GOING FORWARD WITH INSURANCE

After several years of continuous growth, the insurance sector in Azerbaijan is showing a decline in 2019. According to the Financial Markets Supervision Chamber, as of late August, the total volume of insurance premiums reached ₼469.8 million, which is 9.1% less than in the same period last year.

Reasons for the decline are obvious. Legislative changes on endowment life insurance, which limited the accumulation of amounts, have quite significantly reduced the premiums. If earlier an insured individual could direct all income to savings, now it is only possible with half of this amount. In principle, with the introduction of endowment life insurance, it was limited in time with certain tax incentives introduced to make the population accept the product. Then the benefits were eliminated. As a result, collections for endowment life insurance in January-August 2019 amounted to ₼115.3 million, which is 34% less than in the eight months of last year.

At the same time, a decrease is observed in other types of life insurance, including medical insurance. The growth demonstrated by auto insurance and some other types is not enough to cope with the decline. The insurers agree with the existing situation. The head of the Association of Insurers of Azerbaijan, Azer Aliyev, does not rule out a recession in the market by the end of this year. "Life insurance fees will be less than last year. For types other than life insurance, fees are unlikely to change compared to last year, or there will be a slight decline. This is my vision, but miracles happen, so I won’t be surprised if everything changes the other way around," Aliyev said.

Apparently, the situation in the insurance market is not favourable. It is clear how much insurance income depends on life insurance: as soon as the amount of income decreased, it immediately negatively affected the general statistics.

As A. Aliyev notes, recently there have been no cardinal events contributing to market growth. "The regulator, the Mandatory Insurance Bureau and Azerbaijan Insurers Association are carrying out active works but, unfortunately, there is no main driver that would cause significant market growth. Everyone is trying to maintain the positions that they have today. But when you are in limbo, this leads to subsidence. In order to develop, it is necessary to go forward, but this is not happening yet," Aliyev said.

What should be done to restore the market growth? Many insurers remain committed to a proven method of creating and introducing new products. This can really be a way out of this situation but only for a short period. Today's trends require more radical decisions - first of all, it is necessary to increase the financial, and in particular insurance literacy of the population of Azerbaijan.

In fact, legal entities make a lion's share in the main pool of the insured. Among individuals, the most common type of insurance is compulsory motor third party liability insurance, better known as compulsory motor liability insurance. As for the other products, their coverage is not so wide.

What changes are needed to foster market growth? According to experts, for starters, it is necessary to improve the existing legislative framework in this area, to carry out reforms so that the market better meets the modern requirements of the insurance sector. After all, the existing legal framework has not been updated for almost ten years, although the insurance market over the years has not been able to use its potential.

For example, as far as the compulsory motor liability insurance is concerned, the growth potential for this product coupled with necessary reforms can reach even more than 20-25%. The product covers almost 100% of car owners. But the bottom line is that even with this amount, the premiums reach ₼100 million versus the loss of ₼120 million. Old and not updated tariffs, high agency commissions, etc. cause high loss in compulsory motor liability insurance. Tariffs for this type of insurance should be revised, since the amounts discussed during the introduction of this product in 2010-2011 are quite outdated. Moreover, this applies to both OSAGO premiums and the amount of insurance coverage for the car damage. Obviously, prices of spare parts have risen significantly since then.

But in order to choose the method and timing of necessary changes, it is necessary to wait until the calculations of the working group of actuaries are completed, which today is studying the experience of our neighbours. “Recently, representatives of the Russian Union of Auto Insurers came to share their experience of reforms carried out in this area in Russia. The experience of the Baltic countries, the Turkish market and other countries was also studied. I think that by the end of the year we will have a certain opinion,” Azer Aliyev said.

In addition, it is necessary to increase the coverage of the population using compulsory real estate insurance. According to statistical data, this product is mandatory only on paper because coverage is only about 2% and covers mostly the legal entities, while the coverage of individuals is only 0.8%.

According to experts, the main challenge is the presence of a large number of legislative restrictions that impede the full deployment of mandatory real estate insurance. Today the coverage of this type of insurance is very small. There are some large enterprises that conclude contracts but the population as a whole is not interested in this product, although the product provides serious financial protection to property owners for a fairly small fee. "We are more interested in reaching individuals because it is a social product. Earthquakes, floods, fires, floods from the neighbouring countries can lead to serious financial burdens for ordinary average citizens of the country. They redirect this burden to the state, which considers the costs as unforeseen expenses," A. Aliyev noted.

To solve the problems with compulsory real estate insurance, it is necessary to introduce a perfect control system, which is absent today. For example, the OSAGO insurance market of Azerbaijan already has such a system - almost all processes are automated, there is a single bureau, a single database, an agent network covering most of the potential customers, supervision that checks for a policy, approved fines and penalties. This has been made possible over several years, but thanks to this process, insurers have experience that they can apply to real estate insurance. Experts believe that no more than five months are necessary to create a control system similar to OSAGO and to test it. Only then this product can bring more than one hundred million manats of premiums annually and, in addition, provide social protection for the population.

As to the introduction of new products, insurance companies believe that this is not relevant today, since there are enough products in the Azerbaijani insurance market today. Unfortunately, insurance companies cannot actively sell even existing products to the public because of their poor development and non-compliance with customer requirements. Only by eliminating these problems can it be possible to ensure that the insurance market finally takes its rightful place in the financial and non-oil sector of Azerbaijan and increases its share in the GDP of Azerbaijan.