New Concept in a Transitioning Society
by Elkhan Garibli
Nowadays, tens of thousands of more families have cars when compared to the Soviet period but the increase did not happen immediately when the Soviet Union collapsed (1991). The surge became noticeable around 1997. Above: Typical traffic jams in Baku today, 2001.
While many in the West believe that insurance is a necessity, this isn't necessarily the case in Azerbaijan. The average Azerbaijani only spends about $2 on insurance each year, usually on mandatory car insurance. This isn't just because of lower salaries; insurance is still somewhat of a novelty in the former Soviet Republics. Although insurance companies began registering in Azerbaijan in 1992, the actual insurance business didn't start there until 1993. For an insurance expert like Elkhan Garibli, who has been in the field since then, it's been a challenge to help Azerbaijanis understand the value of car, life and medical insurance.
During the Soviet period, Azerbaijanis were rarely involved in insurance at the individual level (except for a few cases of life savings insurance). They hardly had any knowledge of what insurance was. For them, it was just a waste of money that went to fill the State coffers.
At the time, there was only one insurance agency, which belonged to the State. The Ministry of Finance allocated annual budgets for enterprises. Part of each budget was supposed to go to the Central Insurance Agency, mainly for insurance of the enterprise's property in the case of a fire or natural disaster. There was one All-Union insurance company called "Gosstrakh", which had branches all over the Soviet Union. That was it - no other agency was involved in insurance. Of course, it had a branch in Azerbaijan, as well.
Insurance payments from enterprises were not based on an actual calculation of property value, but rather on the type of property being insured. For example, there was one norm (let's say, for instance, requiring a 3 percent rate) for oil refineries, and another norm for agricultural enterprises. However, in reality, it's impossible to establish a standard for all refineries. The value of one refinery may differ drastically from the value of another's. So how can you establish a norm such as 3 percent for all refineries?
Some kinds of insurance were mandatory - for example, passengers needed insurance when using intercity or international transportation. This type of insurance was included in the cost of the ticket. There was also mandatory labor protection insurance in hazardous workplaces.
Above: Baku's Railway Station in mid-1990s.
So-called voluntary types of insurance also existed, such as schoolchildren insurance. Money was collected from parents, who knew it wouldn't do any good to bother to ask why they had to pay. In many cases, it was voluntary on paper only. People were not even asked whether they wanted to purchase such insurance or not. The Soviet system was too often characterized by "voluntary activities" that, in reality, were actually mandatory.
The only "commercial" insurance provided by Gosstrakh was voluntary life insurance. Azerbaijanis, just like other people in the Soviet Union, bought life insurance as a way to save money for the future. There was a large network of agents who worked to attract clients to buy life insurance. Unfortunately, after the collapse of the Soviet Union and the resulting inflation, their savings absolutely disappeared and weren't worth anything.
What once could have been considered a substantial amount during the 1970s and 1980s turned out to be worth nothing in the contemporary market. For example, there were many cases where people had worked a lifetime to save 20,000 rubles. Back then, you could have bought a very good apartment with that much money. But when the Soviet Union collapsed and the devaluation of the ruble took place, the Republics began introducing their own currencies. Azerbaijan introduced manats. Today those 20,000 Soviet rubles would be worth less than $5.
No Longer a "Tax"
There have been fundamental changes in insurance since Soviet times - including changes in mentality. Once the head of an Azerbaijani company told us: "We've already transferred your taxes." For this person, insurance payments meant taxes. This is how Azerbaijanis viewed insurance in the past - as a tax they had to pay without even knowing what they were paying for and what damages they might receive compensation for.
Above: Baku's Downtown Boulevard in 1997, just when yellow cabs (and the added traffic) started to appear. During the Soviet period, taxi cabs were rare.
There's another fundamental difference between insurance in the past and that of today. Insurance funds accumulated during the Soviet era were not used to improve the mechanism of insurance. Insurance capital was part of a common centralized budget that was used for other purposes as well. There was no real insurance completely funded by insurance funds.
