CAR MARKET "BRAKES"

The car is no longer a luxury or even a means of transport, it is an integral part of the life of the modern city, the absolute comfort, and, unfortunately, a risk. However, car sales have been declining since last year, primarily because banks set tighter conditions for car loans and Azerbaijan has switched to the Euro-4 ecological standard.

After the February devaluation of the manat, demand on the car market shrank even more. Many dealers suspended sales in manats and began to adjust the price in line with the devaluation, which, amid the unstable situation on the world market, immediately had a negative impact on Azerbaijanis' plans to acquire new cars. It is clear that everyone is trying to protect themselves from excessive spending, especially against the backdrop of such economic fluctuations.

As a result, in June, the prices on the secondary car market fell by 30-35 per cent in comparison with May.

In September, the trend continued, and the car that was previously sold for 10,000 manats can now be purchased for 6,000-7,000, while more expensive models fell even more sharply.

The situation on the car market has resulted in it becoming empty by 50 per cent in recent months, and sales are now down 3 times. Potential buyers prefer to buy small, inexpensive cars to save money, which is largely due to difficulties obtaining car loans.

If it continues like that, some dealers will be forced to close. At the moment, the prices on the car market in Azerbaijan are even lower than in neighbouring Georgia, but it cannot stoke demand.

Loss-making trends

Accordingly, the demand for insurance services is also gradually decreasing, which adversely affects the volume of premiums of insurance companies.

It is known that insurance helps to compensate for the cost of restoring your own (CASCO) or someone else's car (OSAGO). Meanwhile, we should also note that the growth on the market of voluntary car insurance depends on car loans, as when buying a car on credit, the purchase of the CASCO policy is one of mandatory conditions.

In turn, lower prices for cars can have both positive and negative effects on the market of voluntary car insurance. Of course, negative trends will prevail, since the decline in prices will first of all reduce the premiums for insured cars, as they are calculated based on the value of the car. For example, if before the car was worth 25,000 manats and the insurance premium on it was 750 AZN, the decline in the price to 20,000 manats will reduce the premium to 600 manats.

But at the same time, the cost of spare parts and repairs is not decreasing, but increasing, so the amount of payments in the insurance case is not falling. So losses will only grow.

Second, the fall in prices will not affect the volume of insurance either because those who buy a car with cash show interest in it extremely rarely. As is known, the main flow of persons acquiring CASCO has formed because of car loans. Currently, when buying a new car on credit, the amount of initial payment is approaching 40 per cent and used ones - even 60-80 per cent.

This size of the initial payment reduces the availability of car loans, which leads to a decrease in consumer demand and stagnation on the market.

Lower prices will also reduce tariffs on CASCO as they are now at a low level, says an expert in the field of insurance, Xayal Mammadxanli. "Insurance companies will not reduce tariffs now, as this will dramatically increase the losses. While some companies may resort to this method in order to expand their presence on the market during the crisis, this will happen only if shareholders are willing to cover the initial losses. In this case, the company can take a risk, but no one is willing to go for dumping on the insurance market of Azerbaijan at the moment," the expert said.

We should note that by the end of 2014, the market of voluntary car insurance in general became not very desirable for insurance companies of Azerbaijan.

If last year payments for this type accounted for 65-70 per cent of the fees, in January-August 2015, the figure rose to 79.5 per cent.

According to Mammadxanli, one of the reasons for this situation is that, despite the rise in prices for spare parts and repairs, the rates for the calculation of premiums actually stayed at the same level.

Insurance companies should have revised CASCO tariffs, but they decided to take the path of quantity - the more people are insured, the better for the insurance companies. Now the situation is different, and there is a need to raise the rates, but ... on the other hand, it may further alienate the population from car insurance. In short, it turns out to be a double edged sword.

Way out

Trying to raise interest in car insurance, some insurers have already resorted to new methods of selling insurance policies.

In particular, one of the companies, on a pilot basis, started selling CASCO policies through auctions for the first time. The company auctions insurance for any vehicle, regardless of make and model, with a market value of 10,000 manats. The starting price of the lot is 1 per cent of the value of the car, i.e. 100 manats. The minimum increment of the auction is 5 manats, i.e. anyone who wants to buy insurance for the car can offer a price that will be at least 5 manats higher than the previous offer.

The winner will get the opportunity to insure his car for 10,000 manats for the sum he offers himself.

If the value of the vehicle exceeds 10,000, partial insurance will be applied, i.e. the car will still be insured for 10,000 manats. Subsequent auctions will be held with cars costing 15,000 and 20,000 manats.

Usually, the price of the insurance of the car that costs 10,000 manats is 300 manats.

In turn, the State Insurance Department has introduced a common approach and a system of assessing the damage caused to a vehicle as a result of a traffic accident. From 1 October, insurance companies have access to Audatex software to calculate the cost of repairing vehicles. According to Zakir Karimzada, the CEO of Solera Azerbaijan, which provides software services in Azerbaijan, insurance companies will now be guided by the vehicle manufacturer while evaluating the damage. "As far as the price of spare parts is concerned, they are regulated by local distributors and are subject to change. We register all prices for spare parts in our system, and insurance companies will be guided by them. This will help unify the prices for spare parts of vehicles of the same model in different service centres," he said.

We can say that the current situation on the market is a temporary phenomenon, taking into account the potential for the sale of cars in Azerbaijan. For example, there are now 1.3m cars in Azerbaijan. There is one vehicle for every eight people, while in developing countries there is one car for four people and in developed countries one car for three and even two people.

In addition, domestic production of vehicles that meet current market requirements will help meet the existing demand with cheaper products. Accordingly, it will be much easier to acquire spare parts for cars of our own production and repairs will cost cheaper.