Potential Insureds’ Risks in Conditions of Modernization of the Economy of Uzbekistan

Transformation of the economy of Uzbekistan carried out in accordance with the Strategy, is related to significant complication of existing and the emergence of new risks. Therefore, the task of specifying the risk environment of legal entities and individuals in the context of modernization of the economy of the Republic of Uzbekistan becomes urgent.
The founder of classical political economy A. Smith in his work “An Inquiry into the Nature and Causes of the Wealth of Nations” fundamentally explored the issue of risk as an economic category. A. Smith was among the first to justify not only the economic but also the psychophysical nature of risk (Smith, 2016, p. 1056).
Representatives of the classical theory J. Mill and N.U. Senior identified risk with the mathematical expectation of losses from its implementation and identified in the structure of income received by an entrepreneur, “interest as a share of the invested capital, the entrepreneur’s wage and the risk fee” (Mill, 2012, pp. 55-76). In this case, the risk was the damage caused as a result of the implementation of a specific decision (Senior, 1963).
A. Marshall and A. Pigou moved from the precondition that entrepreneur carrying out his activities in uncertainty conditions when the profit amount from this activity implementation is not determined in advance, operates from the following parameters: the expected profit amount and the magnitude of the values spread (Marshall, 1993).
Joseph Schumpeter, based on a functional analysis of the economic development processes, established that if “risks are not taken into account in the economic plan they become a source, on the one hand, of profit, on the other hand, of losses” (Schumpeter, 1982, p. 21). In his “History of Economic Analysis” book he noted that F. Knight made “two important discoveries: he divided insurable risks and uninsurable uncertainty and connected uninsurable uncertainty with rapid economic changes” (Schumpeter, 2004).
F. Knight defined the difference between risk and uncertainty in that if it is possible to calculate the risk occurrence probability, we need to talk about the risk as such, and in the absence of such an opportunity, uncertainty occurs. Thus, according to F. Knight, risk is measurable uncertainty, and uncertainty arises as a result of “improving production processes, organizational methods, and etc., and the predictability degree increases if new knowledge arises as a result of purposeful reflection, research and experiments” (Knight, 2003, p. 360).

Figure. 2.1. Main groups, categories, types, subtypes and varieties of traditional risks of legal entities (Mirsadykov, 2010, p. 55)

In our study, risk is understood as the possibility of damage arising from the characteristics of natural, climate, economic and social processes peculiar to a modernized economy. In this case, the risk is considered not as a single adverse event but as the environment feature, and the risk is a combination of the loss occurrence likelihood and this loss severity. The most important risk characteristics are the probability of its occurrence and the damage amount from its implementation.
Accordingly, at the present stage of country’s development the functioning of individuals and legal entities takes place in conditions of a growing probability of receiving damage from realization of both the risks inherent in the previous economy and risks arising during its consistent transformation. All types of activities of individuals or legal entities are associated with risk, and the risk degree varies for different situations. For example, significant part of the activities of credit-financial and trade-commercial structures is associated with an increased risk degree, whereas service sector enterprises usually operate in low risk conditions.
It should be noted that traditional risks have been studied in sufficient detail, the main groups, categories, types, subtypes and varieties of traditional risks inherent in the risk environment of legal entities are schematically presented in Figure 2.1.
Based on the analysis of the available information, we have studied in more detail the risks arising in the modernization of the economy. Along with the traditional risks of individuals and legal entities, new risks of both economic and social nature arise. The risks of the modernizing economy are extremely diverse, starting from strategic risks and ending with technogenic risks.
The main groups of risks of the modernizing economy are presented in Figure 2.2, let us consider them in more detail. Strategic risks – risks associated with the sustainable development of the modernization process of the country’s economy. They include the risks of incorrect strategy development and the external environment assessment, as well as general macroeconomic trends, playing crucial role in the process of modernization of the country’s economy. They are difficult to assess, monitor and manage but they can be turned from threats into competitive advantages.

