What Georgians insure

Nino ArveladZe

The year 2006 was an important one for the Georgian insurance market – the trend of merger of banks and insurance companies became apparent, this sphere’s legislative base was changed and cooperation with international organizations was intensified.

The Head of Insurance Supervision Service of Georgia – Mr. Archil Tsertsvade is speaking to us about the main characteristics of the Georgian insurance market, the most popular products among the population, how it is distinguished from other CIS countries, the changes we should expect in the insurance companies’ management as well as important changes and phenomena that have taken place on the Georgian insurance market.
– Mr. Tsertsvadze, how can you appraise the activity of the insurance market in the last year of 2006– this concerns the legislative base, growth of foreign investments and offering of new products to consumers.
– The last year was a very important for the Georgian insurance market, we can call it the year of the insurance market’s activity, merger and enlargement of insurance companies. In 2006 the interest of commercial banks towards insurance companies was observed again, some Georgian commercial banks have been making investments in the insurance sphere. This process was continuing last year too. For instance, 20% of “Europace” insurance company was purchased by the Bank of Georgia and 80% of it – by BCI. BCI is possessed by the Bank of Georgia by 100%. In December 2006 another important phenomenon took place on the Georgian insurance market – BCI purchased “Aldagi” insurance company. It is an significant consolidation since “Aldagi” and BCI were the leading companies on our market, i.e. a merger of the two leading companies took place. Their joint activities started in 2007 and, bearing in mind the conditions existing in Georgia, quite a solid company is being formed. “IC Group” company entered the Georgian insurance market, here there is participation of VTB Bank Georgia.
The year 2006 was an important one from the legislative point of view as well. The basic part of the law on “Insuring civil liability of automobile owners”, which concerns the owners of passenger cars, was put off till 2009.
– What was the deferment caused by?
– The law that concerns high-risk motor vehicles with carrying capacity of more than 3 tons, transit and passenger transport has been was left. Perfection of the existing law is necessary, so it is considered expedient that the law should not be applied to passenger cars till its complete perfection. The social aspect is also envisaged, since everything is related money. At the same time, the law should be prepared in compliance with the international standards. We shall try to appropriately improve it during this period. The World Bank has also got involved in the process. It should be stressed that international organizations are actively participating in perfection of the auto insurance system, so we hope that we shall get a normal system and the law.
Amendments were also introduced in the law “On non-state pension insurance and provision”. The United Social Insurance Fund has underwent structural changes and the functions in pension insurance that it implemented at its discretion were handed over to the Insurance Supervision Service. Three departments were engaged in the issue of regulation of non-state pension insurance – State United Social Insurance Fund, the National Securities Commission and Insurance Supervision Service. As a result of the mentioned structural changes, all functions that had to do with private pension provision were transferred to the Insurance Supervision Service – that includes expert examination of private pension schemes and adoption of normative acts. In short, as far as this aspect is concerned, the scope of our functions was extended. Both registration and issuance of licenses will be implemented in our service and, correspondingly, the system will be simplified, since everything will be related to one department.
Serious work at the law “On insurance” is underway, the main law “On licensing” has been changed. In previous years it was necessary for an insurance company to obtain 15 licenses for its full-fledged functioning, but now 2 ones are enough for this purpose – life insurance and “non-life” insurance. Now we are carrying out a serious work so that all licensing procedures should comply with the law “On licensing”. Till introduction of amendments to the law “On insurance”, the sphere is regulated by the resolution of the government, and after adoption of these amendments licensing issues in insurance will be regulated by the law itself. The issues of harmonization of the insurance legislation with the European legislation were very important, and intensive work on it has been carried out within the framework of European neighborly policy. An important role in the country’s general plan is attached to financial institutions – commercial banks, participants of the capital market and the insurance sphere. Legislative changes and perfection of insurance organizations’ paying capacity is also implied. Of course, this process will continue this year too. As to the regulatory norms that are issued by the Insurance Supervision service, last year we issued important normative acts that are necessary for insurance companies. First of all, the increase in the demand for the authorized capital should be mentioned. If in previous years the authorized capital necessary for implementation of “non-life” insurance made up 500 000 GEL and for life insurance – 1 million GEL, on the basis of normative acts adopted by us last year, from May 1 of the current year insurance companies should have 1 million GEL for “non-life” insurance and 1,5 million GEL for implementation of life insurance.
– What is the necessity for increasing insurance companies’ authorized capitals caused by?
– Insurance companies are developing and, correspondingly, the risks are increasing as well, so their guarantee provision, i.e. the level of capitalization, should be high. An insurance company’s authorized capitals is one of the guarantees of its paying capacity and financial stability. Of course there are also insurance reserves and other limits. That is the reason for increasing of the demand for the authorized capital. The process will not be finalized, it will be developing proceeding from insurance companies’ possibilities and, presumably, the year 2010 will be a final stage. In 2006 we introduced changes in the relations between the supervisory bodies and insurance companies, accounting has become stricter, i.e. statistical information submitted for analyzing to the Insurance Supervision Service has become more perfect and detailed. Important and necessary changes were also introduced in solvency norms, which provides for stability of insurance companies paying capacity. European Bank for Reconstruction and Development has for the first time implemented investment in the insurance sphere. It purchased 34% of “Imedi L” insurance company and became its shareholder.
