In the context of modernization of the country’s economy started in 2017 by the initiative of the President of the Republic of Uzbekistan Sh.M. Mirziyoyev, one of the most important directions for ensuring economic growth of the state is the concept of innovative insurance development involving the use of effective and accessible insurance protection mechanisms for individuals and legal entities. In turn, the innovative way of insurance development leads to adjustment and clarification of the basic theoretical and methodological insurance provisions in relation to the conditions of the republic.

In the monograph, a key role in the innovative insurance development in the Republic of Uzbekistan is given to the fact that insurance science should take into account the national characteristics of the country; we consider it advisable to develop the domestic financial market in terms of insurance relations in two directions: classical insurance for part of the population and entrepreneurs who have the necessary insurance culture, and national insurance using elements of hashar for part of the population and private and small business entities adhering to principles based on the Sunnah. Insurance in all existing and still possibly unknown to us types, should become a necessary element of the general cultural development of our society, should take into account not only economic factors, but also the mentality of our people, existing socio-economic, geographical, environmental, and so on conditions.

The concept of insurance development strategy based on the national insurance model in Uzbekistan should solve the following main tasks: ensuring reliable protection of the property interests of individuals and legal entities in a modernized economy while simultaneously forming and developing insurance culture in the republic.

Conducted research allowed us to determine that following the large-scale modernization of the economy of Uzbekistan, the risk environment of individuals and legal entities is changing, it is becoming more complex, new risks appear which, as a result of the interaction with existing risks, increase the severity of the consequences of risk occurrence. The domestic insurance market development in terms of insurance of specific risks of the digital economy in the near future will be determined by:

• the level of digital technologies penetration in the domestic economy;
• the development and complexity of digital technologies, especially artificial intelligence and the Internet of Things, including the Internet of Things in industry;
• the adaptability of domestic legislation on insurance of cyber risks and other risks of the digital economy;
• the development of digital risk insurance infrastructure, aimed primarily at surveying and adjusting;
• the level of protection systems against the digital risks occurrence;
• the level of risk management systems of the insurer itself and the presence of effective protection against insurance fraud.

In the conditions of economic modernization, approaches to organizing risk management for individuals and legal entities are substantially changing. At the same time, we accept as a working hypothesis that the risk management system effectiveness for individuals and legal entities in a modernized economy is largely determined by the quality and completeness of the stage of risk identification and analysis, and more preferable method of risk management for individuals and legal entities is where this stage of risk management for individuals and legal entities is carried out at professional level by trained people using proven methods – the relevant employees of the insurance company or insurance surveyor.

The fundamental direction for further reform of the national insurance market is to provide conditions for its innovative development while strengthening the foundations of regulation and supervision of insurance activities in the republic. As global experience shows, innovations carried out without accompanying regulatory standards and supervisory measures, especially in countries with transition economies, contribute to a situation of chaos in the market. In this regard, the task of further development of the system for regulating insurance activities in the republic becomes especially urgent.

Analysis of the current state of the system of insurance activities state regulation through the legislative establishment of rules and regulations mandatory for its participants, insurance activities licensing, studying the financial position of insurers and solvency for accepted contractual obligations to insureds made it possible to formulate the basic norms of civil, administrative, state, financial and international law in the field of insurance activities. Despite the multiplicity of sources of law regulating insurance, a number of significant problems of legal relations in various aspects of insurance activity remain unresolved over the past few years and are sources of compliance risks (regulatory risks) for domestic insurers.

Insurance market state regulation in the republic is in the stage of formation and development, and its main task for the near future remains the provision of optimal conditions for the national insurance market development, including the widespread introduction of mechanisms for managing the insurer’s compliance risks.

The implementation of regulatory compliance risks is associated with potential significant losses for domestic insurers, however, until recently, the republic’s insurance companies did not bother to create compliance control services. The majority of domestic insurers believe that the main reason for the insufficient development of compliance control services in insurance organizations is related to the lack of regulatory requirements in this direction. Other factors preventing development of compliance control services in the insurance organizations of the republic include: high costs of establishment and functioning of compliance control services; practical absence of compliance control specialists in the insurance organizations of the republic; insufficient supply of computer programs for automation of compliance control in domestic insurance companies.

