AZERBAIJAN PASSES NEW INSURANCE LAW

UNCLAS SECTION 01 OF 02 BAKU 001348

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TAGS: ECON ETRD ENRG EFIN AJ
SUBJECT: AZERBAIJAN PASSES NEW INSURANCE LAW


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1. (U) On October 9, Azerbaijan's parliament passed an updated Law
on Insurance Activity that the Ministry of Finance indicates is a
first step to raising Azerbaijan's domestic insurance up to the
International Association of Insurance Supervisors'(IAIS) standards.
The World Bank and other international donors assisted the GOAJ in
drafting the new insurance law. Azerbaijan's insurance services
sector has developedless in the past 10 years compared to other
econmic sectors (e.g. oil, banking).


2. (U) Accordin to insurance industry contacts, the overall
insurance market volume in 2006 grew at 7 percent to USD 100
million, equaling only 0.5 percent of GDP. According to official
statistics, the paid-in capital of insurers reached USD 66.7 million
(USD 5.3 million or 7.9 percent of which is foreign investment),and
there are 83 insurance shareholders and 29 insurance companies
operating in Azerbaijan. Total amount of premiums was USD 48
million in 2002, USD 75 million in 2004 and USD 101 million in 2006.
Voluntary insurance services made 92 percent of the premiums, while
8 percent was generated by the compulsory insurance sector. The
total payment for insurance claims was USD 48 million in 2006, which
accounted for 50 percent of the premiums.


2. (U) According to local insurance business contacts (AIG
Insurance, Ateshgah, MBask),the new draft law brings the following
key changes: it alleviates the 49 percent participation ceiling for
foreign capital, which is a positive change. At the same time,
however, it requires all the insuring companies to reform into the
joint stock open societies, which requires the insurers to start a
company reorganization process. The law empowers the state
regulatory body with more control authority, but only allows ranking
insurers be co-founders of an insurance company in Azerbaijan.
Given that this creates complications for participation of
international Financial Institutions (IFIs) at the local insurance
sector (EBRD is a stakeholder of the local MBask insurance company),
the Azerbaijan Insurers' Association has applied to the GOAJ with a
request to change the new law and allow participation of the IFIs at
the insurance companies.


3. (U) In details, through its 15 chapters, the law 1) clarifies
insurance terminology, alleviates misinterpretation and clearly
determines the insurance secrecy aspect; 2) requires all the
insurers to operate as joint stock companies; includes an article
about the prevention of money laundering and financing of terrorism;
gives detailed classification of life and non-life insurance
classes; sets requirement that life insurance and non-life insurance
have to be provided by different insurance companies; 3) sets clear
requirements for founders and stakeholders of an insurance company,
both - individuals and legal entities; sets requirement that the
limit of participation of the foreign capital in the insurance
system of the Azerbaijan Republic is determined by the State
Insurance Supervisor; 4) requires all insurers establishing the same
administrative (management) bodies for the sake of consistency; 5)
provides rules and procedures of issuance and calling back of the
insurer's license; 6) requires an insurer setting and following
clearly identified investment policy directions; 7) determines
categories and volume of deals (business contracts) allowed to sign
with related parties of the insurers; 8); sets requirements about
transfer insurance portfolio from one insurer to another insurer and
about insurance merger; 9) describes requirements of how to hire and
dismiss an independent auditor; 10) sets rules of providing
financial stability of the charter capital through initial cash
installments with further provision of the difference between
insurer's assets and liabilities; also sets classification of
insurance funds; 11) introduces a new regulatory element through
licensing an agent's functions as professional activity; 12) expands
duties and authorities of the state insurance regulatory body ;13)
provides rules for preservation of legal rights of those insured
while shutting down an insurance company as a legal entity; 14)
final wrap up provisions and 15) transition provisions (from old
requirements to new requirements).


4. (SBU) Government officials and local businessmen are hopeful
that the new law will be the impetus to greater development of the
insurance sector. Foreign access to the domestic insurance market,
however, remains a large problem, despite GOAJ's efforts to
liberalize the sector. According to the Ministry of Finance,
Azerbaijan "will partly liberalize access to the local insurance
market, but will not completely open for foreign capital," adding
that there will be no branches of foreign insurance companies
operating in Azerbaijan.


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5. (SBU) Private sector and economic experts believe that there is
greater potential for insurance sector development but growth has
lagged behind other non-energy sectors. The head of the Azerbaijan
Insurers Association says that local insurance companies hope to see
more progress with the new law, including better protection
mechanisms for companies and modernization of insurance regulations.


DERSE