The agency believes that the measures taken to contain the pandemic spread will likely lead to a GDP decline in 2020. S&P expects modest profitability in the coming year due to economic effects of the pandemic on the non-life sector, which will most probably show muted growth prospects in 2020, depending largely on further regulatory support initiatives and introduction of new products.
"We expect a return on equity (ROE) and return on revenue (ROR) of 10% and 15% in 2020 to support profitability compared with forecast inflation of 3.3%. In our view, insurers are gradually improving their underwriting performance due to cost-optimization measures and better underwriting practices. With a combined ratio (loss and expense) of higher than 100% for the whole sector in 2019, Azerbaijani insurers' operating results were weaker than peers' in some neighboring countries like Russia and Kazakhstan, which recorded ratios lower than 100%. However, market leaders posted sound underwriting results, which boosted the performance of the whole sector. We note the high sector concentration, which defines current market trends. In our view, the institutional framework assessment is on track to improve with the Central Bank of Azerbaijan (CBAR) becoming the regulatory authority of the insurance sector at year-end 2019", S&P noted.
According to the agency, the operating environment for the local insurers is challenging, provided macroeconomic trends, low insurance penetration and moderate premium prospects in 2020. S&P expects Azerbaijan's real GDP to contract by 6.6% in 2020 and then gradually rebound in the next two years. The struggling banking sector also weighs on insurers' asset quality and profitability, since the domestic banking system is still weak and insurers are exposed to credit and market risks associated with the banking sector, where they invest most of their assets.