Insurance companies need to launch compliance risk assessment and mitigation programs, focusing on the most critical risks, in a strategic and forward-looking manner. Particular attention should be paid to identifying the risk environment – identifying the most vulnerable, bottlenecks in the insurer’s business processes.

In order to use insurance as an effective method of risk management for individuals and legal entities at the stage of modernization of the country’s economy, it is necessary to have the appropriate quality of risk management for the insurer itself, namely the management of solvency and compliance risks. The main function of compliance risk management in insurance is regulatory, i.e. ensuring compliance by the insurance company and its employees with the required standards and current legislation. The goal of compliance risk management in insurance is to prevent possible risks and losses for the insurance company due to violations of certain rules and regulations.

At the same time, solvency risks can be managed directly by the insurer itself, and compliance risks are determined by the state and prospects for the development of the insurance activities state regulation system.

Assessing the solvency and financial stability of insurers is a rather complex task and requires the collection, processing, and interpretation of a large volume of statistical information, the use of labor-intensive economic-mathematical and probabilistic-statistical methods using modern applied software products.

To implement Solvency II standards in the conditions of the Republic of Uzbekistan, at the first stage, a simplified system for assessing its main indicators is proposed. They should mainly provide justification for the optimal amount of equity capital required and methods for calculating technical provisions. Calculation of insurance reserves adequate to the risks accepted for insurance should become a key business process of the insurer. Improving the reliability and completeness of the insurance reserves assessment and disclosing information about the sources and level of insured risks makes it possible to quickly determine the profitability and riskiness of insurance activities. Therefore, improving the insurance reserves assessment in conjunction with financial reporting according to international standards will make it possible to make timely, correct decisions necessary for the successful development of insurance companies in conditions of high competition and increasing regulatory restrictions.

Digital technologies open up new pricing models. We consider it advisable to take as the basis for calculating IBNR reserves not the basic insurance premium, but the basic insurance premium – net of reinsurance. This is especially important for smaller insurance companies. Practice shows that taking the basic insurance premium as a basis for small insurance companies can create problems related to compliance with the regulatory requirement that “the insurer is obliged to allocate assets in the amount equivalent to the value of insurance reserves,” threatening them with penalties from the ASB. In this regard, we consider it appropriate to use a proportional approach to calculating IBNR, as is practiced in the jurisdictions of countries such as France, Great Britain and Sweden.

According to Clause 23 of the Regulations on Insurance Reserves of Insurers, the size of IBNR should not be less than 10% of the amount of the basic insurance premium under non-life insurance (reinsurance) agreements for the period of twelve months before the reporting date. With this approach for calculating the IBNR size, the adequacy of the reserve depends on the structure of the insurance portfolio and the value of insurance tariffs. Calculation of IBNR as a share of the basic insurance premium for all insurance types, regardless of the risk profile, leads to a violation of the principle of reserves adequacy for liabilities accepted.

During the study, a historical retrospective analysis of the insurance development on the territory of modern Uzbekistan was carried out. Insurance on the territory of modern Uzbekistan passed through the following periods in its historical development: the first period – the early Middle Ages – was characterized mainly by mutual non-commercial insurance of trade operations; the second period – the period of Amir Timur reign – there were rudimentary of state property and personal insurance; the third period – the period of early capitalism before the revolution of 1917 – on the territory of Uzbekistan, commercial insurance was carried out by foreign insurers, the insurance needs of the population main segments were satisfied through non-commercial mutual insurance; fourth period – the Soviet period of the existence of Uzbekistan – the monopoly position of Gosstrakh, insurance of the property interests of individuals and cooperatives. State property was not insured; the fifth period is the period of development of the insurance market of independent Uzbekistan including five stages of the domestic insurance market transformation.

