UNINSURED INSURANCE

After regaining control over financial institutions of Azerbaijan, the Central Bank of Azerbaijan (CBA) decided to eliminate the weak links in the market as soon as possible. This time CBA is going to tackle the insurance companies. So far, the only CBA-regulated insurance company has been Standard Insurance, whereas four banks have been closed since the beginning of the year.

The first one

“Standard Insurance completely lost its capital, could not reliably carry out its activities and violated consumer rights. Thus, on May 19, CBA decided to revoke the license of the company, appointed a temporary administrator, and applied to court to declare the company bankrupt,” CBA statement reads.

Standard Insurance has been operating in the insurance market of Azerbaijan since October 2002. The company provided services for 28 types of compulsory and voluntary insurance. With its liquidation, the number of insurance companies (ICs) licensed to operate in Azerbaijan decreased to 21.

During the audit of the company CBA determined that the aggregate capital of Standard Insurance was significantly lower than the minimum requirement of ₼5 million. Similar to the banks closed this year, CBA had previously called on the company to implement measures to increase capital, “but the shareholders did not provide a specific plan of action.” “Standard Insurance operated with low efficiency and completed the last two years at a loss,” Central Bank statement reads. Thus, the net loss of Standard Insurance in 2019 reached ₼1.8 million, which is 73.2% more than in the previous year.

“We have repeatedly raised the issue of misbehaviour of Standard Insurance on the market before the management of the company, especially in terms of consumer protection. The chronic liquidity problem of the company caused serious delays in resolving insurance claims, which inflated consumer dissatisfaction,” CBA said.

The regulator assured that the consumer rights are taken into account during the liquidation process. And if there is an insured event, damage must be compensated under the existing contracts.

Interestingly, Standard Insurance continued operations even after the bankruptcy of Bank Standard in 2016, since most insurance companies in Azerbaijan traditionally do business together with banks and are dependent on them. By the way, the recently closed banks also had ‘subsidiary’ insurance companies, but the regulator remains silent about their situation.

“In terms of improving the insurance market, closing Standard Insurance is the right step. An unstable financial company, which does not have sufficient funds to fulfil its obligations, unfortunately, created a negative image. That’s why the measures taken by CBA are very timely, especially considering the economic situation during the pandemic,” Azer Aliyev, head of the Association of Insurers of Azerbaijan, said.

According to Mr. Aliyev, for a long time CBA has not carried out the monitoring of the financial situation of insurance companies. So, this is also a positive challenge for the market. In addition, the regulator sends tough messages about relatively high fees and commissions to insurance agents. “For many years, many insurance companies have set commission fees for their insurance agents in the amount more than prescribed by law. This is true for a wide range of insurance products, especially for compulsory types of insurance. CBA strongly opposed this practice, warning that it would seriously punish such violations. This is a very positive trend to increase confidence in insurance sector,” A. Aliyev said.

New perspective

CBA chairman Elman Rustamov had voiced at his last press conference the perspective of purges in the insurance sector. In contrast to banking, the insurance sector is generally a new area for regulation for the Central Bank. Initially, even before the Financial Markets’ Supervision Chamber was responsible for the sector, insurance companies were regulated by the Ministry of Finance.

However, in May, Elman Rustamov gave a definite summary on the situation in the insurance market, with negative notes prevailing in it. “Our insurance system is developed very poorly, and cannot cover the risks of the national economy and population in full. As a result, we periodically encounter problems. Insurance companies should be a system for creating capital reserves of the population, act as funds, but we do not have such an approach. Therefore, I believe that a new perspective is needed to develop the market,” Rustamov said.

A few days before this statement, the problem of real estate insurance and business risks became relevant again after another fire took place at the Eurohome Shopping Centre. Similar emergency situation occurred last year, after which the regulator was given instructions to study the problem and solve it as soon as possible.

But if the first was managed to be done as soon as possible, then with the second point, according to E. Rustamov, you have to wait, because the measures planned for this year are somewhat late due to the coronavirus pandemic and problems of the banking sector. “Azerbaijan’s insurance system has long accumulated problems, and today we are seriously dealing with them. We know the main weak points of the sector, and we will seriously tackle them. The state should not take insurance risks. It is necessary to develop an insurance market. We are planning extensive events. In particular, we plan to expand the coverage of compulsory real estate insurance,” E. Rustamov promised.

