Azerbaijani insurance market's potential valued at 1 billion manat

Azerbaijan, Baku, Aug. 23 / Trend I.Khalilova /

Several Azerbaijani insurance companies may suspend their activities next year due to the failure to raise their total capital to 3.5 million manat, a market expert said.

"Their shareholders do not think that raising their capital is efficient given the current market volumes," he said. "At the moment, only 12 of 27 insurance companies exceed the minimum capital requirements."

The insurance market's potential is about 1 billion manat, with collected premiums having hit 163.31 million in 2009. However, the market volumes are falling. Total premiums have dropped by 21.64 percent (113.02 million manat) since 2009, as have payments. According to the expert, the total market volume will vary between 120-150 million manat in 2010.

Turkey recently set a $5-million capital requirement for new insurance companies. The insurance market is currently valued at $8 billion. In recent years, the market has observed a strong flow of foreign investors. About 80 percent of the market is controlled by the French AXA company.

"Educational mechanisms such as training, surveys and adopting legislation are used widely worldwide," the expert said. "The government and institutions must work with higher educational institutions in Azerbaijan, as 65-70 percent of the insurance market depends on these factors."

Meanwhile, the Azerbaijani Finance Ministry is working on a project to facilitate the insurance market's development.

Another problem facing insurance companies is a lack of fund investment tools. The yield of state securities may reach only one percent today, so their main source of income is investing their funds in deposits in the banking sector, which has an average annual interest rate of eight percent.

"It would be advantageous for banks to invest in the country's stock market," the expert said. "There are two types of income abroad - technical (profits from transactions) and financial, which helps to minimize the level of expenditures and to cover them by 60 percent."

Given all of these factors, the market's weaker companies will inevitably shut down, he added. The market will ultimately only have large insurers and will be forced to attract foreign investors into a more competitive environment. This will provide a new impetus to the market's development, the expert said.

Meanwhile, Alfa Sigorta Chairman of the Board Khayal Mammadkhanli said the market will not see a serious spike over the next five years.

"If Azerbaijan does not accept new insurance legislation, such as fire insurance, for example, which is difficult to do, then it would be hard to expect any new arrangements in the insurance market over the next two years," Mammadkhanli said. "Strong growth should not be expected."

In his view, the government must get rid of the burden of paying compensation to cover damages caused by natural disasters, as this obligation must already be transferred to insurance companies, he added.

Mammadkhanli added that the insurance market will grow annually at 5-10 percent in the medium term under favorable conditions.

"I do not think that the country's insurance market will double or triple in size," he said. "It may grow 5-10 percent per year thanks to compulsory insurance on labor ability loss and also by enhancing the effectiveness of compulsory insurance. In any case, the market is unlikely to exceed 200 million manat in the next two years."

Such predictions are based on projections that 3-4 years are needed before the accumulative life insurance market can develop fully in Azerbaijan, Mammadkhanli said.

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