Classical commercial insurance appeared on the territory of modern Uzbekistan simultaneously with its colonization by Tsarist Russia. The needs for insurance protection of the local population were met through a local form of non-profit mutual insurance on the basis of co-participation. During the Soviet period of the country’s development, compulsory insurance types and cumulative insurance were mainly developed due to the presence of significant unmet demand. Also, during the Soviet period of the country’s development, mutual assistance of the population on the basis of co-participation was widely practiced.

Thus, the state of insurance in the periods immediately preceding the independent development of the country did not contribute to the development of insurance culture, did not take into account local characteristics and did not lead to the creation of national insurance model.

Despite the fact that insurance in Uzbekistan has certain specifics, its development direction corresponds to global trends. Transforming the insurance industry into strategic sector of the national economy, creating a more effective insurance protection system in conditions of the Republic of Uzbekistan requires the joint work of the insurance companies themselves, the Ministry of Economy and Finance of the Republic of Uzbekistan and other interested ministries and departments. In many ways, the success and speed of the processes of the insurance business digitalization in Uzbekistan as an infrastructure institution will be determined by the pace of digitalization of the economy, while the development of the insurance culture of the country’s citizens and the efficiency of the insurance mechanisms use in corporate risk and financial management systems will have a significant impact.

Within the framework of this study, it was established that insurance of foreign economic activity risks can have a positive impact on growth of export transactions; for this, domestic insurers should offer not just one or another insurance product, but a full range of relevant services, while the client should be offered the opportunity to choose the most appropriate option for him. It is obvious that the current legislative system to ensure comprehensive regulation of foreign economic activity insurance in the republic must be constantly improved; systematic work is necessary to develop a whole system of laws regulating various aspects of foreign economic activity insurance.

Research conducted by the author within the framework of this work, aimed at solving the practical problem of improving the risk insurance methodology in the conditions of modernization of the economy of the Republic of Uzbekistan, allowed us to formulate the following conclusions:

1. As a result of the analysis performed in Chapter 4 of this monograph, it was determined that the state of the insurance market in Uzbekistan today is characterized by the following positive trends: high growth rates of gross premiums written (at least 10% annually); the presence of more than 40 insurance companies in the market in non-life insurance industry, including two companies with state participation with more than 20 years’ work experience and being actually national brands – Uzagrosugurta and Uzbekinvest Export-Import Insurance Company joint-stock companies – as well as 8 companies in the life insurance industry; relatively high degree of insurers’ presence in the regions of the country through branches and offices (more than 7 thousand).

However, along with positive trends, it is necessary to note the negative aspects of the domestic insurance market development:

• state is the main reformer of the insurance market, reforms by market initiatives has a very modest trend;
• insurance premiums are growing due to compulsory and imputed types of insurance; the main growth drivers in Uzbekistan insurance market are domestic commercial banks;
• domestic insurers have weak sales channels for “voluntary” insurance products aimed at the population of the republic. Insurance companies work mainly with corporate clients. Cumulative types of life insurance are sold mainly by classic insurance products that do not take into account the mentality of the local population.
• domestic insurers do not systematically improve the insurance culture level in the country.

2. The conducted research allowed to reveal the main problems of the domestic insurance market, preventing the full application of insurance as an element of risk management of individuals and legal entities:

• low level of insurance culture among representatives of private and small businesses, as well as among the population. In this case, insurance culture means a conscious perception of the financial expenses for insurance as reasonable and necessary;
• low level of insurance coverage of the population (negligible volume of retail sales for voluntary types);
• underdevelopment of compulsory insurance types; weak capitalization of most insurance companies;
• insufficient level of development of citizens’ life and health insurance;
• limited range of actually offered insurance services not reflecting the current and future needs of both legal entities and individuals;
• lack of a large, well-capitalized national reinsurer;
• lack of mutual insurance;
• insufficient level of state regulation and supervision of insurance activities, especially in matters of the regulatory ratio of liabilities and provisions;
• unreasonable limitation of insurance rates for compulsory insurance types by the state;
• the practical absence of self-regulatory organizations in the insurance market of Uzbekistan.

