MODERATE OPTIMISM

Generally, the insurance companies of Azerbaijan have managed to adapt to the realities of the ongoing energy crisis. By the end of this year, market participants demonstrate a growth dynamics. After all, at the beginning of 2017, the leadership of the Financial Markets Supervision Chamber (FMSC) promised that this year would be the Year of Insurance. Indeed, this year we witnessed a 12% increase in the volume of voluntary insurance thanks to the diminishing of processes that have negatively contributed to the market contraction. On the contrary, the reduction of mandatory insurance fees, as well as the expected growth in unprofitableness in this segment, pushes the insurance market towards the development of new competitive products for voluntary insurance.

An indicative growth

Comparatively high rates of development of the insurance market and its stability during the pre-crisis period were largely possible due to close relations between insurance companies and banking sector. In other words, thanks to the banks, insurance companies were able to sell more than three quarters of mandatory insurance policies, in particular in construction sector and mortgage lending, automobile loans, etc. Thus, protection guaranteed by the banks, as well as the policy of the Ministry of Finance to expand mandatory insurance business since 2011 (before the crisis) were the main drivers of dynamic development. This also contributed to a six-fold growth of the insurance market in 2006-2014.

However, this cooperation between the banks and insurance companies was fatal during the banking crisis, which provoked the devaluation of manat. Hence, the growth of bank non-payments and decrease in consumer lending. The insurance market intimately connected with the banks experienced the negative effects of the suspended lending policy implemented by the Azerbaijan Mortgage Fund, decline in real estate market, more than a tenfold reduction in the sales of new automobiles, etc. In particular, the tightening of rules regarding automobile loans has seriously affected the CASCO voluntary insurance. CASCO premiums have been declining for two consecutive years: 25% in 2016 and another 6% in January-August 2017. Local insurance companies selling insurance products in manats, like other actors of the financial market, faced the problem of declining profitability due to the devaluation and volatility of the national currency. Plus, a number of other factors led to the withdrawal of the weakest segments of the insurance market: the number of Azerbaijani insurance companies decreased from 27 to 22 since the beginning of the crisis.

However, during the past nine months, national insurance market managed to overcome the most difficult period of transformation in financial sector. According to FMSC, insurance companies collected ₼414.35 million as premiums in January-September 2017, which is 6% more than the same period of 2016. In fact, the voluntary insurance ensured the growth dynamics in national insurance market increasing the insurance fees by 12% (₼281.65 million). Thus, the share of voluntary insurance exceeded 68% in the total amount of insurance incomes.

On the contrary, insurance fees in mandatory insurance sector decreased by 5% (₼132.7 million) and to 32% in the total premiums of insurance companies. For comparison, during the nine months of 2016, the ratio between voluntary and mandatory insurance was 64% and 36%, respectively. It is noteworthy that a similar proportion of voluntary and mandatory insurance persisted even in the pre-crisis period.

It may seem that the growth of voluntary insurance and its share in the market is insignificant, but this trend may reflect indicative changes that have occurred in the local market over the recent period. According to some experts, this growth trend in voluntary insurance allows the insurance companies to get the bulk of profits, cover administrative costs and improve efficiency. Generally, the voluntary insurance segment determines the qualitative characteristics of the insurance market and its dynamic development rates.

Easy mandatory insurance policy

As for mandatory insurance, the growth dynamic was observed after the adoption of the Law on mandatory insurance at the end of 2011. Undoubtedly, this played an instrumental role in supporting the development of the market contributing to the survival of many small companies.

According to Chairman of Ateshgah Insurance Co. Azer Aliyev, a relatively rapid growth in sales of mandatory insurance products was not due to the interest of insurance companies in the development of this policy. "As these products are mandatory, they are easier to sell, yet they pose an implicit type of danger. We can feel the threats of the loss-making mandatory insurance products. With time, the losses in this segment may increase even more. I believe the insurance companies will realize how important it is to seriously develop cross-selling by offering mandatory insurance products together with the voluntary insurance ones," said Aliyev.

