Azerbaijan's insurance market on the rise Insured future: risks at a minimum

Azerbaijan’s insurance market, which has successfully overcome the crisis period of the previous years, is showing dynamic growth and a solid upward trend. Recently, the Azerbaijan Insurers Association (ASA) published forecasts indicating that by the end of 2024, domestic insurance companies are expected to increase premium collections by over ten per cent. This follows the trends seen in 2022-2023, when the industry’s annual growth rate was even higher.

Meanwhile, the Central Bank and the Ministry of Finance of Azerbaijan continue to reform the sector, aiming to increase the penetration of insurance services, drive digitalization, optimize reinsurance structures, and more.

The energy crisis of 2014–2017 and the subsequent twofold devaluation of the manat led to a banking payment crisis and a halt in loan issuance by the Azerbaijan Mortgage Fund, as well as more than a tenfold drop in credit-based sales of new cars, and the freezing of numerous private and public programs for industrial and infrastructure financing. All of this collectively had a highly negative impact on insurance capital: as a result, the weaker players exited the domestic market, and the number of insurance companies decreased from 27 to around 17.

Building on this challenging experience, Azerbaijan's Ministry of Finance and Central Bank (CBA) strengthened the regulatory framework of the banking sector and its closely related insurance market in the following years, improving prudential indicators in the industry and restructuring insurance companies to minimize the likelihood of major future disruptions. The effectiveness of these efforts is evidenced by the fact that the COVID-19 pandemic and the 2020-2021 lockdown, along with subsequent global crises in 2022-2023 — hyperinflation and recession — did not significantly impact the insurance industry, aside from the revocation of licenses for two insurance companies.

In line with international legislation and insurance market principles, measures were taken to build reserves and reinforce industry institutions for reinsurance and coverage assurance. As a result, the assets of Azerbaijan's insurance sector have grown by 34% over the past three years, while the capitalization of market participants has increased by more than 7%.

Moreover, according to information from the Azerbaijan Insurers Association (ASA) widely reported in local media, the country’s insurance sector has shown high growth in insurance premiums over the past three years. "According to Azerbaijan's 2022-2026 socio-economic development strategy and the National Socio-Economic Development Priorities through 2030, an annual target growth of 10% for the insurance market was set," said ASA Executive Director Elmar Mirsalayev recently. "In the past two years, the industry has grown beyond this target, with market growth reaching 15% in 2022 and 26% in 2023," he added.

Mirsalayev also noted that, based on the latest forecasts, total premiums for insurance companies are expected to exceed 1.4 billion manats ($823 million) by the end of 2024, reflecting an increase of more than 10% compared to last year’s results.

ASA’s forecasts appear realistic: according to recent Central Bank of Azerbaijan (CBA) statistics, domestic insurance companies' premium collections rose by 9.4% in January-September 2024, amounting to nearly 1.024 billion manats ($588 million).

The data presented indicates that the regulator's efforts to implement the action plan for the development of the insurance sector, approved by the Cabinet of Ministers on May 21, 2019, are yielding fruitful results. At the same time, several other tasks remain to be addressed: to implement national priorities and ensure sustainable financial flows during the 2023-2026 period, the Central Bank of Azerbaijan (CBA) has developed a strategic roadmap aimed at strengthening and managing the financial sector. Key priorities of this strategy include ensuring digitalization, enhancing human resources, developing infrastructure, and implementing best practices to increase the volume of insurance services and optimize their delivery.

Among the priority areas for the insurance market highlighted in the strategy for future development are agriculture, healthcare, and environmental insurance. Additionally, new methodologies have been introduced to raise public awareness of insurance services and improve the mechanism of mandatory insurance, ensuring access to various life insurance options. In recent years, the main contributions to voluntary insurance have come from the life insurance segment, and this positive trend is linked to the increasing recognition of this option as an investment tool, with a significant share of policies sold through banks.

In Azerbaijan, life insurance policies are primarily purchased by corporate clients for their employees, including large companies in the oil sector and other industries, as well as banks. However, there has been a growing interest in these products from individual users as well. It is worth noting that insurance premiums, as well as payouts from this type of insurance, are exempt from all forms of taxation. In addition to the payout of the insured amount (capital) in the event of survival, policyholders can also expect additional investment income at the end of the contract period, as premiums are placed in a bank deposit account.

Equally important for the future is the strengthening of the tools for universal and sustainable health insurance, and significant progress has been made in this segment. For instance, in the first three quarters of this year, local insurance companies in the voluntary health insurance sector collected 765,429 million manats ($450 million) in premiums, which is a 12% increase compared to the same period last year.

To further strengthen the financial stability of the insurance sector, a new regulatory framework has been established concerning reinsurance policy and reinsurance operations. According to the amendments made to the Law on Insurance Activity on July 6, 2023, the role of independent experts in providing insurance services has been enhanced. New requirements for these experts have been introduced, along with rules for their training and practice.

In connection with these regulatory changes, a new "Procedure for Maintaining the Register of Professional Participants in the Insurance Market" has been developed, and the Central Bank of Azerbaijan (CBA) maintains a register of insurers, insurance intermediaries, including foreign insurance brokers and their representations in Azerbaijan, actuaries, as well as legal entities and independent experts engaged in auxiliary activities in the insurance sector.

According to CBA data, the number of foreign brokers operating in Azerbaijan's reinsurance market has reached 92. The mediation of foreign specialists plays a significant role in enabling domestic insurers to access new reinsurance programs from foreign partners under more favourable conditions in line with the prudential requirements of the regulator.

Despite the high dynamics of premium accumulation in recent years, the share of Azerbaijan's insurance market in the overall revenues of the financial sector, and particularly its ratio to gross domestic product (GDP), remains relatively small. Specifically, the penetration rate (the ratio of gross premiums to GDP) for the domestic insurance sector in the first nine months of this year was 1.1%.

These parameters in the insurance sector are generally directly related to the income levels of the population—higher income levels tend to lead to a higher ratio of gross premiums to GDP. In the United States, China, and EU countries, these indicators are several times higher. This presents a strong incentive for local insurance companies to pursue further growth, particularly in the mandatory insurance market.

"In Azerbaijan, there are five types of mandatory insurance, and this market is developing steadily. The reforms by the Central Bank of Azerbaijan (CBA) are aimed at ensuring full coverage of all types of mandatory insurance. In some segments of mandatory insurance, such as mandatory motor insurance (OSAGO), the penetration level is close to 100%," stated Ziya Aliyev, the Director General of the CBA, during his speech at the third International Insurance Summit in Istanbul in early October.

The Director General of the CBA also noted the growing significance of the insurance sector within the financial system: over the past three years, the share of insurance company assets in the total assets of the financial system has increased from 3.2% to 3.8%.