OBLIGATORY INSURANCE

Azerbaijan takes fourth place for the development of its insurance market after Russia, Ukraine and Kazakhstan. The country has 28 insurance and one reinsurance company, as well as seven insurance brokers. Last year the Azerbaijani Ministry of Finance completed work on a complex of measures to develop the country's insurance market. On 15 March this year, the new law "On insurance activity", which was drawn up in compliance with the "Insurance Core Principles" of the International Association of Insurance Supervisors (IAIS), came into force.

At the same time, the total capital of Azerbaijani insurance companies reached 150 million manats in 2007, while their authorized capital reached 65 million manats, their own capital - 75 million manats, the volume of total premiums - 148 million manats against 75 million in 2003, and payments - 36.77 million manats against 14.7 million manats in 2003. All these tendencies, as well as the new legislative initiatives, testify to the increasing attention of the Azerbaijani government to the development of the national insurance market and its intensive integration into the world market. Meanwhile, this major and promising segment of the country's financial sector is experiencing a number of problems. Insurance takes no more than one per cent of the country's GDP today. For example, the level of premiums to Azerbaijani insurance companies in 2007 accounted for 0.59 per cent, while payments accounted for 0.15 per cent of GDP. In other words, the share of the insurance sector in GDP is quite low.

A clear mechanism is needed

Azerbaijani Minister of Finance Samir Sarifov said at the opening of the first Azerbaijani international forum of insurers in Baku on 10 July that the level of the capitalization of insurance companies is quite low in the country, while the assortment of their services is very limited, the population's awareness of the benefits of insurance is very low and the life insurance market is underdeveloped. We can also add here the low demand for obligatory types of insurance. If in distant 1992 when the insurance market had just started taking shape in Azerbaijan, obligatory types of insurance were in the lead in the collection of premiums and accounted for more than 80 per cent, now the leading position is taken by voluntary types of insurance (almost 85 per cent). According to the head of the state insurance department of the Azerbaijani Ministry of Finance, Namiq Xalilov, general insurance premiums accounted for 98.9 per cent of all insurance premiums in 2007, voluntary premiums - 9.7 per cent, obligatory insurance - 9.3 per cent, and life insurance - 1.1 per cent. At the same time, car insurance takes first place in the collection of premiums (26 per cent), liability insurance takes second place (22 per cent) and property insurance (12 per cent) - third place. They are followed by obligatory state insurance (11 per cent) and medical insurance (9 per cent). According to the chairman of the board of the MBask insurance company, Camil Malikov, in the first quarter of 2008, the main types of insurance services were car insurance (24.6 per cent of the market), medical insurance (12.1 per cent), property insurance (11.2 per cent) and obligatory insurance (9.4 per cent). Life insurance accounts for only 1.5 per cent.

The leading position of car insurance is easy to explain. More and more Azerbaijani citizens are buying personal cars since long-term car crediting and leasing are quite developed in the country. The insurance market expects a further growth in this type of business.

The state of affairs is not so good in property insurance. Insurers do not encounter corporate insurance of property. Another matter is insurance of private individuals' property. In 2007 alone, the market managed to make a profit from this type of activity for a very prosaic reason - fires.

Obligatory types of insurance are clearly underdeveloped, which many link to the absence of a single law "On obligatory insurance" in the country, which would finally clarify existing types of obligatory insurance and bring them in line with international standards. Currently, the Azerbaijani Cabinet of Ministers has submitted the draft law for examination by various departments. The draft law was drawn up by the Ministry of Finance and the Canadian company Lawrie Savage & Associates Inc., which renders technical assistance in insurance reforms and in improving the insurance legislation of Azerbaijan. The company operates within the framework of a contract worth $325,000 using a grant from the FIRST Initiative programme provided with the mediation of the World Bank.

For the time being, Azerbaijan has nine laws on obligatory types of insurance, but not all of them are "effective". That's to say the legislative base for obligatory types of insurance exists, but it is not working. For this reason, officials decided to unite all nine types of obligatory insurance into one law. Of course, not all of the obligatory types of insurance will stop working after the adoption of the new law. Initially, the so-called social types of insurance (for public servants, deputies, servicemen and so on) were removed from this document of exceptional importance to the development of the insurance market. The main emphasis was placed on the obligatory insurance of the civil liability of vehicle owners.

The initial edition of the law included five types of obligatory insurance - the civil liability of vehicle owners, passengers' insurance against accidents, the liability of enterprises with a heightened source of danger, construction workers' insurance against accidents and the civil liability of entrepreneurs while using real estate for commercial purposes. At the same time, the builders' insurance is a fundamentally new type of insurance. In turn, the insurance of the liability of enterprises with a heightened source of danger almost leads the existing obligatory ecological insurance to its actual status.