Figure 2.2. Map of the main risks of modernizing economy (Azimov, 2021)

Modernization of the economy of Uzbekistan is characterized by the localization of production processes in the regions of the country, which clearly increases the importance of natural and climate risks. For example, the hurricane occurred in Bukhara on April 27, 2020 with a wind speed up to 90 km/h, which arose as a result of a cyclone formed over the southern territory of Uzbekistan, damaged more than 40 thousand buildings – residential houses, schools, kindergartens, polyclinics, and other institutions. One person has died and thirty people were injured with varying severity (UzReport Information Agency, 2020).
At the stage of economy modernization there is a need for fast changes in legislation, but sometimes the pace of economic transformation significantly in advance of the level of legal system development of the country, which is the cause of legal risks. The main factors of legal risks include: insufficient development level of the legal system and existence of legal conflicts in legislative and subordinate acts; inconsistency of certain aspects of the legislation of the Republic of Uzbekistan, its exposure to changes, including in the part of not perfect methods of state regulation and (or) supervision; changes in the taxation and/or customs legislation of the Republic of Uzbekistan (Tikhomirov & Lapina, 2014.).
The need for the national economy innovative development, i.e. systematic and widespread use of innovations to ensure its accelerated modernization is obvious. In its essence, innovation risk is an economic category that depends on political, social, economic and criminal situation. It is a measurable value, the quantitative measure of which can be the probability of unfavorable outcome when investing in the production of new goods and services, development of new equipment and technology, as well as when investing into development of management innovations that might not bring the expected effect. At the stage of the economy modernization, innovation risks related to digitalization, namely the production Internet technologies, new production technologies, big data technologies, and artificial intelligence, come to the fore (Azimov et al., 2020, p. 367).
Transformation in the economy is directly related to transformations in the social life of society and they do not always have a positive direction. Social and community risks are understood as the probability of occurrence of events threatening the normal human beings’ reproduction, their physiological and socio-economic life activity. In our opinion, to the social risk factors group at the stage of economic modernization it is necessary to add cultural risk factors where risk is considered as a social mechanism helping different ethno cultures to determine the main principles of responsibility to civilization. Changes in the society cultural development and healthy lifestyle promotion change the requirements and standards of consumers and, consequently, create a risky environment for producers (Sharin, 2013).
Large-scale production modernization, new technologies introduction is objectively related to an increase in the number of technogenic risks. Technogenic risks are caused by the internal properties of means of production, namely their ability to wear out and break over time. Means of production with a large reserve and high concentration of internal energy or substances with special properties (radioactive, toxic, fire and explosion hazardous) are particularly dangerous. In other words, one of the technogenic risks sources is the ability of means of production over time to change their properties (parameters) that ensure their normal functioning (Alymov, 2007, pp. 113-116). For example, as a result of errors in project documentation as well as during construction and operation, on May 1, 2020 in Syrdarya region there was a water overflow from the 6th picket wall of the Sardoba reservoir. As a result, evacuation of over 70 thousand people was required, 8 kindergartens, 16 schools, 7 medical institutions, 1 college, 7 cemeteries, 3 mosques, 13 bridges of national importance, 52 km of roads, 1 market were damaged. This man-made disaster caused destruction and significant damage to 99 multi-storey residential buildings. The total cumulative, including transboundary, damage from this man-made disaster has not been fully assessed, but only the amount of funds necessary to compensate for the damage caused to businesses specializing in fisheries, livestock and poultry, as well as for the construction and repair of irrigation and meliorative network amounted to 126 billion Soums (Kun.uz Online publications, 2020).
Considering the factors of the risk environment of individuals (Figure 2.3), it should be noted that it includes the following risks: natural and climate (natural disasters, climate change, etc.); technogenic, associated with human production activities (hazardous industries, radiation, etc.); everyday, related to the household activities in his/her environment (damage to water supply systems, clogging of sewers, etc.); third parties’ criminal actions (secret or obvious possession of other people’s property, robbery, physical violence associated with damage to life or health, etc.); personal, related to the actions of the person himself or his family members (professional, every day, etc.).
In addition, the risks inherent to individuals in the modernizing economy can be divided into those related to: life or health; property; liability to third parties. In the modernizing economy, the risks of income loss by individual as a result of the employer’s costs optimization can be additionally attributed to the risks of individuals.
The factors contributing to the risks of individuals may include ineffective personnel policy of the employer, lack of opportunities for professional development and retraining for a new specialty, inadequate motivation and remuneration systems, downsizing, rejection or opposition of individuals to changes in the economy, professional errors in the performance of new duties.

Figure 2.3. Risk environment of individuals (Azimov, 2021)

Legal entities traditional risks depend on their occurrence conditions – external or internal. Each legal entity in its activities faces external environment factors forming risk types common for the legal entities activities: political; legislative; natural; macroeconomic.

