Azerbaijan's insurance market: Results of 2010

Analysis Materials 5 January 2011 12:11 (UTC +04:00)

The insurance sphere in Azerbaijan in 2010 overcame the pole of "instability". There is a logical explanation for this: the insurance sphere entered a period of crisis later than other sectors of the financial sphere. Hence, it expects to emerge from it at a later stage.

The downward trend in insurance rates, which began last year (the companies' premiums in 2009 declined by 8.9 percent) continued this year. Meanwhile, there are players on the market who continued to increase their market share even during the crisis.

The amount of insurance fees totaled 139.82 million manat (reduced by 8.17 percent per year), and payments were made to the amount of 45.48 million (2.48 percent) with a potential of the market worth of 1 billion manat for the first 11 months.  The growth rate of the insurance market amounted to 22 percent in 2008 compared to 60 percent in 2007.

Despite the declining trend in the market after a five-year break in 2010, the world's largest insurers have used "active offensive actions". Apparently, during this period, foreign insurers only then get accustomed to the Azerbaijani market as a whole. A stable economic and political situation in the country, as well as a great potential for developing the insurance sphere, could be an incentive in joining Azerbaijan.

Another factor was the liberalization of the insurance market. The share of foreign capital could not exceed 49 percent of the capital in one company before 2008. A 49-percent limit applies to the total capital of the insurance market after a law pertaining to "Insurance activity" entered into force in March 2008. This meant that the restrictions on the investment of a 100-percent foreign capital were eliminated.

At present, roughly 5 of 27 insurance companies have foreign capital in Azerbaijan, but their share in the total capital of companies do not exceed 20 percent.

AIG Insurance (now Chartis), Axa, Miracle Insurance and Financial Group, Basak, and the Glencarron Group Limited are among major international players on the market. The market is preparing to accept the Slovenian reinsurance company Sava Re.

The French AXA Group's joining of the Azerbaijani insurance market in October was accompanied by EBRD's leaving the Azerbaijani Insurance Company MBASK. This, however, cannot be attributed to the fact that the bank was disappointed in the insurance market of Azerbaijan. According to the bank's strategy, it remains a shareholder for a certain period. By purchasing involvement in MBASK, EBRD initially limited its participation by 7-8 years.

From the investors' point of view, today is the best situation for buying the assets, as this can cost less than it was in 2008. On the other hand, it is not reasonable to sell insurance companies now, because the market assets worldwide are closer to the lowest level, rather than to the peak. At present, the assets are sold only in emergency situations, or in case of takeovers. Although it was impossible to say about MBASK, which is one of the largest companies with a capital of 5.73 million manat on the Azerbaijani insurance market [while the five millionth milestone is the minimum capital requirement for the insurance companies as of January 1, 2013].

Taking into account the financial condition of insurers during the global crisis and the dynamics of the insurance market of Azerbaijan, the Ministry of Finance made concessions to the insurance community by softening the requirements for the minimum capital of insurance and reinsurance organizations. Now, insurers must strive to achieve a minimum of 3 million manat by early 2011, and 5 million by 2013, whereas this requirement should have been done a year earlier according to the old schedule.

At present, only 19 insurers' capital, among 27 companies operating in the country, exceeds the minimum requirements for early 2011. Moreover, there are two companies in Azerbaijan (Paşa Sığorta with a capital of 20 million manat and Xalq Sığorta - 21.06 million manat) may correspond to a level that is acceptable and normal for the insurance market in Eastern Europe and CIS according to the international financial institutions.

The company cannot provide itself with professional staff, necessary material and technical base, which requires significant resources of capitalization. The presence of such companies on the market also impedes the total development of the insurance market.

In this regard, we will see new players on the market next year and leaving the weakest companies. The problem of weak companies may be resolved by consolidating their assets, which is supported by the State Insurance Control Committee.

The State Insurance Control Committee will take steps in accordance with the law, beginning from issuing orders to annulling the licenses for insurance activity towards the violators of minimum requirements for the capitalization. The measures will be taken depending on the circumstances.

The Ministry of Finance has used specific actions since April 2010. AzInvest Sigorta was one of the companies that failed to get a permanent license for insurance activity.

The licenses of Günay Sığorta, Azal Sığorta and Əmrah Sığorta for insurance activity were suspended in May. But in a short period, they launched their activity by fulfilling all the requirements of State Insurance Control Committee.

This year insurance companies also continued renewing their licenses.

The permissions for insurance activity in the country will be granted for an indefinite period in accordance with the law "Insurance activity", whereas they were granted for a period of five years before.

At present, the State Insurance Control Committee updated permissions for insurance activity of 16 companies. Licensing of other companies in accordance with the new legislation will not be fully completed until 2014.

Forming a perfect legal base in the insurance industry was continued this year. In July 2010, Azerbaijani President Ilham Aliyev approved the law on "Compulsory insurance of disability resulting from occupational diseases and accidents at work". All necessary laws were necessary for this type of activity. According to the law, only the specialized insurance companies with licenses for life insurance can deal with this type of insurance.

There is a tendency of growth in the number of specialized companies by expanding the sources of savings this year. There was only one specialized company - Ateshgah Life - before December 2010, but now three companies deal with this activity (PASA Həyat Sığorta and Qala Həyat). Ata Həyat may be the fourth on the list. It prepares to enter the market jointly with Slovenian reinsurer Sava Re.

The fees on life insurance doubled this year. It is a good trend. This was achieved through staff corporate insurance, life insurance of borrowers on the mortgage and consumer loans and insurance not associated with lending. Although the absolute numbers are not so big, the growth rate is high enough.

The share of premiums on life insurance hits 55-60 percent of total premiums in Western Europe or other countries with developed insurance markets. The figure was 0.96 percent as of December 1 in Azerbaijan, whereas the year before these fees were 0.55 percent.

The specialized companies' appearing will give a great impetus to this type of insurance, as only in this case there may be an increased interest in this type of insurance expanding the agency network and product line

It will be the only way to make a profit for these companies. So, Life-company's appearing will give an impetus to develop this type of insurance. One can expect the highest activity in this sphere from 2011.

In total, 2010 was hard for the insurance sphere. But the market will come out of these tests more healthy to be more ready for the tough competition. The insurance companies in Azerbaijan must actively expand a range of products and services, and develop infrastructure and distribution channels to compete successfully.

A sphere of insurance is the infrastructure capable to increase effectiveness in all areas of business. This is determined by the significance of developing all types of insurance in Azerbaijan, including the process of integration into the global community.