Azerbaijan's insurance market: From risk to growth Review by Caliber.Az

Azerbaijan’s insurance companies, which have successfully overcome the consequences of the pandemic crisis, relatively painlessly absorb the risks associated with the global recession, inflation and other negative influences on the financial market, and for the second consecutive year have shown positive growth dynamics.

The increase in the market base for voluntary types of insurance has contributed to the growth of 29.1 per cent in this segment. And in general, according to the recently published statistics of the results of January-May of 2023, the participants of the insurance market collected premiums by almost 33 per cent more than in the five months of last year.

The insurance market and Azerbaijan’s entire financial sector have overcome the negative effects of the COVID-19 pandemic and the subsequent fall in oil prices relatively well. Certain risks still remain in the macroeconomic realities of the 18 months associated with the war in Ukraine and the confrontation on sanctions between the West and Russia.

This refers to such factors as imported inflation and the slowdown of economic growth in the current year due to intensified recession in the USA, the EU, as well as due to a number of problems in other trade and economic partners of the country in the post-Soviet region.

The rise in consumer prices and the period of lower economic growth is not the best background for the development of the insurance market, nevertheless, the domestic insurers managed to avoid possible difficulties related to the fall in demand for insurance products relatively easily.

By comparison, during the 2014-2016 energy crisis, the insurance capital closely tied to banks experienced the entire negative impact of the credit default crisis: the suspension of loans from the Azerbaijan Mortgage Fund, the decline in the real estate market, a more than tenfold reduction in new car loan sales, the freezing of many industrial and infrastructure construction financing programs, etc. Insurers were also faced with the problem of declining profitability due to the depreciation and instability of the national currency. These and a number of other factors resulted in the retreat of weaker parts of the insurance business from the market.

However, it should be noted that during the energy crisis nine years ago the number of Azerbaijani insurance companies was reduced from 27 to 21, and for the last several years, despite a number of external and internal difficulties in the financial market of the country, the license of only one insurance company - Revan Sigorta OJSC was revoked (in March 2021).

However, according to some experts, it is possible that complications may arise with Günay Insurance as well, given the recent decision of the Central Bank of Azerbaijan (CBA) to revoke the license of its related structure - Günay Bank.

It should be noted that insurance companies are closely dependent on banks, with which they are usually united in holdings. In some cases, banks are major shareholders of insurance companies.

On the other hand, a large part of the insurance companies’ turnover comes from servicing auto, deposit and mortgage loans issued by a “related” bank, etc.

In periods of banking crises such close cooperation has a very negative effect on the insurance business, and on the contrary, during stable growth in the banking market (like in 2022-2023) affiliated insurance business also experiences a period of prosperity.

At the same time, after the 2014 energy crisis through the efforts of the Central Bank the regulatory framework of the insurance market was seriously strengthened, market participants were sanitised, the prudential indicators of insurance companies were improved, due to which today the probability of bankruptcy of insurance companies has been minimised.

Overall, the actors of the insurance market have been demonstrating rather high stability in recent years; moreover, the growth of key sectoral indicators was fixed by the companies in 2022 and 2023.

In particular, the year 2022 was marked by a 15 per cent growth of total premiums - their volume exceeded 970.8 million manats ($571.07 million). The assets of the insurance sector increased respectively: last year they grew by 20 per cent up to 1.5 billion manats ($882.3 million). Positive dynamics were also marked on the balance sheet and on the total capital of insurance companies.

These positive trends were preserved and even enhanced in 2023: according to the data published by the CBA, the total premiums of domestic insurance companies in January-May 2023 exceeded 566,4 million manats ($333.1 million) that indicate a 32,8 per cent growth compared to the same indices of the previous year.

The key driving point was the growth of premiums for voluntary insurance by 29,1 per cent, and during the reported period, Azerbaijani insurers increased their volume to over 410,6 million manats ($247.4 million), and the share of this segment accounted for 72,5 per cent of all premiums on the market.

"The main driver of the insurance market at present is voluntary insurance, which indicates a gradual growth of confidence in insurance of the country's population," CBA General Director Ziya Aliyev stated.

Indeed, voluntary insurance, which in the last five or six years accounted for nearly three-quarters of all premiums on the market, surely plays the role of a catalyst for growth. The main income on voluntary insurance is provided by the segment of life insurance: from January to May 2023 alone the premiums on this option exceeded 251,8 million manats ($148.1 million) with growth by an impressive 42,6 per cent.

Such high positive dynamics are explained by the fact that in recent years the importance of life insurance as an investment instrument with a significant share of sales of policies with the participation of banks has increased.

In Azerbaijan, life insurance policies are mainly purchased by corporate clients for their employees - large companies in the oil and other sectors, banks, etc. Insurance fees and payments under this type of insurance are exempt from all kinds of taxes.

Besides, in addition to payment of the insured sum (capital), if the insured person survives, they can count on additional investment income at the expense of the fact that premiums will be placed on a bank deposit account at the expiration of the contract.

Despite the fact that the total volume of premiums for compulsory insurance is twice as less - about 155.7 million manats ($91.6 million), the growth dynamics in this segment are very high - 43.5 per cent. Among the leading areas here are compulsory medical insurance and compulsory insurance of civil liability of vehicle owners.

It is noteworthy that in the near future, real estate will be added to the effective instruments of compulsory insurance, and this segment is expected to almost double its growth. Among the priority areas for the development of the insurance market in 2023, the Central Bank has identified the sphere of real estate insurance due to the tangible potential of this area.

To realise this potential, it is planned to carry out intersystem integration between the mechanisms of the Compulsory Insurance Bureau and the systems of other state structures, especially the information system of the State Service for Property Issues in 2023. Such integration will provide the possibility of issuing an electronic certificate of real estate insurance, which is very important for the coverage of the insurance market, not to mention the possibility of online control over the activities of the relevant structures.

“In the near future, the launch of the electronic sale of insurance policies for real estate is expected, which will strengthen electronic control and lead to an increase in the spread of compulsory insurance.

The implementation rate of compulsory insurance is currently 15 per cent and is expected to rise to 30 per cent. If last year premiums for this type of insurance amounted to 50 million manats [$29.4 million], this year they will rise to 100 million manats [$58.8 million],” Azerbaijan’s Compulsory Insurance Bureau Executive Director Rashad Ahmadov said.

In his opinion, in general, the growth rate in the insurance market of the republic in 2023 is forecasted at 35-40 per cent.