Political risks are related to the political situation in the country and the activities of public authorities. Legislative risks imply changes in the existing norms with the introduction of new legislative and regulatory acts. Natural risks are related to possible natural disasters.

Macroeconomic risks are caused by the development of economic processes in the country and in the world as a whole. In turn, macroeconomic risks include inflationary (deflationary), currency, interest rate and structural risks.

Internal processes in the activity of a legal entity are divided into three types: production; commercial; and financial.

Production risks are related to the peculiarities of the technological process at a particular enterprise, the employees’ qualification level, the organization of raw materials and goods deliveries, logistics and the process of checking and monitoring of counterparties.

Commercial risks arise at the stage of realization of finished products. Entrepreneurial commercial risks are caused by incorrect marketing research resulting in inability to sell all or part of the manufactured products, underestimation of competitors in the commodity market or unsound pricing policy, as well as failure of counterparties to fulfill contractual obligations.

Financial risks are related to the population purchasing power, inflation or exchange rates fluctuations and investment errors. The most significant ones in this group may be: risk of the customer of construction works; credit risk of the borrower; risk of loss as a result of errors or omissions related to the ownership registration; purchase of illiquid securities.

Based on the available information analysis, in the framework of this study we have studied in more detail the risks arising during economic modernization. Along with the traditional risks of individuals and legal entities, new risks of both economic and social nature arise. Risks of the modernizing economy are extremely diverse, starting from strategic risks and ending with man-made risks.

As a result of the expansion of the list of risks and growth of their danger in the conditions of economy modernization, legal entities have become aware of the need to apply various risk management methods. Generally accepted risk management methods of legal entities in the conditions of modernizing economy are: risk avoidance by ceasing actions that contribute to the risk emergence and realization; risk retention – creation of provisions to cover potential losses from the risk occurrence; risk reduction through preventive measures; risk transfer. Risk transfer can be carried out in the form of outsourcing (reinsurance) and insurance.

The choice of a risk management method is made on the basis of comparing various methods and selecting the optimal one. The risks diversity in the risk environment of individuals and legal entities objectively leads to the inevitability of developing a wide range of risk management methods, focused on the interests of even a small number of groups of possible insureds. The choice of risk management method depends on the composition and content of the risk environment.

Following large-scale economy modernization of Uzbekistan and formation of an effective market economy, the risk environment of individuals and legal entities is changing. It is becoming more complex, new risks appear resulting in increase of the severity of risk realization consequences due to interaction with existing risks. In the conditions of economy modernization, the approaches to the organization of individuals and legal entities risk management significantly change. In this case, we accept as a working hypothesis that the effectiveness of the individuals and legal entities risk management system in the modernizing economy is largely determined by the quality and completeness of the stage of risks identification and analysis and such individuals and legal entities risk management method is more preferable where this stage of individuals and legal entities risk management is carried out on a professional level by specially trained professional specialists in accordance with the established methodologies.

Innovation Risks

Innovation risk is an economic category that depends on political, social, economic and criminal situations. In general, in the modernizing economy, the risks arising in the following situations can be attributed to innovation risks: the risk of incorrect determination of demand for products (services) produced (rendered) using a cheaper method of production of products (rendering of services) compared to the existing ones; the risks of non-compliance of product or service quality with the established norms and incorrect determination of demand for products (rendered services) when creating new products (rendering of services) using old technologies; the risk of incorrect determination of demand for products (rendering of services) when producing new products (rendering of services) using old technologies (Balabanov, 2008; Maramokhina, 2013;). Table 2.1 summarizes the main risks by stages of innovation introduction and promotion.

Table 2.1. Main risks at the stages of innovation introduction and promotion

Source: “Economy of Knowledge”, Glukhov et al., 2003

The main types of specific innovation risks, according to the author’s classification, are:

