Central Bank introduces new regulatory procedures to life insurance

31-05-2024

Baku, 31 May 2024: The ongoing growth in the size of loans to individuals issued by banks and non-bank credit institutions has necessitated strengthening of life insurance protection of borrowers.

The Central Bank has been particularly attentive to the treatment by credit institutions of the issues of the creditworthiness of individuals serviced on consumer loans and their protection against life risks. The Bank has prioritized the development of the related regulatory framework and enhancing supervision.

To bolster the protection of borrowers against life risks through insurance mechanisms, the Central Bank initiated co-operation of the Azerbaijan Insurers Association (AIA) and the Azerbaijan Banks Association (ABA) for the first time at the beginning of this year. Consequently, new terms and conditions were established, suggestions were made on the current regulatory framework, and extensive discussions were held with the Central Bank.

As a conclusion of this cooperation, on 16.05.2024, the Management Board of the Central Bank of the Republic of Azerbaijan approved the additions and corrections to the ‘Regulations on insurance of borrower’s life against death and incapacity for work’ and the ‘Regulation on credit risk management in banks’.

According to the updated regulations, the period of insurance coverage should match the remaining loan maturity. Whether fixed or decreasing, the insurance amount should be set at a minimum equivalent to the actual debt amount owed by the borrower to the credit institution, and at a maximum of 110% of that debt amount, as mutually agreed by the parties. This ensures the settlement of borrower’s liabilities to the credit institution, including the actual debt according to the loan payment schedule, any additional interest that may accrue after an insurance event, or any penalties.

Moreover, the new regulation introduces some regulatory relaxations for individuals obtaining consumer loans. These relaxations aim to ensure the efficiency of insurance depending on the volume of consumer loan and prevent intra-bank lending procedures from causing additional delays. In addition, it is possible to conclude an insurance agreement without an application from the borrower.

Other significant changes include the elimination of obstacles related to concluding insurance agreements for persons with disabilities and ensuring their access to credit agreements. In the event of an insurance claim leading to disability or an increased degree of disability, it is planned to pay an amount corresponding to the percentage of the borrower’s health impairment, taking into account the remaining debt under the loan agreement.

One of the new requirements introduced to the regulations is the requirement to establish an electronic system that allows the borrower or his/her relatives to verify the existence of the insurance agreement concluded with the borrower against insurance companies. This requirement facilitates easy access to insurance information and prompt adjustment of insurance claims.

Furthermore, the updated regulation on credit risk management in banks requires that when a bank offers consumer loans to its customers, it should also offer an insurance agreement against the borrower's life, death, and loss of working capacity. According to this new requirement, banks will provide customers with an application form for the voluntary purchase of relevant insurance coverage. Based on this form, customers can freely choose the services of one of the licensed life insurers.

The new regulations approved by the Central Bank aim to strengthen the protection of consumer loan borrowers against life risks, reduce disputes between consumers and banks and insurers in lending and insurance, and further safeguard consumers' rights in this area.