When we talk about insurance in Azerbaijan, the first thing that comes to mind is the compulsory car insurance.

Mandatory application of insurance to more than 1.4 million cars, imposition of fines on uninsured cars, in addition to a large number of accidents and therefore demand for insurance every day, those who cannot pay, less insurance offer than expected, adaptation to the applied innovations and other issues make compulsory auto insurance more popular among the population. made it famous.

But in the local insurance market, there is a type of insurance that grows rapidly every year and is many times larger than the compulsory car insurance in terms of the volume of collections.

This is life insurance for life.

What is term life insurance?

Life insurance is a type of life insurance that combines both investment, insurance, and benefits provided by the state.

To put it simply, citizens with a fixed monthly salary sign a contract with an insurance company for a period of several years (usually the contract period is 3 years).

An employee in the public or private sector pays a portion of their monthly salary towards life insurance.

The life insurance company collects the funds paid at the end of the contract period, the income interest calculated on these funds, as well as the tax and social insurance calculated on the funds directed to this insurance, and returns it to the citizen.

The matter does not end there.

As the name suggests, life insurance is life insurance, so if any damage is caused to the citizen's health during the contract period, or if death occurs,

the final payment amount calculated under the contract is immediately presented either to the citizen himself or to his heirs in case of death.

In other words, the citizen insures his life, gets back the tax he will pay to the state, including social insurance, and also gets additional investment interest from the funds collected from the insurance company.

The invisible "giant" of the Azerbaijani insurance market - a portfolio worth 400 million

All these factors have made life insurance particularly attractive.

This can be seen from the statistics published by the Central Bank of Azerbaijan.

According to the calculations of "APA-Economics", the funds collected for this type of insurance in Azerbaijan have increased 5 times in the last six years.

Thus, in 2016, "investments" in life insurance amounted to 79.8 million manats, and in 2022, collections reached a record level and increased to 396.7 million manats.

For comparison, let's note that last year, the collection of compulsory car insurance was 3.5 times less than this, i.e. 113.8 million manats.

In 2022, the market share of life insurance for life insurance types was equal to 93.3%.

On the general insurance market, 4.1 manats out of every 10 manats collected last year belonged only to this type of insurance.

This means that life insurance is an invisible "giant" of the Azerbaijan insurance market.

Despite the high growth dynamics, this is not the end,

the potential of life insurance is many times higher than the last figures announced.

This is acknowledged by the leading experts of the sector.

"In the next 10 years, investments in life insurance may reach 3 billion manats"

Şahin Mahmudzadeh, director of the risk management department of "PASHA Life" insurance company, told "APA-Economics" that the growth potential of life insurance depends on the savings habits of the population.

As the savings habits of the population increase, this also affects the volume of total savings.

He said that in large developing countries like Turkey, life insurance is formed in the amount of 2-3% of the gross domestic product (GDP).

In Azerbaijan, this indicator is only 0.3% of GDP.

In the CIS region, the Baltic countries, Russia and Kazakhstan are ahead of Azerbaijan in terms of the volume of life insurance.

These collection insurance indicators for other countries are at the same level as Azerbaijan.

Sh. Mahmudzadeh said that if the dynamics continue in this way, within the next ten years, Azerbaijan will reach the level of Turkey and life insurance collections can increase 10 times, that is, investments in this insurance can be formed around 3 billion manats.

Insurers noted that those who invest in life insurance are mainly people with high incomes and financial literacy.

"More people working in the financial sector and banks invest in life insurance. Various professionals working in private companies also invest in this insurance. This is due to the fact that life insurance is risk-free compared to other investment opportunities," added Shahin Mahmudzadeh.

"More financiers, bankers, employees of large holdings are investing their salaries in life insurance"

Insurance expert Ali Bayramov also emphasized that those who are interested in life insurance as an investment tool are mostly employees working in large holding companies, companies operating in the oil sector, banks and insurance companies and whose salary is more than 1000 AZN: "The salary should be such that both living expenses, and it should be enough for investment. This suggests that those with higher wages are interested in this insurance."

"The potential of the market is in the size of the country's salary fund"

However, the expert pointed out that the growth potential of life insurance is higher: "The increase in investments in life insurance is mostly related to the fact that it is considered as a lossless investment tool in the corporate environment and there is no alternative in the market. The potential of life insurance in Azerbaijan is equal to the size of the annual salary fund. The current and the penetration rate is estimated at 10-15%. This is very low."

"Life insurance can become private pension insurance"

Ali Bayramov believes that in order to further develop this insurance in the local market, the accessibility of life insurance products to different parts of the population should be increased: "Life insurance companies are more focused on citizens with high salaries in Baku. For citizens working in the regions, this insurance is also about opportunities. there should be proposals".

The expert believes that the term of life insurance contracts can be determined for 10 years or more.

This can also be useful as an alternative retirement option.

But at present, life insurance companies seem not interested in increasing these types of insurance for some reason.

Ali Bayramov added that pension insurance from foreign experience has become widespread and has collected a large part of insurance collections.

"Life insurance can become a competitor of the current pension system"

The analysis of the published figures and the opinions of experts suggest that not only the creation of private pension funds, but also the continuation of the privileges applied to life insurance in the previous form can become a competitor to the current pension system.

"Changes to the Tax Code have reduced life insurance premiums"

Insurance expert Ilkin Ibrahimov stated in his statement to "APA-Economics" that even the social insurance discounts applied to the salaries involved in life insurance had an effect on the reduction of the collections of the State Social Protection Fund.

Taking these factors into account, the privileges applied to the part of wages involved in life insurance were relatively reduced according to the change made to the "Taxes Code" from January 1, 2017.

Under the previous rule, the part of a citizen's salary above 200 manats was exempted from social payments when life insurance was included, but according to the innovation, this amount was reduced to 50% of the salary.

"Considering that the investment in this insurance is mainly made by high-income individuals, the citizen was able to allocate a smaller part of his surplus income to life insurance. Since insurance contracts are concluded for a period of 3 years, the introduction of the new rule had a sharp impact on the volume of life insurance collections for 2019. Collections the volume suddenly decreased from 253.9 million manats in 2018 to 166.1 million manats. With this, the state was able to prevent the reduction of social insurance funds collected in the State Social Protection Fund. If there was no change, the growth dynamics of life insurance on the market could have been higher." - added Ilkin Ibrahimov.

This article was written for the writing contest organized by the Association of Azerbaijan Insurers on the topic "The role of insurance in the development of the modern economy of Azerbaijan: current situation and prospects".