THE NEXT STEP

Azerbaijan 2012 | FINANCE | REVIEW: INSURANCE

Thanks to sweeping regulatory changes, new levels of efficiency and competition, and growing awareness among the population, Azerbaijan's insurance sector is on the brink of a new era.

Despite significant increases in per capita income across the last decade in Azerbaijan, the insurance system's share of GDP is still only 0.4%. The number is below the approximate 2.5% in the Russian Federation, and 1.5% found in Turkey, and is well below the near 10% found in most Organization for Economic Cooperation and Development (OECD) member states. Regulatory upgrades in 2008 and a wave of new products, however, have transformed the sector. Now, with a new law on compulsory lines of insurance put into practice on December 16, 2012, that share of GDP is set to hit 2-3% in the near term according to the Ministry of Finance.

Until recently Azerbaijan's insurance sector hosted no major international players, with the sole exception of the European Bank of Reconstruction and Development's 25% stake in local company MBASK. Following the passage of a new insurance law in 2008, which reduced and in some cases eliminated restrictions on foreign participation, six foreign players have entered the market.

International competition has grown in parallel with premiums. From January 2011 to September 2011 premiums for all insurance instruments totaled AZN165 million, marking a 40% increase in year-on-year terms over 2010. In the same period, payouts grew 15% to reach AZN41 million. According the State Insurance Supervision Service under the Ministry of Finance, which regulates the sector, the charter capital of insurance companies in 2011 increased eight fold from AZN18.4 million to AZN150 million.

In 2011, Azersigorta, the country's only state-governed commercial insurer, emerged as the leader of the domestic market with premiums of AZN26.1 million. Azersigorta was followed by Ipek Yolu Sigorta (AZN21.58 million), AzSigorta (AZN20.79 million), Atesgah Sigorta (AZN18.55 million), AXA MBASK (AZN12.7 million), International Insurance Company (AZN12.41 million), Pasha Sigorta (AZN10.51 million), Standard Insurance (AZN9.7 million), Ateshgah Heyat (AZN9.5 million), and Xalq Sigorta (AZN8.75 million).

The highest compensation payers in 2011 were Azersigorta (AZN11.08 million), Ipek Yolu Sigorta (AZN8.98 million), Ateshgah Sigorta (AZN6.2 million), International Insurance Company (AZN5.69 million), A-Qroup (AZN5.34 million), and AXA MBASK (AZN3.2 million). Overall premiums for the 28 insurance companies totaled AZN212.98 million and they paid out compensations worth AZN61.57 million.


Of the total premiums stated above, 75% were comprised of voluntary insurance with the remaining 25% coming from vehicle insurance made compulsory by the pre-December 2011 law. Of the payouts, 95% were made on voluntary insurance policies with a negligible 5% coming from compulsory policies.

NEW MANDATES

These ratios, and overall premium levels, are set to change significantly with the enforcement of the new December 2011 compulsory insurance law. The legislation requires four types of mandatory insurance: real estate, liability of owners of motor vehicles, passenger insurance, and liability insurance for the exploitation of real estate.

Per capita insurance premiums constitute AZN18 ($22.86) in Azerbaijan, a comparatively low figure. The new law, according the Ministry of Finance, will raise the per capita premium level to AZN50 by 2015 and AZN100 within the medium term, putting Azerbaijan on par or beyond its regional peers.

While this certainly makes Azerbaijan a highly attractive insurance market, Finance Minister Samir Sharifov notes that the law wasn't designed for that purpose. “It is not our aim to create business for the insurance companies," Minister Sharifov told an Insurers' Forum in Baku in July 2011. “The main aim is for people to understand that there are risks in daily life as in business and that it is the practice worldwide to use insurance companies to provide protection from these risks." The new law will also speed up the payment of insurance, especially to heirs of the deceased. Additionally, the Finance Ministry is working on coordinating legislation to allow for the use of electronic signatures on insurance documents to further increase speed and efficiency.

COMPULSORY BUREAU

The new law also mandated the creation of a Compulsory Insurance Bureau. Contributions to the Bureau were set at 5% of compulsory insurance premiums, and membership was necessary to offer mandatory lines. The founding members of the Bureau were Pasha Sigorta, Ateshgah Sigorta, Ata Sigorta, AXA MBASK, Xalq Sigorta, and Standard Insurance, with AzSigorta joining shortly after. With the exception of Ateshgah Sigorta, which works exclusively with vehicle liability, all members of the Bureau will provide all types of compulsory insurance. As of 1Q2012, there were five more insurers under review by the Ministry of Finance to join the Bureau. Trend Analytical Center in Baku predicts the Bureau will host 15 members by the end of 2012.

Companies must now pay AZN200,000 to be a member of the Bureau and AZN200,000 for permission to stay for a year, which some believe will maintain rationalization in a sector that might otherwise tempt too many under-capitalized players. “The established Compulsory Insurance Bureau poses a threat to the existence of relatively weak insurance companies in the country," writes Layla Abdullayeva of the Trend Analytical Center in Baku.

New capital requirements also aim to ensure prudence in the insurance landscape amidst surging premiums. A minimum capital requirement of AZN3 million was put into effect as of January 1, 2011. This was increased to AZN4 million in early 2012.

Additional requirements for insurers dealing with mandatory lines are expected to be legislated throughout 2012. For example, a draft law requires insurers to have one branch or representative office fully capable of indemnifying damage in all of the 10 economic regions of the country, with only the occupied Nagorno-Karabakh region being a temporary exception.

As of 1Q2012 there were 29 insurance companies operating in Azerbaijan offering some 35 insurance products. There is one re-insurance company, 174 insurance agents, and seven insurance brokers. There are three exclusive life insurance dealers, comprising only 8.8% of Azerbaijan's insurance market.