Today, however, insurance is being developed as an individual sphere of the economy. It has its own capital, its own policies. It is becoming part of social and economic life. Insurance is developing in a new way, even at the State level. "Azersighorta" is a State company, but it works in quite a new way and is following new economic tendencies.
Even if you compare the insurance business as it was in Azerbaijan in the early 1990s with the way it is now, you'll see a big difference. Between 1992 and 1994, the main emphasis was on credit insurance carried out by banks. Many commercial banks had their own insurance company. (In 1994, there were 294 banks; now there are fewer than 60.) One of the conditions for getting a loan from these banks was to buy insurance against the loan. However, is that really what we should call insurance? There was no reinsurance behind it. It was merely a technical procedure, providing another way to collect money, because there were so few guarantees in terms of loan redemption.
Today, auto insurance is the most popular kind of insurance in Azerbaijan. Every vehicle that is driven must be covered for third-party liability insurance, in case the driver causes damage to another party or their vehicle. If a person doesn't buy auto insurance (which costs less than $15), they have to pay a penalty if they are stopped by the police. But the amount of the penalty is so low ($10) that most people risk getting stopped.
If someone isn't covered by insurance and they cause an accident, they may have to pay the other party out of their own pocket, as the victim may choose to sue or seek compensation directly from the person who caused the damage. The damage recovery from insurance these days, at the turn of the 21st century, is usually about $700 for property and about $1,100 for bodily injury in the case of death.
As far as the number of policies issued in Azerbaijan, auto insurance is the most common, though the amount of capital for this kind of insurance is not very high. It's still very important for us to have it, as the more people who are covered, the better for insurance. It's an educational process. Maybe 5 percent of the people who have auto insurance now will eventually start thinking about other kinds of insurance: property, health or life.
Educating the Public
Insurance is a type of business that forces you to broaden your knowledge in many areas. You have to know about medicine, roads, cars, banks and finances. If you sell bread, the only thing you need to know is how to sell bread. But if you deal with insurance, you have to delve deeper into social and economic complexities.
For example, if I traded in socks, sales would not be so difficult. When customers need socks, the need is obvious and they go out and buy them. But being an insurance expert requires intellectual and cultural talent along with the ability to sell insurance. An insurer has to start by persuading the client that he really does need such a product.
We're only in the early development of our field here in Azerbaijan. That's why I'm more interested in promoting the general concept of insurance than in advertising our own specific company. That will come later. If we can't convince people that they even need insurance, it's a waste of time and money to advertise a specific insurance company.
People have to understand what insurance is all about, that it provides protection to them and their property. It's not just a collection of money or a tax. The concept of paying for one's own protection is new for our society. It means that you don't have to protect everything by yourself, that someone else can help share the burden if your health or property is in jeopardy. You're not on your own when a crisis comes; you can count on others to help you.
Psychologically, this independence period is very different from the Soviet era. Back then, even though everything was shared, people thought in terms of "I am the only person who can protect my property." Now that model is changing.
It's too early to expect society to change overnight, however. That will take years. I think the younger generation is more open to the concept of insurance, since they are more involved in the market economy and business spheres. They have more access to foreign experience and understand the necessity of insurance.
Foreign insurance companies also help in the educational process. First of all, they bring know-how, experience and skills, plus they train personnel, especially companies like AIG, Bashag Inam and Atashgah. They are always open to sharing their skills and knowledge and giving us access to their worldwide experience.
Now that many foreign companies are getting established in Azerbaijan, I've noticed how quickly they try to cover their insurance needs. Actually, it's somewhat amusing: when they buy third-party liability insurance, they demand high coverage limits, for example, $5 million. But such high coverage is not necessary in Azerbaijan; they need something closer to $100,000 to $500,000. When foreigners see these low limits, they get afraid that the insurance company will not be able to cover the damage if the claim is higher. We have to explain to them that nobody in Azerbaijan is going to make a $5 million claim against them. The limits are different here.
In January 2000, Parliament passed a law that makes health insurance mandatory. According to the President's Law, the Cabinet of Ministers was supposed to have developed instructions for implementing this law. A year has passed and, unfortunately, nothing has happened so far.
