PURSUIT OF BILLION

The insurance market of Azerbaijan has successfully overcome the crisis of recent years, demonstrating very decent growth dynamics for the second year in a row. In January-July 2023, local insurance companies (ICs) collected almost 31.2% more premiums than in the first seven months of last year. In order to support this trend and inform the wider population about the benefits of insurance and the variety of products and services offered, the Insurance Festival is held for the first time in Baku and nine major cities of the country. At the opening ceremony of the festival, the Association of Insurers of Azerbaijan (AIA) presented a series of forecasts, which show that by the end of 2023, total insurance premiums in Azerbaijan will exceed the landmark threshold of ₼1b.

After the crisis

During the energy crisis of 2014-2017, the insurance sector of Azerbaijan was seriously affected due to the worsening stability of the national currency's (Azerbaijani Manat, ₼) exchange rate. This led to the withdrawal of the weakest insurance companies from the market. As a result, the number of Azerbaijani ICs decreased from 27 to 21.

The insurance business is extremely well integrated with the banking business. Traditionally, they are part of holding companies, with banks being their main shareholders in most cases. On the other hand, a considerable part of the turnover of insurance companies is formed by servicing car, collateral and mortgage loans issued by related banks, etc. But if such close co-operation has a very negative impact on insurance during the banking crises, the situation changes dramatically during the periods of steady growth in the banking market.

This is why after the energy crisis nine years ago, the Ministry of Finance and the Central Bank of Azerbaijan (CBA) seriously strengthened the legal and regulatory frameworks for both the banking and insurance sectors, bailed out financial market participants and improved prudential indicators in the industry. Thus, the likelihood of new large-scale crises in the insurance market has been minimised. Thanks to the success of this policy in 2020-2021 local insurance companies overcame the negative effects of the COVID-19 pandemic and the subsequent drop in oil prices. The only troubled company was Revan Sigorta JSC, and its licence was revoked in March 2021.

During yet another wave of the economic crisis in the past and current years, ICs could maintain comparative resilience despite a bunch of negative factors such as imported inflation and the slowdown in economic growth due to the intensified recession in the US, the EU, as well as a number of problems in trade and economic partners. Rising consumer prices and low economic growth do not create favourable conditions for the insurance and banking markets. In July 2023, the Central Bank revoked the licence of IC Günay Insurance. However, the incident is not related to the poor performance of the company, but to the failure of its related structure and main shareholder, Günay Bank, which was forced to direct all its capital to repay debts on deposits.

Nevertheless, the majority of domestic ICs avoid possible difficulties related to fluctuations in the service demand. Moreover, they attempt to expand the market, including in the regions of the country, promoting new products and adjusting to market demands.

Favourable dynamics

The current Insurance Festival (August 26-September 7) held in Baku, Sumgayit, Ismayilli, Ganja, Guba, Lankaran and other cities of Azerbaijan is a perfect example of the growing activity of insurance companies. Organised for the first time in Azerbaijan as a joint initiative of the Central Bank, the Mandatory Insurance Bureau and the Azerbaijan Insurers Association, the festival is implemented as part of the action plan for the development of insurance sector approved by the Cabinet of Ministers on May 21, 2019. 

The events are held in the edutainment format (education + entertainment), which is a synthesis of educational, informative and entertaining programmes. The main objective is to increase the insurance literacy of the population and ensure accessibility of services. That is why almost all the local insurance companies participated in the event.

"Given the high growth rates of the insurance market in the first half of 2023, we can expect a high growth rate by the end of 2023. If we maintain the rate, insurance collections across the country will exceed ₼1b," ACA Executive Director Elmar Mirsalayev said during the press briefing of the festival. According to Mirsalayev, currently the most popular types of insurance products in the regions of Azerbaijan are compulsory insurance, voluntary insurance of motor vehicles, real estate and life.

In general, the dynamics of the market in recent years looks quite favourable. In 2021, the sector's revenues increased by 16%, while in 2022 twenty ICs collected ₼970.8m of premiums, which exceeded the previous year's indicators by 15%.

However, the industry is likely to achieve the highest dynamics of development this year. According to the recently published CBA indicators, the total amount of premiums of ICs in January-July 2023 reached ₼761.8m, indicating a 31.2 per cent growth against the indicators of the same period last year. The key driver of growth was the increasing premiums on voluntary types of insurance (27.5%). During the reporting period, Azerbaijani ICs increased this amount to more than ₼559.3m. The share of this segment accounted for 73.4% of all premiums in the market.

In general, according to CBA Director General Ziya Aliyev, the growth of the voluntary insurance market, which reached almost 75% of all premiums on the market in the last 5-6 years, is a sign of increasing popular confidence in this area.

Meanwhile, the life insurance segment collects the main revenues from voluntary insurance: in January-July alone, premiums for this insurance product reached ₼338.3m (+35.8%). Such high positive dynamics can be explained by the increasing significance of this investment instrument with a significant share of sales of policies through the banks. In Azerbaijan, life insurance policies are mainly purchased by corporate clients for their employees. These are large companies in the oil and other sectors, banks, etc. Insurance premiums, as well as benefits, are exempt from all types of taxes. In addition to the payment of the insured sum, at the end of the contract term the client can count on additional investment income as premiums will be placed on the bank's deposit account.

Share in GDP

Although the total volume of premiums for compulsory insurance is more than one and a half times smaller (c. ₼202.5m), the growth in this segment is very high (+42.8%). Among the leading areas are compulsory medical insurance (CMI) and compulsory motor third party liability insurance (CMTPL).

In the near future, real estate insurance will be added to these products, expected to boost a twofold growth in this segment. The Central Bank has identified this type of insurance as one of the priorities for the insurance market development in 2023. It is planned to ensure inter-system integration between the mechanisms of the Compulsory Insurance Bureau and other state agencies, especially the information system of the State Property Service. This will in turn make it possible to issue an electronic property insurance certificate, which is very important for market coverage, let alone the possibilities of online control of the relevant structures.

Despite the high degree of insurance development in recent years, its share in the total revenues of the financial sector, especially in the gross domestic product, is still relatively small. In terms of penetration (the depth of insurance penetration: the ratio of gross premiums to GDP), the indicator for January-July 2023 was 1.08%. Of course, this is better than in the post-pandemic crisis year of 2021 (0.9%). Nevertheless, so far Azerbaijan lags behind the countries of the region. A year ago, the level of penetration of the insurance sector in Georgia was 1.2%, in Russia - 1.5%, in Türkiye - 1.7%, while in a number of EU countries and in the US this indicators reaches 10%. The Chinese insurance market is developing very dynamically in this respect: 3.5% in 2015 and possibly 7% in 2023. Usually the penetration parameters in the insurance sector are related to the level of income of the population. The higher they are, the higher is the ratio of gross premiums to GDP. The general culture of the financial market, trust in banking and insurance companies, the degree of popularisation of the offered products and awareness of the population about their advantages are equally important. In this respect, Azerbaijan still has a lot to work on and reform its insurance market gradually.