WIND OF CHANGE

The development of the insurance market in our country testifies to positive changes in this sphere. This is also proved by the 30-per-cent growth in comparison with the same period last year in the overall volume of insurance bonuses which 29 local insurance companies managed to accumulate in the first half of this year. The market is indebted for this growth to developing forms of voluntary insurance. However, most experts suppose that only the improvement of the legal base and tougher requirements for mandatory forms of insurance might lead to a growth in the turnover of insurance companies. Work is this direction has been speeded up, and recently, the Milli Maclis adopted a draft law "On insurance activities" in its first reading.

Non-mandatory "car insurance"

The sphere of mandatory insurance is regulated by nine legal acts: on the insurance of servicemen, members of the law-enforcement agencies, medical personnel, diplomatic staff and members of parliament, passengers, entrepreneurs' real estate from fire, drivers' responsibility, medical and ecological insurance. Despite the increase of 71.15 million manats in the overall volume of insurance bonuses, collected by all insurance companies of Azerbaijan in the first half of this year, mandatory insurance has yet to play an important role in this process. For example, out of the total volume of incomings, only 10 million manats came from mandatory types of insurance, and in this regard, it is pleasing that in comparison with the first half of 2006, sums in mandatory types of insurance have doubled. As for other types of voluntary insurance, their sum is 61.15 million manats - most of the bonuses that were collected.

The situation that has come about in our country does not at all resemble the practice of developing the insurance market in Western countries where mandatory forms of insurance have been the driving force of the insurance market since the first half of the 20th century, promoting the development and popularization of voluntary insurance. For example, the main retail product of foreign insurance companies was a mandatory insurance policy for car owners. Proving the effectiveness of mandatory policies in practice, car owners were offered other products as well - voluntary car insurance and the insurance of the car owner and his passengers from accidents. Similar schemes are also used in the process of insuring entrepreneurs' real estate against fire. In order to attract clients, insurance companies offer significant discounts if a client buys voluntary insurance policies together with a contract on mandatory insurance. These tried and tested schemes have yet to be used in our country.

The reason why the mandatory insurance system is not well developed is ineffective control over the implementation of the law and shortcomings in legal documents. Although there are about 600,000 vehicles in the country, only 40 per cent of all car owners buy the mandatory policy.

Another reason is that mandatory insurance tariffs, approved by the Cabinet of Ministers, are not attractive enough. The price of an annual policy for private individuals is 12 manats, while it is slightly more expensive for legal entities. Insurers have a low interest in car insurance also because the commission of agents from 12 manats is only 6 per cent - 0.72 manats. In Latvia a car insurance policy is more than 100 euros and the commission is 10 per cent, which certainly prompts companies to look for new customers.

One law to solve all problems

The situation surrounding mandatory ecological insurance is even worse as economic entities are not interested in it. The law "On mandatory ecological insurance" defines the terms and rules of mandatory insurance for damage caused to the life and health of the population, property and the environment if the environment is polluted as a result of accidents. It should apply to dozens and hundreds of major industrial enterprises of Azerbaijan. However, only several dozens of such mandatory contracts were signed with major insurance companies last year.

It is notable that since the adoption of the law "On fire insurance" in 2004, there has been no significant growth in insurance bonuses. On the contrary, there has been an outflow of bonuses from voluntary types of insurance due to the lack of proper control over those who use insurance. According to the Interior Ministry, only several thousand of more than 100,000 enterprises liable to mandatory fire insurance have been insured so far (!), which testifies to a very low level of control over the implementation of the law. In any case, the ineffectiveness of mandatory fire insurance is partly related to shortcomings in the law.

The unsatisfactory pace of growth in mandatory forms of insurance over the last few years has caused serious concern at the Ministry of Finance. It is necessary to take serious measures as soon as possible to ensure the observance of the laws that regulate the sphere of mandatory insurance and to introduce a system of incentives for this segment of the market, making mandatory insurance more beneficial and improving its legislative basis. In order to overcome this situation, continue reforms in the sphere of insurance and improve Azerbaijan's insurance law, the Ministry of Finance has completed work on the initial draft of the single law "On mandatory insurance". The company Lawrie Savage & Associates Inc., which works on the basis of a contract worth 325,000 dollars allocated through the World Bank, is a consultant of the Ministry of Finance in drawing up the new draft law.

"Work on the project has been completed, and the document has been submitted to the government, international organizations and the insurance community for consideration," the head of the insurance surveillance department of the Ministry of Finance, Namiq Xalilov, has said.

The new law will not be a mechanical mixture of the already existing nine laws on mandatory types of insurance. The single law will not include some types of social insurance, for example, the insurance of public servants and servicemen. As a result, the new law will apply to four types of mandatory insurance services - on the civil liability of car owners, on fire insurance, on the insurance of passengers and ecological insurance.

It is also planned to introduce mandatory insurance for people working at construction sites. Moreover, the mechanisms of mandatory insurance will be seriously corrected. For example, as far as the mandatory insurance of automobile owners is concerned, we can expect a growth in both insurance fees and insurance tariffs the level of which remains one of the lowest in the CIS. The principle of social justice will be used in the process of increasing tariffs. For the time being, the rate of insurance is only 12 manats. After the law is updated, the country will be more active in joining the international system of automobile insurance - the Green Card.

The Ministry of Finance intends to submit the draft of the single law "On mandatory types of insurance" to the parliament soon.

The target is the liberalization of the market

Another law - "On insurance activities" - has already been agreed by all departments and was recently considered and approved by the Milli Maclis in its first reading. It is high time to update the law "On insurance" which has been in force since 1999 because the main reason why the country is lagging behind in the sphere of insurance is imperfect legislation, the chairman of the parliamentary commission on economic policy, Ziyad Samadzada, thinks. "In 2006, the volume of insurance bonuses accounted only for 0.51 per cent of GDP with the average indicator of 8 per cent worldwide, while the volume of bonuses per head of the population reached only 11 manats with the average world indicator of more than 500 dollars and even 3,000-5,000 in some countries," Samadzada says.

The new draft law "On insurance" provides for the liberalization of the market (probably with some transition period) with an increase in the quality of services with the support of local companies. In comparison with the current law "On insurance" which has been in force since 1999, the main innovations of the draft law are the reorganization of insurance control in compliance with the standards of the International Association of Insurance Fraud Agencies, the application by insurance companies of modern norms of corporate management and financial accountability and a switch from the regulation of the level of authorized capital to requirements for overall capital. At the same time, restrictions on the participation of foreign capital in an insurance company are lifted. Instead of the current norm (no more than 49 per cent in the capital of an insurance company), the volume of foreign capital on the entire insurance market will be defined. Along with that, if 20 per cent of the share or more are sold, insurers will have to apply for permission from the regulator. At the same time, a new procedure of licensing insurance companies is introduced, which provides for the introduction of a system of licensing old agents and the introduction of open-ended insurance licences.

"The adoption of the new law will give an impetus to the development of the insurance market, make it possible to attract foreign insurance companies with a high rating, improve the system of management in insurance companies and reduce risks," Samadzada thinks.