SMOKE WITHOUT FIRE

Mysterious announcements have begun to appear for some time now on the walls of multi-storey buildings in Baku requesting the tenants to insure the property urgently. Otherwise, they would be liable to pay penalties growing every day. The threats did the trick as insurance companies had an unprecedented inflow of customers at the end of 2019.

Interestingly, the law On Compulsory Types of Insurance, which is the legal instrument governing real estate insurance, has been effective since December 16, 2011. For some reason however, only a few people had remembered it over the past eight years and the majority of population did not know about the collection of fines...

Why did this question emerge now? Is it at all necessary to insure the property?

Everything is legal

Insurance as a financial instrument has long proven itself in world practice, so no one argues about the need to use the numerous products of insurance companies as much as possible. Real estate insurance should have long become a priority for the owners. After all, no one can guarantee the waterproofness of your apartment if your neighbours living one floor up forget to turn the tap off or the safety of your country house during the long winter season. Even without the human factor, we are powerless against the forces of nature.

Therefore, it is worth remembering that the real estate insurance is necessary and important. Moreover, it is a legal requirement, is accepted in all civilised countries, and is in the direct interests of each owner of the property. The same applies to both individual and commercial facilities – the big fires in Baku recorded in the recent years have shown how unexpectedly one can lose the office, shop or even a shopping centre such as the Diqlas Mall or EuroHome building materials market, etc.

However, the desire to save money often prevails over a rational approach. Many owners of commercial real estate continue to rely on state assistance, as it has repeatedly compensated for damage to victims of natural disasters and fires.

On December 19, 2019, President Ilham Aliyev said at the meeting on the results of the cotton-picking season and the measures scheduled for 2020: "All commercial facilities should be insured so that the owners can contact the insurance company for compensation in case of an accident. Instead they often apply to the government for compensation. Can anyone show me a state where the government pays compensation to private entrepreneurs for the harm caused during an accident? Everyone insures their property. In case of an accident, the insurance company pays compensation to cover the loss, that's it. We should also apply the same in Azerbaijan."

In other words, the president made it clear that the government will not pay compensation to entrepreneurs anymore. This is quite logical. From January 2020, the control over the availability of obligatory real estate insurance agreements between non-residential facilities and insurance companies will be tightened.

According to Report news agency, this is because the State Fire Supervision Service under the Ministry of Emergency Situations of Azerbaijan will restart conducting inspections of entrepreneurs in accordance with amendments to the law On Suspension of Inspections of Entrepreneurs approved by the President of Azerbaijan on May 30, 2019. Since the fire is also an insured event, in the absence of insurance contracts, penalties will be applied to the owners of such facilities.

Are penalties so terrible?

Let's go back to the above-mentioned announcements that provoked a hype in the real estate insurance market.

Paragraph 469.1 of the Code of Administrative Offenses, which prescribes the calculation of penalties in the absence of an obligatory insurance contract, has existed for a long time. In addition, it applies to all types of obligatory insurance. That is why, the insurance companies, which claim that the system of penalties becomes effective starting from January 2020, are wrong.

It is clear that this is a kind of psychological moment of pressure, because when the deadlines are set, people begin to respond faster. Accordingly, the terms indicated by insurance companies is also part of the marketing game used by insurance companies to attract people. That is just a marketing move.

As for penalties, their amount is reduced in the code for individuals from the originally established ₼50 to ₼30, for officials - from ₼100 to ₼80, and for legal entities - from ₼300 to ₼200.

But, as mentioned above, there have been no high-profile cases of collecting penalties until now. At least, such information should have appeared after the fire in the Diqlas Mall, which occurred last year.

According to experts, there is still no clear mechanism for monitoring the availability of property insurance contracts. In other words, no one knows which state agency is responsible for carrying out inspections and establishing penalties. One of such authorities is the Ministry of Emergency Situations, which is going to deal with commercial facilities starting from this year. According to some reports, the authorised body for residential buildings are local executive departments of government. But it is assumed that they do not have resources and staff to carry out such supervision.

According to the law, the nationals of Azerbaijan have to insure any real estate that they buy,  sell or donate, and the notary office will not complete the transaction for any property without  obligatory insurance.

Although notaries are not a controlling body, they help to comply with the law On Obligatory Types of Insurance as a government body, and may act as unofficial agents of insurance companies, receiving material benefits from the implementation of this function.

Thanks to a database of clients of insurance companies, notaries earn 20-25% as commissions from home insurance. Thus, notaries act as subagents without being official insurance agents of the first category, which requires obtaining a license from a supervisory authority from the Central Bank. Notaries ensure the conclusion of insurance contracts with the help of official local insurance agents.

