provides services of both types, it should have the required minimum capital for both types of activities separately.

Yet another "plus" is that restrictions on the share of foreign capital in the capital of insurance companies were cancelled in 2008. In other words, from now on insurers can invite foreign companies, or even major international financial institutions, to buy shares in their company. At the same time, restrictions were introduced on the maximum share held by foreigners in the total incorporation capital of all insurance companies in the country. Overall, this is a more liberal approach and enables foreigners to own up to 100% of an individual insurance company.

Insurance guarantee

As we can see, the lion's share of problems which hold up the development of the life insurance sector in Azerbaijan have been resolved. Nonetheless, there are still significant gaps in the sector. You would think that citizens would have started to buy life insurance policies long ago as their incomes continue to climb. But this is only a minor explanation of people's passivity. The main reason is that the country's insurance market is still haunted by memories of the Soviet insurance system. People are still reluctant to believe that they will be indemnified in case of a claim. That is why insurers simply must win customer confidence. Incidentally, it is worth noting that, together with the law 'On insurance', additions and amendments to the "Insurance" chapter of the Civil Code were enacted, regulating relations between insurers and customers. These changes to the Civil Code aim to fill the gaps and eliminate ambiguity, to better protect the rights and legitimate interests of insurers, their customers and underwriters.

Finally, the Finance Ministry plans to create an integrated system of insurance against insurance risks, a so-called Fund of guaranteed indemnification. The fund will pay off debts in case of an insurer's bankruptcy and in other cases as prescribed by law. At present, the ministry is working on an appropriate draft law.

In addition, the majority of Azerbaijani citizens simply have no information about the benefits of holding a life insurance policy, which elsewhere is a proven way of meeting various needs. These needs may include paying for children's education in the future, additional material support in retirement, and so on. In other words, many parents might already be taking steps to ensure their own financial security and that of their children, thanks to the right life insurance policy. Especially as, together with the accumulation and investment of customers' money, the insurers also provide insurance services in case of accidents. If a proper insurance programme is created, the companies will pay off the contractual sum even if the customer cannot pay the insurance premium because of the aforementioned accident. In other countries, the classical life insurance schemes envisage payment of the insured amount both in case of the customer's death and when the insurance policy expires - not solely when an insurance event occurs, which in this case is death. For instance, 15 years after the signing of the policy, the customer is paid the insured sum in full.

Very often, the life insurance contract includes additional insurance programmes from accidents which include standard risks: injury, disability, temporary inability to work, insurance against critical illness, achievement of a certain age, death and so forth. This is why mixed insurance policies are beneficial, because they fully cover risks to the customer; they are in a sense much more beneficial than bank deposits (banks will not support customers in case of accidents).

There are plenty of accumulative products of this type and they are of benefit to all interested parties. Customers receive a guarantee of a decent retirement, the state delegates some of its social security concerns to the insurance companies and the latter receive large amounts of money for a long term and can invest them profitably, both for themselves and for the country. So the insurers should intensify their public awareness campaigns to better inform people about the insurance system in general and to promote life insurance in particular.

The development of the market is also slowed by the religious factor, unusual as this might sound. According to an opinion poll conducted by one of the country's insurance companies, the overwhelming majority of respondents "entrust their lives to God, rather than to insurers."

But alas, the psychological and educational aspects do not exhaust the list of impediments. At present, insurance companies are not professional enough in the development and marketing of life insurance products. Incidentally, the government, too, should take an interest here because it needs to focus on public awareness in this field. For now, insurers have to literally cajole the Education Ministry to introduce extra academic hours at universities for students who want to know more about the sector. They have also organized numerous courses, but the problem of developing professionals for this business remains on the agenda.

First "baptisms"

Nonetheless, in the opinion of Namiq Xalilov, head of the Finance Ministry insurance supervision department, it is possible that the first specialized life insurance policy companies will appear in Azerbaijan in 2008. "But because life insurance is different from other types of insurance, of all the insurance companies operating in Azerbaijan at present, only four or five can seriously entertain life insurance," said Mr. Xalilov (Interfaks-Azerbaijan).

He noted, at the same time, that the Finance Ministry plans to implement a system of measures to stimulate the development of the life insurance sector, in particular, by issuing medium and long-term bonds. This is understandable, too. These bonds are a good means of investment for insurance companies. In addition, by investing in long-term bonds, the insurance companies will find it easier to predict returns on investments for their clients' life insurance schemes.

But there are a number of positive changes besides these legislative initiatives. For example, in the first half of 2008, life insurance premiums totalled AZN 990,000 (in the corresponding period of 2007, they amounted to AZN 320,000, so there has been a growth of 209.4%) and claims amounted to AZN 100,000, which is equal to the figure in the corresponding period of last year (1news.az).

Despite the obvious progress, experts think that the country is still far from realizing its full potential, if only because there are no specialized life insurance companies here. But the major foreign insurance companies have already demonstrated their interest in life insurance in Azerbaijan. Among them are the French SCOR Life, the American AIG Life and the German Allianz Life...  And there are a number of Azerbaijani insurers who are already planning to open specialized subsidiaries, with foreign participation.