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Azerbaijan's insurance sector is swiftly recouping lost opportunities from recent years, showcasing impressive growth rates. Over the past three years, the industry's total assets have surged by 34.2%, with total capital climbing 7.7%. Regulators anticipate a further 10-15% market expansion this year, a goal that appears attainable based on data from the initial five months. While compulsory insurance remains the primary focus, newly introduced products are yielding promising results. Both regulators and market participants identify burgeoning public confidence as the linchpin of this success. The recent 10th Azerbaijan International Insurance Forum (AIIF 2024) in Baku centred discussions on strategies to further bolster this crucial indicator.

Regulator's Priority

The implementation of vital measures to ensure risk-oriented control and establish robust corporate governance in insurance companies has garnered significant attention as a pivotal factor shaping the industry's trajectory. In a relatively brief period, substantial strides have been made in regulating insurers' investment activities, enhancing reinsurance operations, forming insurance reserves, and fortifying the independent expert institute within this sphere. To safeguard fair treatment of customers, service infrastructure has undergone significant improvements, complemented by extensive educational initiatives aimed at fostering a more sophisticated insurance culture throughout society.

"We are actively broadening sales channels, promoting innovative voluntary insurance products through regulatory and institutional means, and refining compulsory insurance mechanisms," stated Taleh Kazimov, Chairman of the Central Bank of Azerbaijan, during his address at the forum. "Additionally, we are strengthening access to unified sources of information on insurance and bolstering consumer protection measures."

"As a result of these concerted efforts, we anticipate the sector's confidence index to rise from 66% to 80%. Furthermore, we aim to increase the total insurance premium per capita from the current ₼121 to ₼195, representing a substantial 61% growth," he elaborated.

Taleh Kazimov highlighted that the insurance industry, mirroring trends in other financial sectors, is adopting an innovation-based business model. This approach seeks to deliver maximum quality at optimal, customer-oriented costs. "The integration of cutting-edge technologies is enhancing the accessibility of insurance services and ensuring heightened customer satisfaction. Moreover, the application of innovative solutions enables cost optimisation across the industry," the regulator emphasised.

A significant factor underpinning hopes for improved performance is the Central Bank's introduction of a specialised regulatory regime. This initiative is designed to nurture the financial sector's innovative capacity while effectively managing potential risks through preventive measures.

Simultaneously, Kazimov noted that despite the positive trajectory, substantial market opportunities remain untapped. Consequently, developing the insurance sector and ensuring its alignment with contemporary requirements rank among the Central Bank's strategic priorities.

The "Strategy for the Development of the Financial Sector for 2024-2026" outlines legislative initiatives aimed at broadening distribution channels for insurance products and increasing penetration of both compulsory and voluntary insurance types. The strategy also encompasses plans for digital transformation within the sector.

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"Our insurance market is experiencing growth, yet, mirroring global trends, there remains a pressing need for ongoing reforms in specific areas. Digitalisation and e-innovation top this list as indispensable tools for ensuring affordable, high-quality services," stated Ulviyya Jabbarova, chair of the Supervisory Board of the Azerbaijan Insurers Association. "Another crucial focus is database management. A market player with a rich database invariably maintains a competitive edge. Information security also ranks high on our agenda. Our industry processes vast amounts of data in a digital environment, making cyber resilience a paramount objective."

Market participants underscore the necessity of efforts towards digitalising the insurance industry. "The discourse around digitalisation and digital optimisation has persisted for two to three decades. While artificial intelligence currently basks in the spotlight, the challenges of digitalisation remain critically important for insurance companies worldwide," remarked Murad Mammadzade, a representative from a leading insurance firm. Indeed, in today's landscape, the availability of effective digital solutions confers a competitive advantage and satisfies customer expectations. However, market participants caution that failure to implement digital transformation in the coming years could lead to consumer dissatisfaction. "In the post-pandemic era, we've observed an increasing trend towards digital channels for interactions with insurance companies, particularly among younger clientele. They favour digital communication methods, eschewing phone calls and face-to-face meetings. Consequently, the provision of quality digital solutions already offers a competitive edge, while their absence in the future will inevitably result in customer dissatisfaction. We must acknowledge these shifts and adapt proactively," Mammadzade added.

Emerging Categories

New types of state-supported insurance introduced in Azerbaijan over the past couple of years have become key factors in drawing increased attention to this sector overall.

Chief among these innovations is compulsory medical insurance (CMI), which has effectively transformed every citizen into a consumer of insurance services. Like all innovations, CMI is navigating a challenging path, fraught with dissatisfaction and problems on one hand, yet yielding positive outcomes on the other.