The Ministry of Finance maintains that the law "will not mechanically unite all the existing laws - the very mechanism of obligatory insurance will be corrected".

Obligatory insurance comes first

But there is a problem. All talk about obligatory insurance has been going on for quite a long time. The stake is made on changes in the country's legislative base. However, most of the country's citizens do not understand who can force them to become clients of insurance companies and how. In other words, if "obligatory insurance" does take root, we will be forced to buy insurance policies regardless of our desire. Only one thing makes us happy: if previously representatives of the Ministry of Finance did not bother to explain what types of insurance will be obligatory, today we have more or less detailed information on this matter.

If we set scepticism aside, we can say the following: of course, the presence of a great number of types of obligatory insurance may play a positive role, not least because many of our countrymen still cannot understand the benefits of the same fire insurance, while the law will prompt them to insure their property and offices against possible cataclysms. So it is quite possible that the new law will contain elements of so-called "painless" insurance. For example, the cost of insurance is included in the cost of air tickets at the moment. The passenger pays the sum shown on the ticket without thinking that he may be able to get insurance compensation "if something goes wrong". There are masses of examples like this.

Another matter is whether all the prescriptions of "obligatory insurance" will be fulfilled. The same fire insurance is nothing other than a theory today.

Another important thing is that two years ago, the draft law "On the material liability of employers to their employees" was put on the agenda. We should agree that this is a very important law. Meanwhile, most insurers opposed this innovation. They still question the development of obligatory types of insurance. Many insurers think that first it is necessary to complete work on all types of insurance available today and on the legislative base, for example, obligatory fire insurance. This is a very big problem because there is a law, but it does not work at full stretch, i.e. although a lot of time has passed since the adoption of the law, risks in this type of insurance have yet to be divided. There are many problems of the sort, mainly due to the weakness of the legislative base. For example, obligatory insurance against ecological risks is almost not working either. This type of insurance, just like many others, is obligatory, but a question arises: who oversees its implementation?

Whatever it is, insurers are convinced that the new legislative initiative - the law "On obligatory insurance" - will be able to break the deadlock around this type of insurance. The approval of the draft law "On obligatory insurance" by various departments is continuing. The draft law is currently being examined by the Azerbaijani Cabinet of Ministers. Xalilov said that the Cabinet of Ministers has submitted it to several organizations for consideration, which is why the deadline for examination is difficult to predict.

It is already known for certain that tariffs for some types of insurance will undergo changes in the process of adopting the new law. It is already planned to drastically change obligatory liability insurance tariffs for vehicle owners. For example, according to Xalilov, insurance cover on this type of insurance will be increased from the current level of 1,000 manats, which does not meet the situation on the market, to 5,000 manats. According to the Ministry of Finance official, this level is not enough either, "but we chose it in order to avoid a sudden increase in the sum of insurance premiums", i.e. the process of reaching market principles should take place stage by stage. At the same time, the insurance premium may be diversified depending on the engine volume of a vehicle.

Judging by this information, the law "On obligatory insurance" will be adopted very soon, especially as it was planned to adopt it almost at the same time as the law "On insurance activity". For this reason, Ministry of Finance officials and insurers themselves think that the tendencies of development on the Azerbaijani insurance market are more than promising. For example, the country has already adopted the law "On insurance activity", and the per capita insurance premium of 17 manats, i.e. $22, demonstrates the tremendous potential of the further growth of the insurance market. The first Azerbaijani international insurance forum announced the further plans of the Ministry of Finance to develop the insurance market. The improvement of the legislative base for obligatory types of insurance, education of insurance actuaries, and the establishment of guaranteed compensation and an insurance ombudsman's institute were mentioned first again.

On 14 July, the ministry launched courses on actuaries' work with the support of USAID. A month earlier, the pilot introduction of obligatory medical insurance (OMI) began. Owing to this system, the state will cover expenses on the treatment and examination of children, students, housewives and pensioners in Azerbaijan, as is the case in the rest of the world.

For the time being, the Ministry of Finance is planning to toughen the requirements for the level of capital at insurance companies again - this time 0.8 million manats. According to Minister Samir Sarifov, the preparation of new requirements for the capital of insurance companies is about to be completed. It is planned to adopt new rules in August and introduce them on 1 January 2009. The licences of insurance companies that fail to meet the new requirements will be revoked. This means that stronger companies will survive on the market. This is of benefit to most Azerbaijani citizens who will prefer insuring their risks with reliable and authoritative insurers.