• originality risk, i.e. the risk that consumers, due to established tastes, preferences and stereotypes, are not ready to accept original goods, services or technologies that are new and having no analogs;
• risk of information inadequacy, i.e. the risk that the information environment and information field are not prepared for the innovation perception, information infrastructure is not formed, there is no information support for this innovation;
• risk of time inadequacy implying, on the one hand, delay in the process of innovation realization from the moment of its emergence, and, on the other hand – delay in the moment of innovation product introduction to the market due to the long duration of its development process;
• the risk of technological inadequacy, i.e. the risk that a really innovative technology created by the inventor as a product of intellectual activity cannot become an investment object for industrial realization because it is not promising, and the products created on its basis will not be in demand by the market;
• the risk associated with securing property rights, i.e. the risk of obtaining unpatentable result, non-compliance with patenting requirements, delayed patenting procedure and, as a consequence, information leakage and analogs appearance, patenting for a short period of time;
• the risk related to the property rights protection, i.e. the danger of legal or illegal forging of the innovation, issuing an excessive number of licenses for the right to use the invention;
• the risk of financial inadequacy, i.e. incommensurability of the benefits value from the innovation implementation on the market and the amount of financial resources required for its development;
• the risk of staff inadequacy, i.e. the risk of losing (in the process of innovation development) key employees without whom further development in this direction will be perspectiveless, or the risk of the innovation project participants’ staff inconsistency with the requirements imposed on them;
• the risk of the scales effect (laboratory effect) when moving from a design model to a real product, i.e. the danger that idea that looked perfect in the form of a design concept will turn to non-viable one when trying to bring to life;
• the risk of insufficient scientific and technical capacity, i.e. the risk that an idea cannot be implemented due to lack of intellectual or material resources.

The peculiarity of innovative risks of legal entities and individuals at the stage of modernization of the economy is their close connection with the digital technologies’ development. These technologies have already found their application in the insurance market of the republic, though in different implementation degrees. Some of them have been used since the times of previous technological innovations caused by total computerization in 1980-1990s and increasing use of information and communication abilities of the Internet in the period of 1990-2000.

The active digital technologies development in the emerging digital economy is giving rise to new risks, including new interpretations of cyber risks known since the 1990s, as well as other risks that may arise in the course of scientific and applied research.

Part of the digital economy risks is minimized through the use of insurance mechanisms. Therefore, digital insurance is understood as a way to meet the insureds’ needs in specific insurance protection caused by accidental adverse events occurring mainly in the digital economy environment and accompanying the use of technological equipment, which is the material basis for the realization of economic relations. Thus, digital insurance is a way of satisfying the traditional or specific (generated by digitalization) need for insurance protection through digital technologies. At the same time, the implementation of insurance activities by insurance companies using digital technologies is defined as the insurance market digitalization.

It is worth noting that digitalization provides for risk management, not just creating new risks. Insurance is actively developing in this area these days, despite the complexity of cyber risks assessment. According to the Swiss Re/IBM survey, about half of insurers (51%) and businesses (46%) are open to the idea of using digital technology to create flexible insurance solutions (Dobrynin et al., 2016).

McKinsey analysts suggest three main development areas for the qualitative restructuring of the insurance business in today’s digital economy: new risks types, new underwriting approaches, and new usefulness (Yudina, 2016, pp. 12-16). Among the new risks types that can be managed by insurance companies, in addition to cyber risks, there is also coverage of risks of new global supply chains using the Internet of Things, as well as the risks of the sharing economies, such as Uber or Airbnb, where the car owner becomes a driver and the homeowner becomes a hotelier requiring different approaches to insurance coverage.

Insurers are struggling to meet the needs of tech-savvy consumers, especially Millennials (Generation Y, people born between 1985 and 2002) and Homelanders (Generation Z, people born between 2003 and 2024). Millennials and Homelanders are more than twice as likely than other generations to purchase insurance policies online or through a smartphone rather than through an insurance agent. Consequently, many of the leading on-demand insurance technology startups are targeting them. Simple transactions without paperwork through a smartphone are common for generations Y and Z, and they expect the same from insurance.

Companies in the on-demand insurance industry use cutting-edge innovations such as the Internet of Things (IoT), artificial intelligence (AI), predictive modeling, and BigData. These innovations are helping startups to reinvent the way of insurance products development, underwriting, pricing and distribution.

Today, the majority of insurance companies in Uzbekistan offer a narrow selection of digital insurance products with standard insurance terms, such as compulsory motor liability insurance (CML), accident insurance, travel insurance and property insurance. Below is the information (Table 2.2.) on the number of digital products offered by the leading insurance companies in the Uzbek market through their online platforms (mobile applications and websites) as of 31.12.2022.

