INSURANCE WORKS

Over the past decade, the stability of monetary system, stable economic growth and dynamic development of the non-oil sector were key drivers of growth in the insurance market of Azerbaijan. Thus, its volume increased six times from 2006 to 2014. A relatively high rates of development and impressive capacity of the local insurance market, as well as its commitment to innovation allows to predict that the market volume will double in the next decade reaching $1 billion.

Insurance companies (IC) are closely associated with the banking sector, and both are largely subject to similar risks and threats. Thus, the temporary suspension of lending through the Azerbaijan Mortgage Fund, and the continuing fall of the housing market have significantly narrowed the scope of banking applications and the capacity of the insurance market respectively. The devaluation of Manat and volatility of exchange rates resulted in the stagnation of consumer lending segment making the insurance of new borrowed cars, which was the most demanded area for ICs, virtually impractical. For comparison, last year Azerbaijan imported only 5,600 new cars, which is 5 and 11 times less than in 2015 and 2014, respectively. This explains the reasons for a 25% reduction of insurance fees for voluntary car insurance (CASCO) in 2016.

The decrease of bank loans in production and trade sectors, as well as a deceleration in the non-oil sector have also contributed to the participation of domestic ICs in these projects. Local ICs selling insurance products in manats, as well as the other actors in the market, faced with the problem of yield reduction due to exchange rate volatility of the national currency.

Despite these facts, the results in 2016 suggest that in the context of the banking crisis, the insurance companies of Azerbaijan are able to cope with own problems.

According to preliminary data estimated on the basis of indicators of market players in 2016, local ICs provided premiums of nearly ₼484,900,000 in total, which is 9.5% higher than in 2015.

According to the Chamber of Supervision of Financial Markets (CSFM), total insurance fees during January-October 2016 exceeded ₼420 million, while payments were approximately ₼191 million. This means an 11% rise compared to the same period of the last year.

These figures clearly demonstrate a relative stability in the insurance market. The dynamics of growth is three times higher than in 2015, when the growth rate in the overall sector reached 3.2%. For comparison, in 2013, the very successful year for the national economy, ICs collected ₼405.6 million insurance fees ensuring a tangible growth of 18%. Such a growth rate was the best indicator of previous five years.

At the same time, negative perturbations of the last two years still influence the profits of domestic ICs and change the proportions of income from primary segments of insurance. In particular, the payouts of national ICs on claims was nearly ₼233.4 million in 2016 increasing by 29.5% compared to 2015. Such a high difference between the rate of growth of insurance fees and payments indicates yet persistent negative trends in the national economy and subsequent risks for insurers. Thus, the loss ratio of the insurance market is estimated at 17.9% in 2016, which means a payout of ₼48 per ₼100 insurance premiums.

According to published CSFM data covering the indicators of the last ten months, national ICs retain financial stability: only 3 out of 25 insurance companies had a negative balance of premiums and claims. According to the regulator data as of November 1, 2016, the average size of premiums for a single company reached almost ₼16,815,000 compared to ₼16.403 million in 2015 and ₼15.327 million in 2014, which also confirms the predominance of positive trends in the industry.

Nevertheless, the crisis in the country led to the closure of two ICs in 2015 and three in 2016 (due to the lower financial performance, the licenses of Buta Sığorta, Beynəlxalq Sığorta Şirkəti and Azərqarant Sığorta were revoked). On the negative side, you can also include restriction of the activities of insurance intermediaries (agents and brokers).

The results of 2016 also confirmed that the domestic insurance market remains trend of capital concentration typical for the past few years the. In terms of gross collections, about 60% of the market is shared among the three largest ICs: Paşa, Atəşgah and Qala, including the company's life insurance and general insurance (non-life insurance).

Incidentally, without significant changes in the proportion ratio remained non-life insurance companies fees and SC, specializing in life insurance: the share of non-life insurance companies accounted for 70.2% of total premiums, the remaining 29.8% provided the structure, specializing in life insurance. Also, no significant change in the proportion of voluntary and compulsory insurance, their ratio is maintained at 60% to 40%. There was a slight increase in insurance premiums (1.5% and 4.5%, respectively) on compulsory property insurance and compulsory motor third party liability (CMTPL) for car owners.

Meanwhile, the last year was marked by the development of a number of promising areas, in particular the introduction of new insurance products. Since January 2016, the country began issuing insurance policies at the international motor insurance system, Green Card, which allows customers to receive Azerbaijani CMTPL payments in any of the 48 countries that have signed the agreement. In Azerbaijan, the international system of national insurers' bureau performs functions Green Card Bureau of compulsory insurance, and in January-November last year, 13 local ICs - participants of the system Green Card issued about 8 thousand policyholders, in which premiums amounted to more than ₼620 thousand.

In November last year, the country has also started issuing electronic CMTPL policies, and only in the past month were concluded about 65 thousand. Of electronic insurance contracts worth over ₼5 million.

Even more important tool for insurers was the start of preparations for the implementation of pilot projects on compulsory health insurance. The State Agency for Compulsory Health Insurance under the Cabinet of Ministers of Azerbaijan in the first half of 2016 has defined the main characteristics of a future model of compulsory health insurance, and since the beginning of 2017 will begin implementation of pilot projects in Yevlakh and Mingechevir. In this regard, at the end of November, President of Azerbaijan Ilham Aliyev signed a decree on the allocation of ₼10 million to the State Agency, and another ₼20 million will be allocated in 2017.

The immediate prospects for the development of Azerbaijan's insurance market are seen in a positive way, taking into account the implementation of the plans provided for in the "strategic road map for the development of financial services in Azerbaijan." Thus, according to this document, it is planned to increase the share of the insurance market to 1.4% of non-oil GDP by 2020. "According to CFMS data for 2015, the share of the insurance market amounted to 0.8% of GDP. Despite the steady growth of the insurance market in recent years, its impact on the economy and the financial sector is minimal.", says the document.

The lack of sufficient information about the risks that are present in other segments of the economy is named as one of the causes of the current situation. As a result, insurers are not interested to develop a variety of products for these sectors. In particular, the agricultural industry is considered the most complex and risky insurance segment, to remain "on the sidelines" in recent years the insurance market. To overcome this gap in Azerbaijan, it is planned to establish Agricultural Insurance Fund in 2018, which will increase the number of insured producers of agricultural products at least three times. In 2017, it is also planned to amend the existing legislation regarding the application of insurance risks in agribusiness sector, and to create a register of insurance claims in the agribusiness sector in 2017-2018.

The roadmap indicates that the development of the insurance market in the next four years will introduce new products, including co-insurance, micro-insurance for individual households and, of course, agricultural and compulsory health insurance.

To improve the situation in the insurance sector, CFMS plans to establish a number of working groups for individual sectors, which will organize a diagnosis of the current situation, prepare a security model for each individual insurance segment. It is also planned to establish the Insurance Information System based on potential risks, preparation of an action plan for each insurance direction until 2020. 

The developers of the Roadmap believe that the measures envisaged to support the development of the insurance market will ensure a GDP growth of ₼125 million including ₼40 million from indirect growth of the national economy and the creation of 1,600 new jobs.