Eventually, the law will require employers to pay medical insurance for their employees. Why is it compulsory? This is today's reality. If it were voluntary, not many people would do it. Compulsory health insurance can actually be used more to create social justice than for insurance purposes.
Today we don't have the infrastructure for voluntary health insurance. We don't have the statistics, for example. Perhaps the statistics that result from compulsory insurance will create a basis for voluntary insurance in the future.
Today people are faced with two types of circumstances in terms of being provided with medical service. The first example is when you don't have to pay because treatment is free, or you pay an established official rate. In the second scenario, people pay "unofficial" fees to doctors because they earn very low salaries and the official rate is not sufficient to support them. Examples of the first situation are very rare because those who can afford to, almost always pay the doctor "unofficial fees".
But this frustrates the attempts of insurance companies to determine exactly how much a specific service costs. Insurance cannot base rates on such "unofficial" figures because, first of all, they vary from case to case, and secondly, such fees are not legal. On the other hand, official rates that have been established for some medical services are often based so low that there is no need for insurance. But this is not the whole story. For instance, take surgery. There are illegal rates for doctors - illegal, meaning, you pay the doctor but there's no record of it. It takes on the trappings of a bribe. Of course, the doctors do not force you to pay them, but the impression is made that if you pay them directly, you'll get better treatment. And when you're ill, no one wants to take such a risk of not receiving the best treatment possible.
So you go ahead and pay the doctor for surgery - $100, $300 or $500, depending on the situation or the nature of the surgery. But this is really illegal. The insurance company insures you to cover all of your medical expenses. That illegal fee is also part of your actual expenses. But the insurance companies can't take that sum into account because they base their payment of claims on official figures. So these days medical insurance turns out to be useless because it doesn't really cover all of your actual expenses.
If compulsory medical insurance were in force, it would at least provide us with some statistics. We would have some basis to begin calculating the number of cases in each specific category - for example, how many appendix operations are being performed in a given year. Again, if you know the frequency, you can make better estimates of the actual costs.
The insurance market in Azerbaijan is still very small - only $17 million a year. This includes premiums paid by foreign companies. Some amounts flow from oil business, but still the number of premiums is very low - about $2 per capita. Even in Turkey, the premium per capita is $25, in Europe - between $3,000 and $6,000. So, $2 is nothing.
However, I'm optimistic. Last year's figure was $17 million, but this year's figure has increased by 30 percent. This is extraordinary growth for a single year. Usually, one expects a 10 to 15 percent increase in a good year.
In Azerbaijan there are about 55 to 60 small insurance companies currently in the market-by far too many. Most are not professional enough, nor do they have enough capital to conduct business. These companies are not secure enough. They don't have reinsurance, for example. This is also problematic from a quality point of view. Small companies set low prices, and people purchase what they hope is adequate insurance from them.
Only a year ago, the situation was more confusing and less secure. It was possible to establish an insurance company with only $125 of authorized capital. Today, the requirement is 200 million manats (almost $45,000). This amount still sounds ridiculously low; in Turkey, the authorized capital norm is not less than $3 million. But compared to last year, this is a great advancement for us.
Of course, even with this small step, the government is trying to protect the insurance market and opening the doors for professional people. If you invest a considerable amount of capital, you have to ask yourself: am I professional enough to get a return on my money? You have to know what you are doing.
This will improve the quality of the entire sector. Those who opened a company with only $125 in capital will not be as interested in improving social conditions as those who have invested millions of dollars.
Whenever society is in transition (as we are, since the collapse of the Soviet Union), performance must be based on high quality. Otherwise, you lose out - not only in the field of insurance, but in other fields as well. Eventually, professionals do succeed in rising to the top. And if professionals are able to rise to the top, then employees gain higher salaries, and the company begins to run more efficiently.
There are still a lot of obstacles to buying life insurance. First of all, the salary base is so low. One needs to earn a solid income in order to consider taking out life insurance. But if you only earn $20-50 a month, how much can you reasonably insure yourself for?