Zaur Aliyev, Chairman of the Board of the State Agency for Compulsory Medical Insurance, asserts that ensuring the full financial sustainability of compulsory medical insurance is fundamental to further enhancing the quality of medical services in the country. An analysis of funding sources reveals that a significant portion comprises allocations from the state budget and the Compulsory Medical Insurance Fund. "To diversify the Compulsory Medical Insurance Fund's financial sources, we are undertaking relevant work, including studying international experiences and proposing amendments to existing legislation," Zaur Aliyev elaborated.

He highlighted the increased allocation of funds for healthcare expenditures from the state budget in recent years as an indicator of the government's commitment to this sphere. "This enables us to improve both the quality and range of medical services. Last year, we incorporated long-proposed procedures such as liver, kidney, and bone marrow transplants, as well as other costly surgical operations, into the compulsory medical insurance scheme. Consequently, we've seen improved public access to medical services, particularly to expensive surgical procedures," Z. Aliyev emphasised.

Currently, CMI provides access to over 3,300 medical services free of charge. Another groundbreaking development in the insurance sector has been the introduction of agro-insurance - a complex and challenging process given the high-risk nature of agriculture. Azerbaijan's Agriculture Minister Majnun Mammadov suggests that strengthening this insurance category requires the introduction of more innovative products to mitigate the impact of climate change on the agricultural sector. The Minister pointed out that global climate changes are intensifying negative impacts on agriculture. Global warming, erratic precipitation patterns, floods, landslides, ongoing soil erosion, and salinisation pose serious challenges. In response, the Government of Azerbaijan is promoting environmentally friendly agricultural systems and encouraging the use of modern technologies in organic agriculture and horticulture.

In this context, agricultural insurance mechanisms play a crucial role in ensuring sustainable agricultural development. "Azerbaijan's agrarian insurance model was developed based on successful international systems, drawing particularly on the experience and support of Türkiye's TARSIM system. This model aims to ensure sustainable farming practices, stimulate interest in the field, and support stable incomes for our farmers. Based on public-private cooperation, it's a proven and successful approach. The joint insurance of products by the Agrarian Insurance Fund and private insurance companies mitigates investment risks, bolsters state support for farmers, positively impacts employment, contributes to food security, and strengthens the insurance market. The introduction of this agro-insurance mechanism should be viewed as another manifestation of state support for the agricultural sector," Mammadov explained.

A key feature of Azerbaijan's agro-insurance model is its broad scope of application. Farmers are offered insurance against 14 risks for 41 plant types and 8 risks for livestock. These services cater to 96% of the country's farmers. Currently, 25% of the nation's agricultural area is insured, with farmer compensations increasing annually. This support enables affected farmers to resume and continue their agricultural activities without interruption.

Fuad Sadighov, Chairman of the Board of Directors of the Agrarian Insurance Fund, has announced plans to increase the insured share of agricultural areas in Azerbaijan from the current 25% to 31%. "We intend to extend insurance coverage to additional agricultural areas vulnerable to climate change effects. These initiatives aim to provide comprehensive protection to farmers by mitigating the negative impacts of risks such as drought," he stated.

He also noted that the risks associated with natural factors faced by farmers in recent years are projected to intensify in the future, given global trends.

Climatic Variations

Climate change presents a pressing issue for the insurance sector, necessitating new, important decisions to support not only farmers but also representatives from other spheres of life predicted to face serious challenges in the near future.

"Another issue of deep concern to us and the global insurance sector is the environment, sustainability, and climate change. Global experience shows that risks and damages caused by climate change are escalating annually, sending a crucial signal to the insurance industry. It's worth noting that at the end of this year, esteemed representatives from countries worldwide will convene to discuss this topic at COP29, hosted in Azerbaijan," Ulviyya Jabbarova remarked.

Gepa Jansen-Klaus, vice president of Swiss Re, a Swiss reinsurance company, predicts that insurance companies' expenses related to natural disasters could double within the next decade.

She noted, however, that insurers' payouts related to natural disasters have only increased by 30% over the past 30 years. "Climate change is now poised to become more widespread globally. Our analysis indicates that 36 countries in Asia and North America were significantly impacted by climate change last year. Natural disasters cost these nations approximately $200 billion. For instance, the economic damage from earthquakes in Türkiye and Syria reached $8 billion, 90% of which was not covered due to lack of insurance," Jansen-Klaus explained.

Consequently, the insurance sector must formulate even short-term development strategies within the framework of current challenges to achieve market sustainability and stable long-term growth rates.