RESETTING INSURANCE

Financial problems observed in the banking sector since last year could not but affect the insurance market of Azerbaijan. For this reason, ways out of the hard situation were in the focus at the 7th International Insurance Forum.

This forum was the first big event in the insurance sector after the market regulation function was transferred from the Ministry of Finance to the Financial Market Supervision Chamber.

Of interest from this point of view is the new agency's vision of problems in the sector, as well as its plans for changing the situation.

Four problems of the market

In May, the Chamber management already held the first introductory meeting with representatives of insurance companies operating in the market. At the meeting, the Chamber management made public some basic problems existing in the insurance sector. The first and fundamental problem is the insufficient level of insurers' capital. According to the Chamber's data, the capital of 14 out of 25 insurance companies did not meet the minimum total capital requirement of 5m manats.

In this context, the Chamber is planning to make some changes in the procedures for calculating insurers' total capital. For example, in calculating the size of their capital, insurers will not be allowed to take into account funds placed with banks whose licence has been revoked. According to the Chamber, those are illiquid assets and it would be wrong to take them into account when counting the capital. The Chamber has already circulated a relevant directive among insurers having such problems.

According to insurance experts, the problem of capital shortage can be solved but, in the current times of crisis, this may oust some of the insurance companies from the market. For instance, some of them kept their funds in Royal Bank, whose licence was revoked as far back as four years ago, but the insurers cannot withdraw their money. Those who had their funds in their bank accounts with Texnikabank have a similar problem. Now they need to find additional finance to make up for the shortage of capital and comply with the Chamber's requirements. However, in the present financial market conditions, this task is not so simple to solve. Stockholders in many insurance companies are banks or big holding companies. In a situation where the banking sector is faced with quite a lot of problems including the lack of funds, this drastically restricts the ability to invest in insurance companies. At the same time, the Chamber is not yet considering the possibility of changing the minimum capital requirements for insurers.

Hence follows the second problem of the insurance market with which the Chamber is set to combat seriously. It is the problem of mutual relations between related entities, i.e. companies and banks belonging to one holding company or group. According to the Chamber, such relations in their current form often increase the concentration of risks and problems related to the insurers' financial stability.

For instance, Alfa Sigorta, an insurance company, kept almost all its money in Texnikabank whose licence has been cancelled since 1 February 2016. The insurance company cannot get the money yet and this has a negative effect on its financial stability.

According to experts, a number of other insurers have similar problems. This is why the Chamber has already notified insurers on its plans to take efforts to avoid complications in the future that may be caused by too close relations between related entities.

Yet it will be quite difficult to stamp out the problem of related entities, given the specific nature of the financial market of Azerbaijan. The problem of related entities can be seen in the banking sector, too, where it failed to be eliminated. Many holding companies in Azerbaijan have both an insurance company and a bank. Therefore the problem of related entities will stay on. To settle it, it is necessary to change a lot in the financial system, including providing greater transparency and openness, as well as broader access for foreign insurance companies.

The third problem outlined by the Chamber includes delays and red tape in insurance payments. This problem also has deep roots. Insurers often delayed payments groundlessly or tried to reduce the amount. On such occasions, insured persons having some grounding in law would complain to the Ministry of Finance, which more often than not sided with the insurance companies' customers. Yet quite a lot of people would agree to accept the sum offered by their insurance company.

Rufat Aslanli, the chairman of the board of directors of the Chamber, confirmed the existence of this problem at the insurance forum. "Compared to other spheres in the financial sector, the population is most of all concerned with issues related to insurance. This is why complaints from consumers of insurance services are prevalent among the population's applications to the Chamber," he said.

According to him, there has been significant progress in the field of protecting the rights of consumers of insurance services in recent years, but new steps are needed to simplify and speed up the process of making payments on insured events. The Chamber now needs to form a positive image, and we can assume that any disputed issues will be resolved in favour of the insured.

For the most part, difficulties are cropping up when making payments associated with car insurance, including Compulsory Motor Third Party Liability (CMTPL) insurence. To this end, insurers held a separate meeting dedicated to the implementation of Audatex software.

The Chamber expressed its interest in ensuring the operability of this system. The main goal is to reduce the period of considering the application and accelerate the insurance payment process.

According to experts, the use of Audatex Azerbaijan software will make it possible to introduce unified approaches and the accident damage assessment system to the insurance market of Azerbaijan.

Meanwhile, Audatex Azerbaijan noted that it is very difficult to provide for all the nuances in the software due to the specific nature of the Azerbaijani car market. "The average age of the vehicle fleet in Azerbaijan reaches 14 years. Therefore, in repairing vehicles, many insurance companies utilize spare parts that have already been in use. Prices for such parts cannot be inputted into the Audatex system because only producer prices are recorded in it. As a result, insurers use Audatex products only for new vehicles which are repaired with new spare parts," said company head Zakir Kerimzade, speaking at the forum.

In addition, Audatex Azerbaijan deems it necessary to establish a methodology for calculating the amount of damages, which must take account of all the participants in the operations - from insurers to automobile workshops, appraisers, judicial bodies, etc.

The fourth issue is related to reinsurance. The Chamber management believes that the percentage of risks transferred to reinsurance is high, with their level reaching one-third of premiums of the insurers. Fuad Quliyev, the Board Chairman of the AzRe Tekrarsigorta reinsurance company, said that as much as 132mn manats in premiums were sent by insurers for reinsurance in Azerbaijan in 2015. F.Quliyev underscored that in 2015, payments on reinsured risks amounted to 22mn manats, of which 75 per cent were paid by local reinsurers.

However, insurance market experts do not consider this problem as serious since each type of insurance has its own specific reinsurance.

Where we should go

Basically, Azerbaijan's insurance market has limited coverage of policyholders. If the law "On compulsory types of insurance" would not have been passed five years ago at the initiative of the Ministry of Finance, the level of coverage by insurance services would have been even lower. In Azerbaijan, the current level of premiums per capita is about 50 manats, i.e. about 33 dollars, which is lower than in other countries in the region.

Therefore, the Azerbaijani insurance market has great potential. But in order to master this potential, we need new approaches to market regulation and operation of insurance companies. Insurance companies are mostly focused on the corporate sector as well as mandatory types of insurance of cars and immovable property of citizens. In part, this is due to the low insurance culture in Azerbaijan, where people are not accustomed to paying money for the insurance policy every year and not seeing much use of it.

In this context, the Chamber and insurers should see one of their main priorities in increasing the outreach of insurance services, introducing new insurance products to the market, including combined ones, providing both life and non-life insurance services.

In addition, it is necessary to strengthen the financial sustainability and stability of insurance companies. Available options here are to maximize liberalization of the insurance market and make it accessible for foreign insurers. Local financial groups and holding companies are having problems and, in such conditions, it is difficult for them to channel investments into insurance business development. Meanwhile foreign insurers can give a new impetus to the development of the insurance sector and bring qualitatively new technologies and service standards, which will make it possible to increase the outreach of insurance services.