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Insurance

As the Azerbaijani market aligns itself with international standards, large insurance companies are seeking to enter the market. Meanwhile, an increase in capital requirements is incentivizing M&A activity as smaller companies are pushed from the market.

Azerbaijan has a strong and established insurance market. Recent developments in mandatory insurance, success stories of acquisition and integration, and an impressive national growth trajectory have made this market one to watch, as firms post growth year after year. Specifically, areas such as health insurance are expected to post strong growth well into the future. In mid 2014, Azerbaijan’s Finance Minister Samir Sharifov announced that the insurance market had increased six-fold in the past eight years and doubled for the last two years, reaching $543 million in 2013. He added that the value of the average insurance premium had also increased from $29 to $59, boosting the net profits of insurers to $84 million in the same year. Between 2010 and 2013, Azerbaijan’s healthcare expenditure rose 24%, to $760 million, or 5.2% of GDP. By 2020, healthcare expenditure is predicted to be 6.7% of GDP as the per capita volume of insurance premiums is set to expand by 2.5 fold. An increase in capital requirements is also incentivizing M&A activity as smaller companies are pushed from the market.

As the Azerbaijani market aligns itself with international standards, large insurance companies are seeking to enter the market such as AXA, which entered in 2010 and won the Azerbaijan “Leader of the Insurance Industry” award in 2014. This trend is accelerating. As of 2014, the limit for participation of foreign capital in the local insurance market stood at 30%, with no more than 10% actually in. However, as of January 1st 2015, this limit rose to 50% and by the end of the year, is expected to rise to 70%. By 2016, the limit will be moved up to 85% before being entirely eliminated by 2017.

From January-July 2014, the insurance industry posted 9.9% growth over 1H2013, to the tune of $28.9 million. These strong numbers indicate that the insurance sector is performing strongly in the face of regulatory and market changes—many of which actually favor insurers. These conditions are reflected by an increase in actors in recent years. As of 2013, 800 insurance agents were registered in the country, 52 of which were legal entities, and 748 physical entities, up from 2012, when 643 agents worked in the country, 46 of which were legal entities, and 597 physical entities.

Premiums were up 3.8% YoY for the first 11 months of 2014, with insurers collecting $488.7 million during the period. This is a significant jump from the previous year’s total insurance premiums of $517.7 million—without December’s numbers factored in. In 2013, Azerbaijan-based insurers collected $517.8 million in insurance premiums, up 18.4% compared to a year earlier.

By signing orders in December 2014 introducing more state control over compulsory motor vehicle insurance, President Ilham Aliyev energized a previously undercapitalized segment of the insurance market. The new orders make it easier for the state to enforce mandatory insurance, which had been facing low compliance rated since their introduction. Compliance was enforced through random police inspections of motorists, which were not systematic, and decreased over time, according to Elshad Aliyev of Alfa Insurance. The application of the new law on compulsory insurance came into effect on December 16, 2011. Under the new law, new types of compulsory insurance were introduced to the Azerbaijani market, such as real estate insurance, civil liability in the commissioning of real estate. In addition, insurance amounts were increased for compulsory insurance of civil liability of vehicle owners (CTP) and passenger insurance. For the first two months of 2014, CPT accounted for just over 38% of compulsory fees, and 8.27% of the total premiums collected over the reported period.

Although introduction of the new insurance system is generating some turbulence, uniform application of the rules will generate stability in the sector in the long term. The Finance Ministry regards the toughening of requirements and regulations governing the activity of insurance companies as a necessary and correct action. The new system seems to be working. In 2014, 931,464 motor vehicles were brought under compulsory insurance of vehicle owner’s civil liability according to the Compulsory Insurers Bureau (CIB). In early 2015, the CIB announced that premiums on compulsory insurance services for the past year totaled $90.25 million. Compared to 2013, agreements on compulsory automobile insurance in 2014 grew by 2.14% and premiums by 2.04%. In 2013 911,909 contracts were concluded on compulsory insurance for civil liability of motor vehicle owners to the tune of $88.5 million, according to the CIB. In 2014, the volume of premiums was up slightly to 931,464 to $90.25 million.

External factors are causing a slight stall in the growth rate of car insurance over previous years. One major factor has been the restriction of auto imports that do not correspond to Euro-4 standards. Doing so now precludes imports of cheaper cards from states like Russia and Georgia that manufacture at Euro-3 standards. Not only have imports fallen by over 25,000 between 2013 and 2014, but the cost of existing used cares has been driven up as well. Used car prices rose by 7% while new cars went up by 4%. Adding to this, the Central Bank moved in 2013 to tightened control over consumer loans and lending terms for car purchases, which has also been connected to the deterioration of the portfolio quality of the banking sector for auto loans.

In addition to the automotive segment, compulsory real property insurance registered at 152,111 reaching $20.3 million. For compulsory third-party liability insurance associated with the use of real property, 4,283 agreements were concluded with a price tag of $0.43 million. Finally, compulsory personal accident insurance of passengers came in at 554 contracts $0.2 million bringing the total value of compulsory insurance deals to $111.2 million for 2014.

Another segment where change is afoot is in agricultural insurance. According to Namig Khalilov, the Head of the State Insurance Supervision Service under the Finance Ministry, Azerbaijan plans to adopt a new law on agricultural insurance in 2015. 2010 was an especially bad year with a number of natural disasters, and the latest push is a culmination of a push to cover farmers more effectively and combat poor recordkeeping. The new law will change the way that the state incentivizes coverage. Azerbaijan’s agricultural insurance market potential is estimated to be $190-255 million in value. Currently, the amount of insurance premiums for agricultural insurance for January-October 2014 was only $2.8 million. This figure corresponds to 0.64% of the total insurance market in the country, representing plenty of room for expansion.

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