A new concept has been developed in Azerbaijan to eliminate the longstanding stagnation in the field of compulsory real estate insurance and to protect citizens' property more reliably. The main goal of the new approach announced by Vusal Gurbanov, the Director General of the Central Bank of Azerbaijan (CBA), is to more accurately assess catastrophic risks and to ensure more adequate insurance payments to citizens in the event of unfortunate incidents.
The most important element of the innovation is that the insurance amount will no longer be formed by a single standard but through electronic platforms integrated with government agencies, tailored according to the parameters of the property, the square meters of the living area, and the location.
Medianews.az reports that according to insurance expert Ilkin Najafov, who spoke to "Kaspi" newspaper on the subject, the current situation in this field is disheartening, with the market coverage of compulsory real estate insurance being below ten percent:
"In other words, not even ten out of every hundred houses in Baku are insured compulsorily. There is only one reason for this: the penalty mechanism does not work. According to current legislation, this insurance covers quite extensive risks - fire, explosion, lightning strike, internal flooding or water leakage from a neighbor, as well as damage to property caused by malicious acts of third parties. The insurance subject is not just dry walls; it includes the main structures of the property, doors and windows, ceiling, flooring, and interior finishing as well. As can be seen, the existing coverage package is quite comprehensive and does not need to include anything additional. Our main goal should be just to properly apply this perfect coverage package to the market and to ensure the mass involvement of the population in the system."
İ. Najafov stated that the success of the new concept depends primarily on the implementation of an effective penalty mechanism:
"In my personal opinion, as in compulsory car insurance, if real fines are not applied in real estate insurance, any attractive offer will not be welcomed by the population. Let's look at compulsory car insurance for comparison. When a citizen is uninsured, they receive a fifty-manat fine every twenty days, so everyone tries to obtain this insurance. To change this situation, various options are being considered by the government, the Central Bank, and the Compulsory Insurance Bureau. Different proposals such as integrating the insurance fee into utility payments, especially electricity bills, collecting the amount through municipal bodies, or applying special penalty protocols for those without compulsory insurance by executive authorities are being discussed."
According to the expert, the new concept expected to be implemented is far more fair and flexible compared to the previous rules. The biggest deficiency in the old rules was that the amounts were the same for everyone:
"A one-room panel house in Hovsan worth 70,000 manats and a villa in Genclik valued at 10 million manats had the same insurance fee of 50 manats. Because both received a standard insurance coverage of 25,000 manats regardless of the real property value. In the new concept, insurance fees and amounts will vary according to regions, the degree of urbanization of the city, and zones."
According to property expert Elnur Farzaliyev, although the compulsory insurance system that has a mandatory character works in the automobile and other sectors in our country, it is still not fully implemented in the real estate sector: "The main reason for this is the existence of hundreds of thousands of properties without documentation in the country. According to legislation, to insure any property, there must be a document confirming ownership rights."
According to E. Farzaliyev, another aspect of the issue is the low level of insurance among owners with documentation and the lack of awareness: "In the last five years, more than 60 percent of documented apartments sold in Baku and Absheron have been purchased with mortgages or internal loans, so they are compulsorily insured until the contract expires. This is a very positive situation because damage is immediately compensated in case of risk. However, owners of documented apartments without credit appear to be interested in paying only 50 manats annually to get coverage of 25,000 manats. There are countless apartments in Baku with prices ranging from hundreds of thousands to millions and rented for at least 400 manats. Experience shows that insurance incidents such as fires, short circuits, or floods mostly occur in rented apartments. As a result, the damage payment process is prolonged until courts. However, this problem can be solved in a civilized and fast way through insurance."
The expert emphasized that these realities must be taken into account when preparing the new compulsory insurance concept. If an apartment is in use, has gas, electricity, and communal lines connected, and is registered, it should be insurable regardless of the presence of documentation:
"Applying compulsion only to documented homes will create dichotomy; half of the apartments will be insured while the other half will remain uninsured. Therefore, the new concept should take steps either to involve undocumented homes in insurance or to accelerate their documentation process. This will both expand the insurance companies’ activity and ensure citizens' security. Collection of insurance fees can be integrated into citizens' regularly paid utility expenses. Compulsory car insurance was also initially met with dissatisfaction. However, later, drivers who saw that damage during accidents was paid by insurance companies now seek compulsory and even voluntary insurance themselves. It is essential to form this kind of trust in real estate insurance as well."