Table 2.2. Number of digital products by leading insurance companies of Uzbekistan as of December 31, 2022

Source: Author’s analysis of data from www.insurance.uz, www.gross.uz, www.kafola.uz, www.agros.uz, www.apexinsurance.uz, www.kapitalsugurta.uz, www.alfainvest.uz, www.alskom.uz, 31.12, 2022

The widest product line, namely 9 electronic products, is presented by Uzbekinvest. As of today, 90% of all online sales are for compulsory motor liability insurance (CML). According to the results of 2022, more than 1,841 thousand car owners of the country have purchased CML policy online (The Ministry of Economy and Finance of the Republic of Uzbekistan, 31.12, 2022). According to experts’ estimates, a small part, or rather no more than 10% of all online policies are accounted for other types of voluntary insurance, such as travel insurance (5%), health and accident insurance (3%), liability insurance (2%) and household property insurance (1%). As for other voluntary insurance types, the market practically does not develop attractive insurance products, and in most cases the insurance products offered do not take into account local specifics.
The risks of using artificial intelligence at the moment, mainly machine learning technologies – from widely used chat bots to e-drivers – are a significant risk for businesses. The potentially high riskiness of artificial intelligence is related to two factors: greater exposure to cyberattacks due to the concentration of digital technologies to achieve learning effects; and the ability to learn not only useful knowledge but also errors, such as programming, which leads to the loss accumulation.
The artificial intelligence risks occurrence can happen in the following way: by causing damage to the business due to business interruption. According to the Allianz Risk Barometer, a twelve-hour outage of a cloud service provider with artificial intelligence programs would cause a loss of 850 million US Dollars for companies using the service; by making decisions that could bring damage to property and health of third parties, for example, when choosing actions among alternatives in a traffic accident; by labor market transformation and increased unemployment, especially in non-creative professions; by violation of the consumers’ rights and interests, especially in financial services, due to their insufficient notification about actions and proposed solutions.
The digital economy risks which may form the need of individuals and legal entities for digital insurance are classified into two groups: traditional, associated with automation and digitalization, but inherent in the post-industrial and digital economy, and specific, associated with the use of new digital technologies and taking place only in the digital economy.
Traditional digital insurance risks include: special risks in the electronic devices insurance (power grid accidents and others); e-commerce risks; and cyber risks.
Among the specific newly emerging digital economy risks are the following: risks of using artificial intelligence; risks in insuring the Internet of Things; and other risks of digital technologies that have not been determined or have not yet been identified.
In conditions of the digital economy, despite their attribution to traditional risks, cyber risk insurance programs are becoming particularly relevant, as the introduction of new digital technologies significantly increases the number of cyber-attack targets.
A generally accepted definition of cyber risks in the scientific literature is still being formed, but modifying various points of view, it should be noted that cyber risks are defined through the concept of damage caused to organization or individual as a result of criminal actions using digital technologies. According to the authors, cyber risks are the risks of ownership and use of digital technologies (including not always understood and thought of) related to the danger of their unauthorized possession, modification, distribution and destruction, causing loss to their owners or third parties.
As possible types of loss resulted from cyber risks occurrence we should distinguish: direct loss caused by damage or destruction of digital technologies and the cost of their restoration; direct loss related to the theft of money and other assets in digital form; indirect loss related to the business activities interruption due to damage or destruction of digital technologies; indirect loss caused by cyber-attacks but realized through the artificial intelligence risks and the risks of the Internet of Things; indirect loss related to the spread of Internet of Things; and indirect loss related to the spread of cyber risks (Bryzgalov et al., 2020).
Digitalization risks for potential insurer’s clients can be conditionally divided into two groups: old risks appeared before mass digitalization but intensified in the pandemic and post-pandemic period, and new risks. The group of “old” risks includes all cyber risks. They arise in any user’s operation on the Internet but due to economic life transition to online format, the danger of cyber risks surges many times. We are talking about fishing sites, personal data theft during online policy issuance or unauthorized money withdrawal from a bank card.
In addition to cyber risks, “old” risks include methodological risks. The client may not understand complex wording of the agreement or insurance rules on his/her own, risking to understand them incorrectly, and as a result may have high expectations of the insurance agreement. If when selling a policy offline in the insurance company office the client had the opportunity to clarify unclear matters with a “live” consultant, in the era of total digitalization such opportunity is limited. The group of “new” risks includes increase in the insurance policy cost. There may be two reasons for such increase in insurance coverage price in direct connection with digitalization. The first and quite obvious one is insurers’ investments in IT infrastructure, website improvement and marketplace development which are included in the cost of doing business and ultimately fall on the client’s shoulders.
The second reason – more serious, but less obvious – is related to the fact that in conditions of mass online sales, the amount of data about the insured object that the insured provides to the insurer is much less than before the “digital” transition. Insurers are trying not to trouble customers and do not bother them with filling long applications or free them from filling applications at all if they purchase box insurance products which prevail in mass insurance types.
But insurance applications are not a mere formality, rather statistical data source for the insurance company, on the basis of which actuarial calculations are made. In the long run, the decrease in the amount of data provided by insureds may lead to problems for actuaries who simply will not have enough material for reasonable calculation of insurance rates and differentiating them for different clients’ groups. The consequence of the lack of data for actuaries will inevitably be the inflated tariffs for all – in order to “reinsure” and not to worsen the insurance company financial performance. And if one-time investment in IT-infrastructure is a short-term factor, the actuarial data absence will make itself known after some time and will become a long-term factor. And insureds should understand that they will eventually have to pay for a more comfortable online policy purchase themselves.
Digitalization risks also arise on the insurers side. Some experts have concerns that remote sales channel will open up some new opportunities for fraud. Various technical and statistical methods have been developed and successfully applied to fight insurance fraud in digital environment.
The domestic insurance market development in terms of insurance of the digital economy specific risks 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, primarily of artificial intelligence and the Internet of Things, including the Internet of Things in industry; the adaptability of domestic legislation to insurance of cyber risks and other risks of the digital economy; the infrastructure development of digital risks insurance aimed primarily at survey and adjusting; the level of protection systems against the digital risks occurrence; the level of risk management systems of the insurer itself and the availability of effective protection against insurance fraud.

