Insurance market: "run" with an obstacle
According to the Law on Insurance Activity in Azerbaijan, approved in March 2008, the insurance companies should be divided into Life and Non-life companies within three years. Subsidiary Life insurance companies can provide services with a minimum period of two years. And at a time when an opportunity appeared for the development of this type of services, such as "Life", which is less developed in the insurance sector of the country, a global crisis started, which also affected the insurance market of Azerbaijan.
In fact, one or two years of crisis for the insurance company are not considered critical because of its reserves, rather than its own assets. However, starting from 2007, the main share of success of the leading insurance companies depended on the credit policy of banks. Last year, banks stopped issuing loans, and this led to a decline in the level of insurance through banks.
In addition, all large companies are now trying to reduce their costs. And if spent a little more motivational additional monies on staff, this year they are trying to reduce them. For example, many companies are now abandoning the voluntary health insurance for their employees.
On the other hand, since the crisis began, none of the insurance companies of Azerbaijan has suspended its activities at a time when a recession started in many countries. Over the past couple of months, insurance companies in Hungary, Latvia, Ukraine, Belarus and Serbia have been forced to appeal to IMF for financial support, either in form of a loan or credit agreement on the contingency.
Now Non-life insurance leads in the Azerbaijani insurance market. Of all 28 Azerbaijani insurance companies working in the country, only one company deals exclusively with the life insurance - Atesgah Heyat Company. However, the only life insurance company in Azerbaijan completed operations at a loss during the first year. In the company's balance sheet as a result of 2008, the assets decreased by 39.2 percent compared to 2007 and totaled 1.26 million manat.
The total amount of Life insurance premiums amounted to 291,450 manat compared to 46.47 million manat of total amount for other types of insurance. The situation shows that the life insurance in Azerbaijan needs a fundamental development, since the potential exists. The high standard of living, sustainable regional economy inspire confidence that the Life insurance products are in demand in Azerbaijan. However, for the development of market, insurers will have to work seriously, because life insurance is very different from other insurances.
In its turn, the insurance is different from other activities with that insurance companies are dealing with money, which are only temporarily in their possession. The insurance premiums that they receive from the insured is not payment of tangible goods (products, services), but payment to ensure that in future, the insurance company will carry out an insurance payment when the circumstances stipulated in the insurance contract appears.
This type of premium payment for insurance service needs some assurance that the insurance company will be able to meet all its obligations to all of its insured at any time. This guarantee is a high level of financial security of the insurer, which is defined as the ability of the insurer to perform its functions in terms of any economic and political situation. Financial security is determined by the solvency, financial stability and the stability of the insurer, based on its tariff, investment and reinsurance strategy.
Merely insufficient capitalization of insurance companies presently impedes development of both life insurance service and insurance field in whole.
Insurance companies should have statutory capital in the amount of 15-20 million manat to carry out proper insurance activities, but not act as a broker, re-insuring risks of world re-insuring companies. Unfortunately, the figure hardly reaches 10-12 million manat in Azerbaijan in accordance with the indicators of capitalization at tens of the country's leading insurance companies.
The country also has problems such low organization of insurers within, weak work of obligatory types of insurance, mass distribution of insurance policies. The last has been rejected worldwide. While insuring a security automobile or real estate banks conclude insurance agreements with borrower in case of absence of communications between insurer and insured.
Absence of awareness and understanding of necessity of insurance services, i.e. financial illiteracy of the community and commercial bodies affect on people's confidence on life insurance and insurance in whole. It was resulted from poor propaganda of life insurance. Potential clients even lack of elementary knowledge to purchase long-term life insurance policy. So, today it is necessary to attach much attention to development of curriculums, training, large-scale enlightenment work and expanding insurance universities.
The international experience shows that the insurance system efficiently develops only through establishing competitive environment for insurance organizations, wide application of insurance principles. Respectively, it is necessary to establish rivalry terms to do business. A legislation item which cancels ban on participation of foreign capitalization in the amount of 49 percent will be helpful. The foreign investors can own 100 percent capital of insurance companies. Flow of new foreign insurers boosts market competition, including rivalry among non-residents. Establishment of competitive environment for insurers should be realized through changing a principle of motivating their activities, introducing stimulating mechanisms in terms of fulfilling their major tasks.
Root changes in the insurance market will be seen in a couple of years. Our insurance market should be financially firm, corporate management of companies meet advanced standards, clientele of insurers should expand considerably, insurers should be more pleased, including life insurers. By 2011, the big insurance companies' plans include opening daughter companies, exclusively involved in life insurance. This division, which exists in countries with developed insurance markets, will save insurance reserves on long-term life insurance from possibility of their inexpedient use.