– What effect will this project have on the Georgian insurance market?
– It will certainly have a positive effect. First of all, this project will contribute to inculcation of know-how and European standards in the management of “Imedi L”. From the viewpoint of capitalization, it is an investment, which, of course, is a positive phenomenon. At the same time EBRD was cooperating with us in 2006 and we were working on the project, which will continue in the future as well.
– If it is possible, could you tell us about this project in brief?
– The project financed by EBRD, which envisaged perfection of insurance legislation and supervision, was being implemented in 2006. This project is being carried out now as well and it will be over this March. Together with us the project’s foreign experts are working on perfection of the legislation and paying capacity as well as on the issues related to harmonization with the European standards. I will add that, together with JEPLAC, we are perfecting the issues of harmonization with the European standards, take into account exporters’ recommendations, and the work on the project is underway. In other words, we are working out this issue in different aspects. Of course, harmonization will not take place in a year and, presumably, it will happen by 2010.
– In Georgia there is a trend of merger of banks and insurance companies. What is the reason for that and what effect it will have on the Georgian insurance market?
– An insurance company needs a high level of capitalization for its financial stability. There is a rather keen competition in Georgia and a strong investor is needed for adaptation in a competitive environment. Currently a commercial bank is a real investor in Georgia, since it has money, i.e. a source of investment is one reason. The banks also have an extensive network in Georgia’s regions and its utilization is possible in selling of insurance products. Banks have their permanent partners – consumers that place their risks in insurance companies. Coming of commercial banks strengthens the insurance market, but there is a also contradiction – each bank, as well as insurance companies, is a risk bearer, i.e. two risk bearers merge and in view of this fact we are implementing supervision over insurance companies, and the National Bank – over commercial banks. Therefore, we – the regulators believe that we deal with a bigger risk and the supervision approach and process should be solid and stable. A memorandum of cooperation was concluded between us and the National Bank of Georgia – a commercial bank has an insurance company as its subsidiary, the National Bank controls the commercial bank and we – the insurance company, so we concluded the mentioned memorandum on the basis of recommendations and requirements of the international organizations.
– What would you say about the international insurance market, what main directions are observed on it?
– If we speak about the west European market, it is clear that there is a big difference between us. The insurance market there has a long history, great experience and resources; in Western Europe insurance has turned into a part of life and every risk of a person is insured. Entrepreneurial risks are insured as well and, correspondingly they have a big market and experience in this field. If we draw a parallel between the insurance markets of Eastern Europe and Georgia, we should emphasize that these processes are still in store for Eastern Europe. Making a comparison with the CIS countries, we can say that our market stands out for its stability and our legislation passes ahead of theirs. Reformation of the Georgian insurance market started from 1997 and a positive effect of contacts with the international organizations and their assistance should be mentioned. We have a comparatively developed insurance market in comparison with the CIS countries. Georgia was the second of the CIS countries to join the International Association of Insurance Supervisors in 1999, the first one was Russia. It is necessary to observe the established criteria in order to become a member of this organization. Only 4 of the CIS countries are its members.
– Which countries are they?
– They are Russia, Georgia as well as Kazakhstan Ukraine that joined it after our country. Other countries do not meet the criteria and are not members of the Association so far. As far as the market’s volume is concerned, I will tell you that Azerbaijan has a bit larger insurance market in the Caucasian region than our country. Georgia has good positions from the viewpoint of insurance companies’ stability, there have been no facts of bankruptcy of insurance companies, which is an important indicator, since bankruptcy in other spheres does not lead to extremely negative results, while bankruptcy of an insurance company causes problems to a lot of insured people. Consolidation always stipulates for stabilization.
– Has the insurance culture been formed among the Georgian population?
– It is being formed. Inculcation of this culture requires years and cognitive activities, it is influenced by the Insurance Supervision Service, insurance companies and mass-media. Sociological studies have shown that a compensated sum is the best advertisement, at this time a person realizes that the insurance sum has not been spent in vain, which has a positive effect on his psychological disposition. Quite a big progress has been observed on the insurance market after reformation in this sphere began. Mainly non-life insurance is developed in Georgia, but there are also other classes of personal insurance. Individual insurance and voluntary medical insurance are developing at very high rates. There is also a corporate insurance when an employer insures his employees. Medical insurance has the leading position among the classes of insurance. Today there are quite acceptable products on our market, the companies are offering their clients the products that are available for them from financial point of view, though there are expensive ones as well.