The growth in the loss ratio of certain types of mandatory insurance is not inherent to the Azerbaijani market only. To some extent, many post-Soviet states and, in particular, Russia experience the same problem. In fact, the leading Russian insurance company Ingosstrakh is considering the possibility of renouncing mandatory types of insurance because they are unprofitable.

A slightly different situation develops in the field of mandatory real estate insurance. According to ISB, the number of contracts for mandatory real estate insurance decreased by 42% in October 2017 in Azerbaijan. However, this contraction was compensated by a 25% increase in the volume of insurance fees. This can be explained by the fact that this type of insurance covers not only residential apartments and houses (where the amount of insurance premium is fixed and varies between ₼30-50), but also any other real estate such as industrial enterprises, commercial and other buildings, where insurance premiums are substantially higher, and depend on the market value of properties and other factors.

The flexibility of local insurance companies, which have managed to compensate the decline in fees for mandatory real estate insurance in civil sector at the expense of corporate sector, certainly deserves all praise. At the same time, the same segment of civil real estate is covered extremely poor by mandatory insurance, and current market and social conditions contribute little to the development of this segment.

Today, the prospects of mass introduction of mandatory health insurance (MHI) starting from 2018 are also vague: since early 2017, MHI has been tested as a pilot project in medical institutions of Mingachevir and Yevlakh. According to the Accounting Chamber, in 2018, it is planned to allocate ₼16.05 million from the state budget for financing the State Agency for Mandatory Health Insurance, which is 32.5% less than the amount allocated in 2017. Thus, insurance companies can hardly expect to launch a new type of mandatory insurance in the near future.

In general, according to the Chairman of Ateshgah Insurance Co., mandatory types of insurance should carry two tasks - social and stimulating. Firstly, they should provide the population with a certain financial protection in case of the occurrence of insured events. In this sense, mandatory insurance in Azerbaijan fully accomplishes this function. "The second task is to stimulate the population's interest in voluntary insurance. Insurance companies should put efforts themselves by correctly informing the population, promoting their products, and providing exactly the products that customers need," believes Azer Aliyev.

The latter is perhaps the most important thing. It seems that the leading insurance companies of Azerbaijan are gradually restructuring their work trying to expand the market for voluntary insurance products.

Insurance card

Incidentally, the insurance sector still has quite unreached areas and resources for increasing the volume of voluntary insurance. Unfortunately, the share of insurance business in national economy does not increase. According to a recent World Bank report, the share of insurance in Azerbaijan's GDP was 0.7%. Overcoming this recession is possible through the implementation of plans envisaged in the Strategic Roadmap for the Development of Financial Services in Azerbaijan.

One of the promising directions in the roadmap is the development of insurance products for agrarian risks, which is the segment of insurance market that has remained sort of on the sidelines in recent years. To overcome this lag in Azerbaijan in 2018, it is planned to create an agricultural insurance fund, which will increase the number of insured agricultural producers by at least three times. In addition, it is planned to create a register of insurance cases in the agricultural sector in 2017-2018.

Another promising idea to contribute to the development of insurance sector is the stimulation of electronic insurance. According to the Chairman of AzInsurance OJSC Viladi Maniyev, the sales of insurance products electronically will change the entire industry. The market will be more flexible, easily adaptable to changes by insurance companies. Such companies will be able to lower operating costs and to guarantee higher profits and customer loyalty. For consumers of insurance services, this means better accessibility, more complete and qualitative satisfaction of their needs. "A good example is the electronic sales of the most popular national insurance product, OSAGO," said Maniyev.

The roadmap also envisages the development of the insurance market in the next four years thanks to the introduction of new products, including joint insurance, microinsurance for individual farms, etc. The developers of the roadmap believe that these measures will ensure a GDP growth of ₼125 million, including ₼40 million as an indirect increase, and contribute to the creation of 1.6 thousand new jobs. As a result, it is planned to increase the share of the insurance market to 1.4% of non-oil GDP by 2020.