Property insurance

Along with the objective reasons for negative trends in these types of insurance, the regulator also points to subjective factors affecting the business sector. Indeed, the entrepreneurs do not always avoid insurance of their property and associated risks. On the contrary, insurance companies often refuse to work with them. This paradox is associated with a shadow economy, since businessmen do not fully indicate their financial indicators and real risks, insurance companies cannot conduct an assessment of the situation and conclude an agreement. On the other hand, some large companies completely ignore the instructions of the Ministry of Emergency Situations on observance of safety measures, which also makes it impossible for insurance companies to work with them. As a result, entrepreneurs, who try to save on shadow accounting, risk completely losing their business due to emergency and the absence of an insurance policy.

In addition to a series of emergency situations last year, the topic of real estate insurance gained popularity amid the hype surrounding obscure announcements that people who did not insure their property would face heavy fines. Although it turned out that there was no need to be afraid of any fines due to gaps in the legislation and the mechanism for their collection, the hype had a positive effect on statistical data. According to the Executive Director of the Compulsory Insurance Bureau (CIB) Rashad Ahmedov, in January-April 2020, the bureau recorded an increase in insurance premiums on compulsory insurance of real estate and civil liability for the operation of real estate, 66.6% and 5.3%, respectively.

As for fines, the authorities work hard to improve legislation and to create an effective mechanism for monitoring the availability of real estate insurance policies. “The amendments to legislation are pending introduction. Nevertheless, we began in test mode the process of integrating our electronic system with the system of the State Property Service under the Ministry of Economy. In the future, the Ministry of Emergencies and executive authorities will join it too. They are authorized to control the availability of insurance policies for legal entities and individuals, respectively,” R. Ahmedov said. According to him, this will help increase the volume of the real estate insurance market from ₼45-50 million to ₼300 million annually.

A. Aliyev of AIA believes that the automation of issuing the extracts on compulsory real estate insurance by analogy with the CMTPL insurance policies will expand the coverage for this type of insurance. “Today we do this on paper, which complicates the administration of this type of insurance. If we switch to the online system this year, we will be able to sell more of this product,” A. Aliyev said.

According to the director of the CBA’s Insurance Supervision Department, Vusal Gurbanov, it is planned to switch to an electronic platform of almost all types of insurance, which will make it a more affordable financial tool for the population.

Insurance Quarantine

At the same time, despite the problems, the situation in the insurance market of Azerbaijan is far from critical: the total premiums of insurers in Azerbaijan in January-March 2020 increased by 19.7% compared to the same period of last year. 66.7% more funds were allocated for insurance claims compensation than in 1Q2019.

However, these indicators generally cover the pre-quarantine period. Has the COVID-19 pandemic affected the insurance sector in Azerbaijan? Yes.

“In the second quarter, we expect a moderate pace of market development. There is a slight decline in compulsory motor third-party liability (CMTPL) insurance under the Green Card system; in general, the number of insurance contracts has slightly decreased. This is natural, given the quarantine prohibitions,” Executive Director of CIB, R. Ahmedov, said.

In his opinion, the softening of quarantine measures will lead to greater use of vehicles, therefore, the restoration of demand for CMTPL insurance. R. Ahmedov believes that the pandemic will not have a sharp negative impact on insurance companies, since CBA has taken preventive measures, including the refusal of transfers, ability to postpone the payment of membership fees for CIB participants, calendar fees for compulsory types of insurance until September 30.

Meanwhile, the head of the AIA A. Aliyev is more pessimistic. In his opinion, a situation of forced stagnation in the corporate segment will have a negative impact on the insurance market. “Many business representatives are already asking insurance companies to make either one of the two: to give large discounts on certain types of insurance, or to increase receivables. They cannot pay insurance premiums on time. This negatively affects the insurance market, but we understand the situation, as there are industries that have suffered even more from this pandemic,” A. Aliyev said.

According to insurance expert Khayal Mammadkhanli, it is possible to predict a decline in indicators for voluntary types of insurance, given some objective decline in household incomes and the existing uncertainty due to the pandemic. “Let's say the tourism sector sank, and with it the life and health insurance of tourists. The need for insurance against industrial accidents, etc., has sharply decreased. There are many such moments. But again, all these negative factors today are experienced by insurance companies around the world, and everyone is waiting for the end of the pandemic in order to finally calculate the losses. If this situation is long-term, then insurance companies will also have to ask for support from the state,” Mammadkhanli noted.

In the meantime, insurance companies hope that they will be able to complete this year at least at the indicators of the last year and get through the period of reforms successfully.