3. The analysis of the current state of the insurance market of the republic has allowed to establish that the catching-up strategy of extractive development of the insurance market of Uzbekistan made it possible to create the institutional foundations of the insurance business in the country, but felt short of the expectations associated with it: in terms of main macroeconomic indicators, the domestic insurance market is considerably below not only economically developed countries, but also developing countries; the state of insurance as an element of the risk management system allows us to classify the insurance market of Uzbekistan as the so-called “soft” insurance market characterized by a relatively large number of participants and low insurance premium rates, sometimes at the level of dumping; the level of insurance culture in the country is low, the population is practically excluded from voluntary insurance.
4. Assessment of solvency and financial stability of insurers is a rather complex task and requires collection, processing and interpretation of a large amount of statistical information, application of labor-intensive economic-mathematical and probabilistic-statistical methods with the use of modern applied software products. For introduction of Solvency II standards in the conditions of the Republic of Uzbekistan at the first stage, a simplified system of evaluation of its main indicators is proposed. They should mainly provide substantiation of optimal size of necessary own capital and methods of calculation of technical reserves. Calculation of insurance reserves adequate to the risks accepted for insurance should become the key business process of the insurer. Improvement of reliability and completeness of insurance reserves assessment and disclosure of information on sources and level of insurable risks allows to determine promptly profitability and riskiness of insurance activity. Therefore, improvement of insurance reserves assessment in conjunction with financial reporting according to international standards will allow making timely correct decisions necessary for successful development of insurance companies in the conditions of high competition and strengthening of regulatory and legal restrictions.
5. The goals for innovative insurance development in Uzbekistan, taking into account the interests of the modernizing economy, include:
   • ensuring macroeconomic stability in the country by protecting the property interests of the state and business when solving the issues of economic modernization through the use of insurance mechanisms;
   • accelerating the process of transition to competitive market economy by forming comfortable business conditions through effective risk management for individuals and legal entities;
   • strengthening state regulation of insurance activities in accordance with the standards of the International Association of Insurance Supervisors, developing mechanisms for insurance activities self-regulation, strengthening the role of non-governmental non-profit associations and unions of professional participants of insurance activities;
   • reducing the risk of social tension in society by ensuring access of the general public to quality healthcare and education through the use of insurance mechanisms;
   • developing regional insurance by improving the insurance culture of the population of the regions, as well as owners of private and small businesses located locally through the implementation of a three-tier national insurance model;
   • increasing investment potential by providing access to long-term money through the development of endowment long-term insurance types meeting the mentality of our people, as well as the effective use of temporarily free funds accumulated in special mahalla funds within implementation of the national model of non-profit mutual insurance based on the financial co-participation principle.
   • ensuring the protection of property interests of individuals and legal entities from environmental risks and risks of natural and man-made disasters.

6. In the context of economic modernization, the national model for insurance protection of property interests of individuals and legal entities should contain: for corporate clients – various options for classic commercial insurance; for imputed and compulsory types of risk insurance for private and small businesses and the wealthy part of the population – modernized classic insurance (with the return of the paid insurance premium part), inclusive insurance and commercial mutual insurance; for insurance protection of property interests of the population related to the loss or damage to real estate – non-profit mutual insurance using the principles of financial co-participation on the basis of a voluntary association of citizens living in the same mahalla.

Based on the above conclusions, the following proposals are made:

1. Development and implementation of a large-scale State program for the development of the insurance culture of the population, providing for a 3-year cycle of active advertising and marketing campaign among the population.
2. Organization at the level of Mahalla Citizens Meetings (MCC) of mutual insurance societies with the name “Insurance – Emergency Aid” (Sugurta – tez yordam), providing for:
3. a) creation of societies on a voluntary basis;
4. b) purely voluntary membership in society;
5. c) each member (family, household) of this organization makes a quarterly contribution to the insurance fund of the company;
6. d) payment of insurance claim from this fund to families – members of society who have suffered loss to real estate due to various natural disasters;
7. e) the administration of these societies will be carried out by a public council elected by residents of the mahalla itself, from among the most authoritative citizens;
8. f) exemption of these companies from all types of taxes, obligatory payments and bank commissions.
9. Active involvement of small and private businesses in the insurance institution, through:
10. a) development of reliable, modern insurance products to be of interest to representatives of small and private businesses;
11. b) targeted marketing promotion of insurance services;
12. c) introduction of incentive factors through the state for the development of this promising insurance area.
13. Development and implementation of a set of incentive measures for the insurance business digitalization in relation to small and private businesses and the population and the transfer of major share of customer service to online mode.
14. Development of specific, clear and strict regulations for the fulfillment of insurance obligations by insurance companies, as well as the application of severe penalties for their violation, providing for the unconditional fulfillment of the obligations by insurance companies on the basis of strict regulations, as well as well-thought-out procedures for claims settlement from clients of insurance companies when protecting their interests.
15. Carrying out complete reorganization and transformation of the Association of Insurance Market Professional Participants into the Union of Insurance Market Professional Participants of Uzbekistan, providing for the creation of a fully operational, self-regulating, non-profit, non-governmental structure with the powers and sufficient financial resources to protect the interests of insurance business participants in state and executive authorities, and to submit proposals for the formation of legislative framework for the national insurance market development, and having in its structure such divisions as:
16. a) Republican Insurance School;
17. b) Insurance School for insurance agents;
18. c) Insurance Academy;
19. d) Insurance Arbitration Tribunal to ensure highly professional and independent consideration of client claims to insurance companies;
20. e) Call Center for insurance issues to organize “feedback” with the population and business representatives;
21. f) Specialized rating company that constantly analyzes the activities of insurance market organizations and compiles objective ratings of insurance market professional participants, as well as maintaining a public, so-called “black list” of unfair insurance market participants.
22. g) Insurance Development Fund accumulating financial resources of insurance market professional participants, with subsequent allocation to the implementation of social projects and activities aimed at improving the population insurance culture.

It is also proposed to introduce into the legislation of the Republic of Uzbekistan a norm on mandatory membership of insurance market professional participants in an industry self-regulatory organization; entry of the Union of Insurance Market Professional Participants into the World Federation of Insurance Associations; giving the Union the authority to protect the interests of its members, collect data on the insurance market and participate in the development of legislative and regulatory documents related to the insurance sector.

7. Organization of a national reinsurance company with sufficient level of capitalization, in order to retain significant volume of reinsurance premiums in the Republic of Uzbekistan and build reliable mechanism for protecting the national insurance market from possible potential political risks in the future.
8. Consideration of the issue of transferring the functions of the insurance market regulator to the Central Bank of the Republic of Uzbekistan, which will allow to:
9. a) strengthen prudential supervision over the financial condition and financial stability of the insurance market and strengthen co-operation and business partnerships between insurance and banking structures;
10. b) more effectively use the banking sector organizations for active promotion of insurance services among the population and business entities in the regions of the republic;
11. c) establish a unified system of main financial services under the control of a single regulator.
12. d) accelerate the process of development of “InsurTech” activities and the development of innovative technologies, as well as to form new insurance and financial ecosystems.

The experience of transferring these functions from the Ministry of Finance to the Central Bank in the Russian Federation and Kazakhstan and the rapid development of the insurance market in these countries confirms the efficiency of this approach.

9. We consider it appropriate to take as a base for calculation of IULR not the basic insurance premium, but the basic insurance premium – net reinsurance. This is especially important for smaller insurance companies. Practice shows that taking as a base the basic insurance premium for small insurance companies may create problems related to compliance with the regulatory requirement that “the insurer is obliged to allocate assets in the amount equivalent to the value of insurance reserves”, which threatens them with penalties from the ASB. In this regard, it would be advisable to apply a proportional approach to the calculation of IULR, as practiced in jurisdictions such as France, the UK and Sweden.

To summarize, it should be noted that the theoretical and methodological aspects of the insurance innovative development in the Republic of Uzbekistan are a complex and multi-vector problem, important for both science and practice. Therefore, this topic should be an integral part of further economic research, both for employees of specialized research institutions and specialists from insurance companies, and for financial universities in the country.

It should be noted that a number of scientific and methodological provisions of the monograph are debatable, so the author would be grateful for all comments and suggestions, which can be sent to: office@uzbekinvest.uz.