INSURANCE WITHOUT TEARS

Azerbaijan's insurance market seems to have shaken off the stagnation that dominated most of last year. First quarter figures show that there's no reason to expect a repeat of last year, as premiums will be going up.

The total volume of insurance premiums in the first quarter of this year was 36.8m manats, an increase of 29.49 per cent on the same quarter last year. This is the highest growth rate in the insurance market for the past two or three years. The surge is all the more surprising against the backdrop of the 7-10 per cent fall in premiums that marked much of last year. The leading insurance companies managed to revitalize their work in the first quarter and this is reflected in the figures.

Voluntary types of insurance, whose volume increased by 21.1 per cent to 32.83m manats, laid the foundation for this growth in premiums. The increase in compulsory types of insurance was even greater, 300 per cent, to 3.97m manats, but their volume is not high enough yet to ensure growth in insurance premiums.

The dynamic growth in compulsory types of insurance is linked to the development of insurance in the state system. Military servicemen and civil servants have state insurance. This explains the growth in contributions for compulsory insurance in the Azarsigorta state company which received up to 3 million manats for compulsory insurance in the first quarter.

In these conditions it's most important to assess the situation in the voluntary insurance market. Leaving aside life insurance, contributions have increased in key areas such as: medical insurance from 2.2m to 3.5m manats, accident insurance from 0.7m to 0.9m manats, and fire insurance from 4.3m to 4.7m mantas, as well as disaster insurance (see Table 1).

Of course the economic situation in the country, including its trend towards inflation, also influenced the growth in insurance premiums. For example, virtually all companies have increased the prices of their medical insurance services this year.

The picture was reversed in terms of insurance payouts in the first quarter. They stood at 6.81m manats in January to March this year, a drop of 43.33 per cent compared with last year.

Prerequisites for growth in place: time and money needed

The situation on the insurance market today is reminiscent of the calm before a storm. The insurance sector is on the threshold of very serious change. These changes are mostly qualitative, but could be quantitative too.

One of the main qualitative changes on the market involves two new draft laws: "On insurance" and "On compulsory types of insurance". Work is just finishing on these two documents which will lay the foundation for further development of the insurance market. If all goes well, they will be passed by the end of the year; but it is more likely that the law "On insurance" will be passed this year and the law "On compulsory types of insurance" in 2008.

The law "On insurance" will mean that insurers will have to change their way of working

For example, once the bill has become law, insurance companies will have to change their form of ownership, as banks had to do several years ago. Banks can operate on the market today only as open joint-stock companies. This has not yet been required of insurers. Many companies have been operating as closed joint-stock companies, limited liability enterprises. It is expected that those companies that are not open joint-stock companies will have six months to change their form of ownership. "Almost all the insurance companies will have to change their form of ownership when the new bill has become law. All the insurance companies have already been informed about the Finance Ministry's plans. They can, therefore, even now become open joint-stock companies," the Finance Ministry says. This process is already in evidence as insurers are becoming more open.

The open joint-stock company format is thought to ensure a higher degree of transparency in companies, increase the level of corporate management and also allow for additional capital to be brought in to the company very quickly.

The new law on insurance also envisages simplification of procedures for insurance companies to open branches and representative offices. At present legislation requires insurance companies to obtain permission from the Finance Ministry to open branches and representative offices. The Finance Ministry is planning to reconsider its policy in this area and to greatly simplify the procedure. Under the new rules insurance companies will not have to obtain permission to open branches; they will simply have to inform the Finance Ministry. Twenty-eight insurance companies are operating in Azerbaijan today. Of these, only seven have branches or representative offices and there are 40 branches and representative offices in all. This problem is not new, as insurers see little potential in rural areas. The development of insurance in the districts depends above all on the level of economic progress there. Without the development of business, mortgages and the consumer credit system in the regions, it will be difficult to tempt insurance companies to open branches there. Nonetheless, insurance companies should have branches in the country's major cities.

Another legislative innovation will be changes in the system for licensing companies that provide life insurance. Under the new rules this type of insurance will become specialized, as a result of which companies that wish to provide life insurance as well as other types of insurance will have to set up two separate companies. There is nothing surprising in this as, throughout the world, life insurance is considered to be essentially different from other types of insurance. These differences are linked to business procedures and calculations of income, as well as risk placement and a whole range of other issues. The world's major companies prefer to have separate insurance companies that specialize in different types of insurance. For example, America's AIG has a separate company specializing in life insurance, energy risk etc.

Of countries of the former Soviet Union, this practice is applied most widely in Kazakhstan, where life insurance requires a separate licence.

This begs the question of what companies that provide both life insurance and other types of insurance here should do. Basically, there should not be any particular problems. Life insurance, especially cumulative life insurance, is not well developed in Azerbaijan today and only a few companies provide it. The volume of premiums for this type of insurance is not very great. Nevertheless, these insurance companies will be given a breathing space to allow them to make their choice. If they want to continue to offer life insurance services, they will have to set up new, specialized companies. Certain strict conditions will be applied to insurance companies during this breathing space. These conditions include separating capital for life insurance from that for other types of insurance. In both cases the level of capital must meet the insurance companies' minimum capitalization requirements. They must also keep separate accounts for life insurance and other types of insurance.

