The Central Bank introduced new regulatory rules to the sphere of life insurance

May 31, 2024, Baku: the steady increase in the volume of loans granted to individuals by banks and non-bank credit organizations in Azerbaijan has necessitated strengthening the protection of individuals taking out loans with life insurance.

The Сentral Bank was particularly sensitive to the issues of solvency of individuals served by credit institutions on consumer loans and their protection against life risks. In this area, the development of the regulatory framework and strengthening control are identified as one of the priorities.

For the first time in order to strengthen the protection of life risks of debtors on consumer loans by insurance mechanisms, a joint activity of the Association of Insurers of Azerbaijan (AIA) and the Association of Banks of Azerbaijan (ABA) was organized at the beginning of this year at the initiative of the Central Bank. Thus, with the formation of new conditions in this area, proposals were put forward on the existing regulatory framework and broad discussions were held with the Central Bank.

As a result of this activity, by the decision of the Board of the Central Bank of the Republic of Azerbaijan dated 16.05.2024, amendments and additions to the “rules for insurance of borrower's life against death and loss of working capacity on loan agreements submitted to individuals”and “rules for managing credit risks in banks”were approved.

According to the new rules, the term of insurance coverage under insurance contracts should be equal to the remaining term of the loan. Regardless of whether the insurance amount is fixed or decreasing, the minimum amount of the actual debt of the borrower to the credit institution, and the maximum amount of 110% of the amount of this debt by mutual agreement of the parties should be determined. This will ensure the conclusion of the borrower's obligations to the credit institution in accordance with the payment schedule of the loan, such as actual debt, additional interest or late payment money that may arise after the insured event.

Also, with the introduction of the new rule, a number of regulatory mitigations have been established for persons taking out consumer loans. Thus, these mitigations are intended to ensure the efficiency of insurance, depending on the size of the consumer loan, as well as to prevent additional time loss by the procedures for issuing an intra-bank loan. In addition, the possibility of concluding an insurance contract by the borrower without an application for insurance has been created.

Other important changes reflected in the rules were the elimination of obstacles arising in connection with the conclusion of insurance contracts by persons with disabilities and the provision of their access to loan agreements. In the event of an insured event leading to disability or replacement of the existing degree of disability with another higher degree, it is planned to pay the borrower in the amount corresponding to the percentage of violation of his health capabilities, taking into account the amount of the residual debt under the loan agreement.

One of the new requirements introduced into the rules is the requirement to establish an electronic system against insurance companies that allows the borrower or his relatives to verify the existence of an insurance contract concluded with the borrower. This requirement serves to easily determine the availability of insurance and more promptly regulate the insured event.

One of the new requirements brought to the existing regulation on the management of credit risks in banks is that when the bank provides consumer loans to its customers, in parallel with it, it offers to conclude an insurance contract against death and loss of working capacity of the borrower. According to the new request, banks will submit an application form for voluntary receipt of the relevant insurance coverage to customers. Based on the appropriate application form, the client will be able to freely choose the service of one of the insurers who have a license for life insurance.

The new rules approved by the Central Bank serve to strengthen the protection of persons taking out consumer loans against life risks, reduce disputes between consumers and banks and insurers in the field of lending and insurance, and further strengthen the protection of consumers ' rights in this area.