IT'S BETTER TO BE SAFE THAN SORRY

Natural disasters, acts of God or man-made disasters which, according to the media, happen almost every day in the modern world, incur huge moral harm to people, as well as tremendous economic damage to the states involved. Research by the world's largest reinsurance company, Swiss Re, shows that natural and man-made disasters have led to a whopping $186 million worth of economic loss in 2012 alone.

In addition, disaster-related economic damage has turned into a major problem for many counties and their budgets, as well as for insurance companies. According to the same statistics, $77 billion from the above sum was covered by insurance companies. This is already the third such figure in history even if it is significantly lower than the similar figure last year - in 2011, compensation paid by insurance and reinsurance companies exceeded $126 billion due to natural disasters in the Asia Pacific Region.

Practically all existing systems of protection against catastrophe risks were created after serious disasters. In Azerbaijan, there is a chance to create it "just in case" and the idea has already found necessary support among local insurance companies.

Comprehensive help

It is impossible to provide insurance against natural disasters themselves as these relate to the so-called insurmountable circumstances and are included in the list of fundamental risks in the insurance sector. However, damage that can be incurred as a result of such disasters can be insured.

In Azerbaijan, it was decided to create a disaster insurance pool and insurance companies have already studied the Turkish experience which was initially based on replacing state obligations for financing renovation of houses after earthquakes. About 50 earthquakes happened in Turkey in 2000-2003 and the pool paid for the renovation of houses of 4,200 house owners (about 7 billion dollars). In the event of particularly destructive earthquakes the government removed lack of a necessary insurance policy as a hindrance for people to receive compensation and announced that people who sustained damage could receive help from the state. Help to non-insured residents in 2002 and 2003 incurred an additional pay of $200m from the Treasury. This resulted in the fall of the number of house owners buying insurance since the government demonstrated that it was willing to pay compensation irrespective of whether people had been insured or not. At the moment, the Turkish pooling system has already proved its efficiency and the government has renounced its practice of paying direct financial aid, telling the people to insure their own risks. The same thing happened in Spain as well.

In the case of Azerbaijan, natural disasters caused by the flooding of the Kura and Araz rivers in the spring of 2010 led to the realization of the necessity for insurance companies to become involved in disaster elimination. At the time, the state had to pay over 460 million manats to help the victims. At the initiative of the president, 420 million mantas were allocated to eliminate the consequences of the earthquake in Azerbaijan's Qax-Zaqatala District in May 2012. At the time, President Aliyev, who visited the affected areas, said that had the population insured their property it would have been far easier to solve the problem of damage compensation.

Remarkably, in line with a relevant government decree, in the event of a natural disaster, the amount of financial aid provided by the state should not exceed 20 per cent of the damage incurred. That is, the Emergencies Ministry may build a house for those families whose property were in critical condition but the state does not intend to fully cover expenses for house repairs, something that once again shows that it is better to opt for insurance as an additional and sometimes as the main source of covering damage.

Under the terms of the obligatory insurance of a house or a flat in Baku, the person affected can expect to receive a maximum of 25,000 manats; compensation for the cities of Ganca, Sumgait and Naxcivan is 20,000 manats and for other districts -15,000. The cost of insurance is 50, 40 or 30 manats, respectively. If, in addition to the obligatory insurance, house owners insure their property on a voluntary basis, they can receive additional compensation as part of the voluntary insurance cover.

Triple effect

It needs to be admitted that not only potential clients of insurance companies but also representatives of the market themselves are reluctant to insure against natural disasters since the volume of damage from such insurance instances sometimes exceeds the entire capital of the country's insurance market several times. This creates the necessity to create a disaster insurance pool which, in the case of Azerbaijan, will be set up under the Azerbaijan Insurers Association and which will be operated by the only reinsurance company in the country. Since insurance companies do not view the latter as a rival they agreed to provide it with necessary information regarding risks. Consequently, it is prepared to guarantee and coordinate safety of information. The reinsurance company will redirect resources accumulated in the pool towards reinsurance abroad and will also deal with technical issues. In line with global experience, income of reinsurance companies is 10 to 20 per cent of the risks they carry.

According to Orxan Bayramov, the chairman of the Azerbaijan Insurers Association, the phase of the collection of information from companies has now ended. They also agreed on the terms and conditions of risk reinsurance and other details. By the end of September, it is expected to coordinate with government agencies the issue of creating a catastrophe pool. The date of the launch of the pool will depend on the scale of changes, including those to be introduced in the legislation.

At the initial stage the pool will include companies that are members of the bureau for obligatory insurance since the project of insurance against disaster risks is related to the obligatory insurance of real estate. In the future, negotiations will be held with a number of other insurance companies regarding their future involvement in the pool and the risks related to voluntary insurance.

 Incidentally, natural disasters which are covered by obligatory insurance of real estate include earthquakes, volcanic eruptions, storms, hurricanes, thunderstorms, hail, mudslides, floods, hailstorms and landslides.

At the moment, in compliance with the law, 5 per cent of funds from every collection from obligatory insurance of real estate is used to cover against risks related to insurmountable circumstances. At the initial stage, these resources will be accumulated in the pool but will later be fully channelled for reinsurance abroad. The head of the association believes that when the system becomes operational in the future, it will be possible on the basis of an agreement between companies, to attract an additional 2 per cent from voluntary insurance.

At the initial stage, it is expected that 250-300 million manats will be accumulated in the disaster pool and with the inclusion of risks for voluntary insurance the sum may rise to up to 500-600million. "Given that there are up to 1million business enterprises in the country, their inclusion may result in the volume of pool rising to billions in the future," Bayramov said.

For the state this will create a guaranteed fund for reimbursing expenses in the event of a disaster; in economic terms this will promote the culture of insurance among people and, consequently, result in an increase of the insurance market. Obligatory insurance against disaster risks should become a driving force of the growth of voluntary insurance of real estate; for people, this will mean a guarantee of the reimbursement of expenses related to disaster consequences.

In short, this is a universally beneficial and useful initiative. As they say, it is better be safe than sorry.