Regulatory Compliance Risks of the Insurer

In accordance with the concept of risk-oriented approach to the regulation and supervision of insurers and insurance groups of the European Union (Solvency 2 Directive), the compliance risk management system is an integral part of an effective internal control system of insurance organization performing the following: informing the insurance organization management about insurance company’s compliance with the requirements of legislation, regulations and other acts; checking compliance of the insurance company’s internal documents with the requirements of the legislation, regulations and other acts; assessing the impact of future legal changes on the insurance organization’s business processes; identifying and assessing the risk of regulatory and legal non-compliance (regulatory risk) (Solvency II Directive, 2019).

In the domestic insurance market today there is practically no legal definition of the “compliance control” and “compliance risks” concepts. In our study, compliance risks in insurance are understood as the risks of financial or reputational losses arising from unintentional or intentional violations of legislation, internal regulations requirements and insurance services standards, ethical business norms related to the insurance activities performance.

The main function of compliance risk management in insurance is regulatory, i.e. ensuring that the insurance company and its employees comply with the established norms and applicable laws. The purpose 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.

The reason for the emergence and realization of compliance risks related to insurance law could be the presence of unresolved problems such as:

• the well-known archaism and contradiction of rules related to the protection of the insureds’ interests and rights under the insurance agreement;
• existing frame character of legal norms in the life insurance industry with regards to endowment insurance (there is no definition of “endowment life insurance agreement”, the subject of the endowment life insurance agreement is not defined, the main insurance risks under the endowment insurance agreement are not disclosed, the procedure for the endowment life insurance agreement cancellation and the redemption amount payment is not stipulated);
• there is no clear description of the subject of civil liability insurance agreement, including professional liability and entrepreneurial risk insurance agreement;
• the procedure for determining the “actual” property value is not prescribed leading to disagreements between the parties when concluding the insurance agreement;
• the procedure for reporting the insurance indemnity received under the insurance agreement by the insured in its accounting reports is not prescribed which may lead to problems during tax audits;
• the concepts of “insurance risk” and “insured event” specified in domestic legislation, do not allow to definitely qualify an insured event as a fact of insurance risk occurrence;
• the legislation of the republic contains only 6 essential conditions of property insurance agreement and 5 essential conditions of personal insurance agreement creating certain difficulties in qualifying insurance agreements;

Due to the fact that domestic Civil Code contains only one article – Article 960 “Mutual Insurance” regulating mutual insurance relations, and the new edition of the Act “On Insurance Activities” does not cover any norms concerning the organization of this insurance type at all, serious compliance risks may arise when introducing Islamic insurance and mutual insurance commercial types into the practice of insurance companies in Uzbekistan (Azimov, 2021).