Experts think that there is no need today to force the development of cumulative types of insurance, of which life insurance is one. "This is high liability and a huge risk for insurers. Insurance companies must have the infrastructure prepared to introduce these types of insurance. In this case the various delays benefit the insurance companies," experts say.

Life insurance is attractive for well-capitalized insurance companies. It must be remembered that long-term types of insurance do not bring instant profit. They can only become profitable over a four to five-year period. At the same time cumulative insurance involves dealing with people's resources. Insurance companies, therefore, need to have the necessary capital.

Many experts see life insurance as having great hidden potential on the Azerbaijani insurance market. In developed countries, cumulative life insurance plans account for up to 60 per cent of all insurance premiums. The situation here is rather different. Many insurance companies today cannot or do not want to work with private individuals. On the other hand, citizens themselves are in no great hurry to insure their own lives or those of their family. These factors are mutually related. 

How to make the Top 10

The insurance business is expected to do better overall in 2007 than last year. Most insurance companies are predicting an increase in the volume of premiums this year. The first quarter statistics show that these predictions are not without foundation and are realistic.

This year many insurers are pinning their hopes on vehicle insurance. This is because of a growth in credit deals to buy cars. A bank loan to buy a car today requires insurance. Bearing in mind that car dealers and importers, together with the banks, are constantly putting new credit products onto the market; this type of insurance is reaching its peak.

Mortgage insurance is another promising type of insurance. In the next couple of years the volume of insurance premiums on mortgage credit are expected to exceed 1 million manats.

More and more companies and private individuals are beginning to take an interest in insuring their property. This kind of insurance has huge potential, but unfortunately our businessmen are not sufficiently "mature" for this market. Azerbaijani businessmen can invest several millions in constructing a shopping centre or one of our beloved wedding palaces, but it would not occur to them to pay a couple of thousand for insurance. This is business Azerbaijani-style. Insurance companies, therefore, need to promote themselves more actively if they are to get positive results.

Many major insurance companies now have to re-examine the structure of their insurance premiums too. For example, energy insurance risks have long formed the basis of payments to Atasgah and AIG Caspian Insurance. However, the situation is not all that favourable in the sector at the moment. The volume of potential risks is falling, which leads to a drop in insurance premiums. Two years ago Atasgah began a restructuring process and energy insurance now makes up only 40 per cent of their portfolio and will continue to fall. This year AIG Caspian Insurance has already begun to look at other types of insurance, as the company's premiums have been falling every year because of the situation with energy risk.

Freight insurance is thought to promise the best increases in premiums in the next few years. The growth in the number and volume of export-import operations and the growth in transit freight will lead to an increase in freight insurance deals. Several companies are already working actively in this market, hoping to become market leaders.

The country's leading insurance companies are expecting an increase in the volume of insurance premiums this year, as noted above. Some companies are predicting only slight growth, whilst others are bolder. For example, Azalsigorta is predicting a minimum growth of 10-12 per cent this year, which will mean the company will take at least 15 million manats in premiums. This is a realistic volume, as in the first quarter alone the company signed agreements which will bring in more than 12 million manats. It is not so difficult to reach 15 million manats over the next three quarters.

Standard Insurance's success in January to March 2007 allows predictions that the company will be able to bring in premiums of at least 11-12 million manats this year. This will allow the company to strengthen its position on the market. Standard Insurance is a frequent winner of tenders, including some major ones.

Atasgah will bring in premiums of 14-15 million in 2007, too. Although, traditionally, this company begins very slowly and makes up ground in the second half of the year. Atasgah will try to retain the leading position that it has had since 2001 in terms of volume of premiums. This becomes more difficult, however, with every passing year.

Another two companies are aiming to reach the 10 million manat annual premium level. They are the International Insurance Company and MBask. The International Insurance Company aims to bring in premiums every year to the tune of their founding capital. The International Insurance Company's capital today is 8.8 million mantas, so they will be reckoning on a 10 million manat volume of premiums.

As for MBask, the company is counting on the introduction of new property insurance, vehicle insurance and travel insurance products this year and hopes to use these new services to increase its insurance portfolio to 50,000 contracts.

Another four or five of the leaders on the insurance market are planning to increase their volume of premiums to 5-7 million manats. Azarsigorta, Atasigorta, Xalq Sigorta, A-Group and Pasa Sigorta can all be expected to hit this target.

In order to be in the country's top 10 insurance companies in 2007, insurers will need to have at least 4.5 million manats in premiums. In 2006, AIG Caspian Insurance made it into the top 10 market leaders with 3.5 million manats in premiums. It does not look as though this sum will be enough this year to be in the top 10. This will take premiums of at least 4.5-5 million manats.