This means that the notaries help to somehow promote this type of insurance in the country. Otherwise, the citizens do not go to insurance companies although real estate insurance is obligatory for the entire population. So, it turns out that today it is possible to really control only new residents who simply will not be issued documents for the apartment until they insure the property.

Education first, then penalties

Insurance companies admit that the first and main obstacle impeding the development of real estate insurance market is the lack of a control mechanism.

According to the Chairman of the Association of Insurance Companies of Azerbaijan (AICA), Azer Aliyev, the insurance companies do not try to frighten the population. The objective is, within the limits of existing capabilities (temporary, human and financial), to inform the population as much as possible about the existing legislative requirements.

"Then, why are people unhappy and believe that they have been deceived? Because most of the insured do not fully understand the principle of insurance and how it works. I think the main task of insurance companies is to begin to inform, using all possible means, the population about insurance in general, how it works and what products can and should be used," Aliyev said.

So all the notifications that are being distributed today are just excerpts from the articles of the law, which was adopted a long time ago and must be executed by every citizen of our republic, continued A. Aliyev. And the law itself is primarily aimed at protecting the interests of citizens themselves. This is not a tax or rent, as you can read very often on social networks.

"I even saw someone collecting signatures for a petition to Mr. President to repeal this law. This is not serious. Accidents happen almost every day, most of them causing serious damages to property and health. And almost always we hope that the state can help. Thanks to the resolute character of our president and first vice president, almost all complaints are considered, and they help everyone as much as possible. But this does not work like that in the world. That's why they come up with obligatory types of insurance in order to share the maximum risks among all citizens, making the service very cheap and affordable for everyone so that they expect support not from the state, but from the insurance company, which will compensate the damages within the limits established by law," Mr. Aliyev said.

Moreover, Mr. Aliyev also noted that the association is developing a system for applying penalties, although "that's the last thing we should take care of". But in any case, active supervision and application of penalties will be launched after the integration of the real estate registry with the Bureau of Obligatory Insurance.

As one of the insurance market players noted earlier, insurance companies offer to link real estate insurance payments to checks for paying debts for electricity consumption. "It is necessary to integrate systems of several structures, to automate the entire process. Why electricity - because today it is in all homes," Aliyev said.

"I would like to ask our citizens not to think about penalties, but to think first of all about the security of their housing and to try to ensure financial protection of up to ₼25,000 just by paying a small insurance fee to one of the reliable insurance companies (₼50 annually in Baku, ₼40 in Ganja, Sumgayit and Nakhchivan, ₼30 in other regions of the country). This is really little money, if broken down by months or by days. We spend much more on telephone calls," said the head of the association.

How to get an insurance policy?

In fact, it is quite simple to draw up a real estate insurance contract. It can be implemented in several ways depending on the preferences of the insured. You can apply to both the head offices of insurance companies, members of the Obligatory Insurance Bureau licensed to carry out the appropriate type of insurance activities, and their branch offices. Also, representatives of some insurance intermediaries operate in any of the ASAN centres or in notary offices.

In addition, many insurance companies can deliver an insurance certificate to your home or office. You can also contact insurance intermediaries. Although the application can be filled in electronic form, the insurance contract is concluded in writing.

It is necessary to submit only two documents to the insurance company: registration certificate, an extract from the state register of real estate (deed of purchase) and the passport of the owner of the real estate. Then, company employee draws up the insurance certificate and the policyholder pays the insurance premium.

If a citizen wants to extend insurance to match the actual real market value of the real estate, he can contact the same company and draw up a voluntary insurance contract for the indicated property. Considering that obligatory insurance will be used as a franchise in this agreement, that is ₼25,000 for the city of Baku, the amount of additional insurance premium will be insignificant.

Some insurance companies conduct on-site inspections of insured objects and prepare the corresponding photo-documentary report based on the results of inspections.

Houses without documents remain a problem for both owners and insurers, because the owners of such real estate cannot be made liable to pay penalties, while insurance companies have no right to pay compensations.

Our conclusions are as follows: insurance is required; nobody changed the penalties; there is no control over the situation, but it will be established.

Remarkably, the unnecessary panic in the society around the issue of insurance in fact helped to refresh it. And it's a good news as the insurance sector of Azerbaijan has been going through hard times for a long time. According to insurers, the annual potential of the real estate market reaches ₼400 million. Of course, it would be nice if clients come to insurers voluntarily, not because they want to avoid penalties, but we have to admit that sometimes such radical measures turn out to be more effective than propaganda...