SELF-INDUCED LOSSES

The fall in oil prices and the reduction in the exchange rate have impacted on virtually all areas of Azerbaijan's financial sector. However, even in such difficult circumstances, the insurance market has generally been able to maintain a positive growth. The current situation and the high-priority measures in the insurance sphere were the subject of discussion at a recent session of the Azerbaijani Insurers Association (ASA). 

According to the ASA, last year the country's insurance companies provided a cumulative volume of premiums totalling just short of 442.9m manats, which was 3.2 per cent more than the figure for 2014. By way of comparison, in Azerbaijan's economically very successful year of 2013, the country's insurance companies amassed 405.6m manats, at the same time providing an appreciable growth rate of 18 per cent. This growth rate was acknowledged as the best figure for the past five years.

These changes also affected the structure of the revenues of the country's 26 insurance companies. For example, in previous years, voluntary insurance accounted for over two-thirds of all collected funds, with the remainder provided by compulsory types of insurance. However, last year the proportion of voluntary types of insurance in the overall receipts structure was reduced to 63.4 per cent, amounting to 281m manats, which was 1.3 per cent below the figure for 2014. On the other hand, the proportion of compulsory insurance has increased: in terms of premium income, just short of 162m manats, this segment has provided the highest annual growth rate in the industry - 12.1 per cent.

It was a similar situation during the global crisis of 2008-2010. Faced with a reduction in output and level of sales, local businessmen cut down on expenditure that was not of primary importance and, unfortunately, the sphere of voluntary insurance also often found its way on the list of sequestrated expenditure.

Among the spheres that suffered the most was that of voluntary motor insurance: the negative processes here began back in 2014 following the decision of the National Bank to tighten its rules on bank lending on purchases of motor vehicles. This comes as no surprise if you bear in mind that CASCO [comprehensive motor vehicle insurance] policies have been mainly sold along with auto loans from the banks. The reduction by half in the number of vehicles imported in 2015 reduced the insurance companies' scope of activity even more. By virtue of these factors, last year CASCO insurance proceeds were down by 25.3 per cent, amounting to 28.3m manats. In turn, the devaluation of the manat caused damage to the sphere of compulsory motor vehicle insurance. "The loss rate of compulsory motor vehicle insurance companies amounts to 50 per cent, and taking into account administrative and other costs, is increasing to 80-90 per cent," Orxan Bayramov, the head of ASA, believes. The situation was made worse by the fact that tariffs for compulsory civil liability insurance of owners of motor vehicles are regulated by the state, and at the moment the question of increasing them is not on the agenda. Therefore, insurance companies plan to cut their costs by reducing administrative expenditure and intermediary services of agents and expanding electronic online sales.

As regards tariff-setting in the sphere of voluntary motor vehicle insurance, last year members of the association, along with the State Insurance Supervision Service, drew up a mechanism for calculating the cost of CASCO. These tariffs will be tied to the level of the CASCO portfolio of each player in the market - with low losses tariffs should be minimized and with high losses the tariff bar should not be set below a certain level.

About eight companies operating in the medical insurance sphere are experiencing serious problems: this area is becoming loss-making against a background of an increase in prices for medication and price hikes in out-patients clinics and diagnostic centres. 

"The insurance companies have entered into talks with the medical establishments, they are counting on the granting of additional benefits and they have also proposed justifying an increase in prices on services which are frequently not linked with the increasingly costly medicines and chemicals. If some private clinics refuse to compromise, the insurance companies reserve the right to refuse to work with them and direct their clients to other medical establishments," Bayramov believes. He says such a measure is justified because insurance companies' tariffs have remained unchanged since devaluation, but they have come up against not always justified increased costs for services at clinics. On the other hand, the situation in this sphere has been made more complicated because of the reduction in corporative spending on the so-called "social package" by banks and major companies, who have traditionally been the main customers in the sphere of voluntary medical insurance. 

Generally speaking, despite the devaluation of the manat, the Ministry of Finance is not planning to initiate an increase in the tariffs for compulsory types of insurance, and the insurance companies have been asked to scale down their loss ratio by reducing commission fees, using electronic services, creating a pool and taking a hard line against unscrupulous agents, and so on. For their part, State Insurance Supervision Service experts believe that right now the insurance companies should make more efforts to seek new sales channels in the sphere of compulsory real-estate insurance. Compulsory real-estate insurance has been operating in Azerbaijan since 2011, and last year proceeds from this type of activity increased by 45.4 per cent compared with the previous year, amounting to 25.3m manats. 

"There is also no need to introduce tax benefits for insurance companies in Azerbaijan," the head of the State Insurance Supervision Service of the Ministry of Finance, Namiq Xalilov, believes. He says that in the post-crisis period of 2009-2012, with the purpose of increasing capitalization, speeding up growth rate in the financial sphere and improving the quality of services, re-insurance companies and the banks, too, were exempted from paying profit tax, but today, taking into account the good level of capitalization of the insurance companies, there is no longer a need for such benefits. In the opinion of the head of the State Insurance Supervision Service, the country's insurance sector is noted for its marked stability among other players in the financial market. For example, the players in the market have no problems with fulfilling demands for overall capital, and the structure of the companies' assets is also generally satisfactory.

"After the February reduction in the exchange rate of the manat, most insurance companies transferred their funds to foreign currency, and so the second wave of devaluation in December last year did not affect their capital; in fact, recalculated into mantas the insurance companies' resources increased," Xalilov said.

It should be recalled that, with the purpose of overcoming recurrent problems that have been preventing the development of the country's insurance companies, last year the Ministry of Finance approved a plan of measures for the development of Azerbaijan's insurance market for 2015-2017. The measures envisaged in it cover a number of areas, including the introduction of more effective measures for protecting the interests of insurers and other beneficiary parties, the development of life insurance and the Non-Life segment and strengthening human resources. Among other things, a number of new types of compulsory insurance are expected to be introduced. Specifically, insurance of the professional laibility of entrepreneurs and experts engaged in certain spheres, and also their responsibility to third parties. Legislative changes, aimed at extending investment instruments for companies in the life insurance sphere, are also planned. The new standards will provide companies with the right to invest in various monetary assets, as well as real estate. In the more distant prospect, the Finance Ministry plans to gradually increase the amount insured for compulsory third-party car insurance, and also to draw up new standards for calculating the amount of damages inflicted on vehicles and real estate following an accident.

In general, the prospects for the development of the insurance market are linked with the dynamics of the development of the non-oil sector, which is, without doubt, a key driver in the growth of the whole of Azerbaijan's financial sphere. That said, experts do not rule out that, given a favourable clash of circumstances, in the next decade the volumes of the insurance market could double and approach a billion dollars.