There are other statistics that affect insurance but are difficult to ascertain. For example, we don't have any reliable figures as to the average life span of our population now that the USSR has collapsed. In addition, many of our people live in Russia or Turkey, and we have virtually no information about their mortality rate.
People had a bad experience during the Soviet era. They lost their trust. Therefore, they don't know what will happen to their money. Life insurance investments are usually long-term, 10 to 15 years. And even if people do begin exploring the concept of investing in insurance companies, they prefer to do business with foreign companies or joint ventures. If you look at the top 10 or 12 companies offering insurance in Azerbaijan, they are mostly foreign companies.
Such a legacy from the Soviet system creates difficulties for people who sell insurance, especially for those who are trying to get started in the field. At the moment, AIG is the only major company here in Azerbaijan. It is difficult to find any competitors in Azerbaijan that can compete with them.
There are two Azerbaijani joint ventures with British companies - LondonGate and Anglo-Azerbaijan. There are also two joint ventures with Turkey-Gunay Anadolu and Bashag Inam. Then there's the Russian joint venture, Atashgah, which belongs to LUKoil, plus CIE Sighorta, a Turkish-owned company belonging to the Capital Investments Company. We also have two broker companies - AON and Heath Lambert. All of this involvement proves that there is significant foreign interest in insuring Azerbaijanis.
After the earthquake in Baku last November 2000, a number of insurance companies banded together to create an insurance pool, as it would have been difficult for a single company to pay out, let's say, $50,000 for property damages to a client. But if the companies shared the risk, each would pay according to its own participation in the risk coverage. In other words, these companies have come together to share the risks and work out a general policy. I think this is an important development in our country - both for the client and for the insurance company.
It used to be that we lived in socialism and were always criticizing capitalism. Now capitalism has taken the place of socialism, and people are missing socialism. But I would say that if insurance could really find its place, it could compensate for a well-administered socialism, in much the same way that the Swedish model of socialism does.
The profit that insurance gets from a specific area, directly or indirectly, serves the development of that area. For example, the money that you get from medical insurance will help the development of the medical arena. How? The income that accumulates doesn't remain idle.
Let's say that an insurance company collects $100 per person each year. If there are 8 million people, the company makes $800 million a year. The insurance company could then turn around and invest some of this money in preventive measures, because it is interested in paying out as little money as possible in claims. If an insurance company can help prevent disasters and tragedies, it can hold on to more of its own money.
So, to that end, the insurance company would invest money in public health, hospitals, medical systems, drugs and injections in order to reduce risks and expenditures that it might otherwise incur. It would also be likely to invest in medical research to find out the causes of specific illnesses. It would be interested in strong hospital systems with effective treatments.
Or take the example of car insurance. Accidents mostly happen because of bad roads. So insurance companies obviously would be willing to invest in improving roads or in rerouting city traffic. Therefore, insurance is a kind of reinvestment, and if developed and administered properly, insurance will contribute to social development in one way or the other.
I think a number of concrete steps are needed to achieve tangible advances in Azerbaijan's insurance system. We need the State to become as aware of insurance as it is of the banking sphere. The only Law on Insurance that exists was adopted in 1993. It deals with the general principles of insurance.
According to this law, any insurance company - regardless of the property type - is free in the market. The State has started taking care of the banking sphere, but the insurance sphere is still being ignored. Parliament should adopt more laws or promote legislation in this area. Right now, if a project related to insurance appears on the agenda of the Milli Majlis (Parliament), the legislators seem to postpone it and shove it aside for other projects.
Elkhan Garibli is the Chairman of the Board of Directors for the Azalsighorta Joint Stock Insurance Company. Another one of his articles, "What's in a Name? Nationality, for Starters", describes the bureaucratic hurdles and red tape involved in changing his name from Garibov to Garibli at the beginning of the 1990s. See AI 7.3, Autumn 1999, p. 47.
From Azerbaijan International (9.1) Spring 2001.
© Azerbaijan International 2001. All rights reserved.