COST OF RISK

Azerbaijan's insurance sector is entering a period of structural transformation, where quantitative growth is accompanied by a reassessment of risk models and regulatory tools. The results of 2025 demonstrate both the system's resilience and the presence of accumulated imbalances that require adjustment. On the one hand, there remains a high level of liquidity and asset stability; on the other, pressure from losses intensifies in certain segments, primarily in motor insurance.

In light of these developments, the regulatory body is methodically expanding its toolkit, encompassing measures ranging from tariff adjustments to fundamental legislative changes. Consequently, the insurance market is gradually shifting from an inertial model to a more flexible and risk-oriented system.

Financial resilience

According to the Financial Stability Report of the Central Bank of Azerbaijan (CBA), the insurance sector's assets grew by 4.2% in 2025, reaching ₼2.14 billion. The asset structure remains fairly conservative, with 33% consisting of government securities, 33% in bank deposits, and 13% in corporate instruments. This suggests that insurers are maintaining their focus on low-risk assets.

Sector liabilities also increased by 3.8% to ₼1.5 billion, with reserves for insurance premiums making up the majority (73%). This structure reflects a high level of accumulated obligations to clients, necessitating substantial liquidity reserves.

The liquidity ratio, a key indicator of resilience, stood at 325% at the end of 2025. This means insurers can cover expected claims more than threefold with highly liquid assets. The volume of such assets reached ₼1.258 billion, significantly exceeding the expected net claims of ₼674 million.

Concurrently, the sector's investment model is undergoing a transition. The investment portfolio of insurance companies decreased by approximately 6% to ₼1.441 billion, mainly due to a reduction in government securities issuance. This, in turn, has led to a growing demand for alternative investment instruments, including repo market operations. Despite this, investment activity remains a significant income source, totalling €119.6 million, which is 7.4% of the sector's total revenue.

Risks and tariffs

In addition to overall resilience, loss pressure is increasing in the motor insurance segment, especially in the context of taxi services. The regulator has stated that the problem is structural in nature and is linked to the intensified operational load on vehicles.

As Shahin Mammadov, Director General of the Central Bank, noted: "Due to rising insurance payouts, company losses have increased. Due to the high level of losses being experienced in the taxi sector, there has been a significant increase in insurance premiums. The increase applied to insurance collections is 50%. These regulations do not apply to other vehicles."

Vusal Gurbanov, Director General of the CBA, expressed a similar position. "On average, the loss ratio for compulsory motor insurance rose from 74% to 85% in 2025. This increase is primarily linked to the taxi business." He asserts that high loss ratios are driven by usage intensity: In comparison to other vehicles, taxis travel significantly greater distances, which results in a higher risk of accidents.

The introduction of special coefficients for taxis is a key development in the field of risk segmentation, allowing for more precise management of risk. Previously, tariffs were primarily based on technical vehicle characteristics; now usage type is also taken into account. This change will make the system fairer for insurers, but it will also increase the burden on transport market participants.

The expert community also endorses these changes. As insurance expert Shahin Ismayilov noted: "As a significant proportion of claims relate to vehicles providing taxi services, insurers have had to pay substantial sums." He stated that, under the new conditions, taxi insurance premiums may increase substantially depending on claims history.

Reforms and prospects

Alongside tariff changes, the Central Bank is initiating deeper transformations in the insurance system, including revising approaches to compulsory property insurance and agricultural insurance.

Atakhan Hasanov, Director of the CBA's Stability Department, has announced that the conceptual framework for agriculture has been finalised, along with a new draft regulation for insurance intermediaries' activities. This initiative will extend the reach of reforms beyond the traditional market, thereby establishing a more comprehensive risk ecosystem.

Furthermore, Gurbanov noted that plans are in place to raise insurance sums for property coverage. A concept has been developed to cover risks such as fire, explosion, lightning strikes and others. He emphasised that the current policy does not cover certain catastrophic risks, which limits its insurance protection effectiveness.

There are still challenges to be addressed. Despite the recent focus on property insurance, adverse weather conditions and compulsory housing insurance, collections in early 2026 increased by almost fourfold. This indicates insufficient public engagement and highlights the need to improve insurance culture.

In response, new legislative amendments have been introduced to strengthen the supervision of this product's implementation, which should ultimately lead to increased collection volumes.

A key element of the reform process will be the digitalisation of processes. Gurbanov confirmed that measures are also planned to accelerate insurance payouts and introduce electronic regulatory mechanisms. The objective of these initiatives is twofold: to reduce the time taken to make payouts and to enhance the relationship between insurers and clients.

Consequently, all innovations in the insurance system are aimed at enhancing client orientation and market quality.

It is evident from the published data that the insurance sector in Azerbaijan is demonstrating a commendable ability to maintain equilibrium while undergoing the necessary reforms. Whilst high liquidity and stable assets guarantee system reliability, rising losses and structural imbalances require specific measures to be taken. The extent to which these reforms are implemented will determine whether the insurance market can become a fully-fledged tool for achieving long-term economic and financial stability.