In Uzbekistan, at the stage of establishment of the insurer there is no verification of the origin and reality of funds contributed to the authorized capital. The legislation prescribes only the minimum amount of the insurer’s authorized capital which is set separately depending on the intended insurance activity areas. The licensing procedure stipulated by the legislation includes control over:

• compliance of the authorized capital formed amount with the required minimum amount;
• compliance of the head and chief accountant of the license applicant (licensee) with the established qualification requirements;
• when obtaining a license to conduct compulsory insurance types – verification of the insurer’s branches presence in the Republic of Karakalpakstan, all regions and Tashkent city authorized to conclude compulsory insurance agreements, to settle claims for insurance payments of the victim (his heir or legal successor) and to make insurance payments (Resolution of the President of the Republic of Uzbekistan, 2019).

In addition, a license applicant for compulsory motor liability insurance is checked for the membership agreement with the Payments Guarantee Fund, and a license applicant for compulsory carrier’s third-party liability insurance is checked for the presence of joint activity agreement between insurers entitled to perform this type of compulsory insurance (Decree of the Cabinet of Ministers of the Republic of Uzbekistan, 2022, №80).

The insurer may only operate in the classes (types) specified in the license, with the class structure in the non-life insurance industry and the life insurance industry generally conforming to the EU Insurance Directives.

It should be noted that for life insurance the EU Directives contain a detailed structure of insurance activities, in respect of which different requirements for solvency and financial stability are applied. In its turn, the legislation of the republic contains only the “life insurance” definition which makes it difficult to exercise subsequent control over insurance activities both by supervisory authorities and other state executive bodies (tax authorities, currency regulation and currency control).

A serious disadvantage of the existing license system is that authorized state body (hereinafter referred to as the ASB) has no possibility to control the capital origin, the real availability of funds and assets contributed to the authorized capital of the insurer, the insurance activities experience, the reputation of the insurance company top management at the stage of its establishment (Decree of the Cabinet of Ministers of the Republic of Uzbekistan, 2022).

Current monitoring of the insurer’s activity is carried out by the authorized state body (hereinafter referred to as the ASB). Moreover, according to Article 14 “Rights and Obligations of the Insurer” of the Act “On Insurance Activity” “the insurer is obliged to undergo annual mandatory audit and at least once a year employ actuarial organization to provide actuarial services in accordance with the procedure established by the authorized state body” (Law of the Republic of Uzbekistan, 2021). 

In Uzbekistan, the National Agency of Perspective Projects of the Republic of Uzbekistan is responsible for the functions of the ASB. The ASB monitors the activities of insurers on the basis of financial statements submitted, and the requirements for the financial statements composition and form are adapted to the republic conditions and, in general, correspond to the requirements established by the relevant EU directives. According to the legislation, insurers “… must disclose information related to the state of own funds, capital requirements fulfillment, liquidity, amount of risks and other key indicators (norms) … The annual financial report of the insurer (reinsurer) … is not subject to publication without auditor’s report” (Law of the Republic of Uzbekistan, 2021).

In Uzbekistan, when domestic insurers reinsure in the international reinsurance market, they assume liabilities under insurance agreements in the local market in national currency, while the foreign reinsurer assumes liabilities and forms relevant provisions in hard currency. In such a situation, domestic insurers when carry out outward foreign reinsurance are forced to convert the insurance premium which in conditions of currency market volatility may lead to insurer’s solvency problems.

According to the results of the ASB monitoring, depending on the violations severity, warrants are issued, in the order prescribed by law, the license is limited, suspended or cancelled. In addition, the ASB has the right to impose sanctions such as fines on violating party.

The efficiency of insurers’ activities remote monitoring is determined by the following parameters: timeliness, reliability and completeness of the reporting information submitted by insurers to the supervisory authority; promptness and sufficiency of sanctions imposed by the ASB upon violations detection. According to these parameters, the ASB activities in supervising the insurance market of the republic are not efficient enough. Such state of affairs can be explained by: insurance legislation insufficient level – the republic has formed the basics of insurance legislation, systematic work on its development and improvement is necessary, in particular, on specifying the functional competences of the ASB; understaffing, insufficient level of professionalism of the ASB employees, low work attractiveness in the ASB for highly qualified specialists in the insurance business in terms of remuneration; practical absence of digital channels for communicating, processing and analyzing reporting information which significantly reduces the ability of the ASB to promptly respond to identified violations.

Compliance risks in the field of administrative legal relations may occur during: initial control over insurance conditions and insurance rates when establishing insurance company (in most EU countries, such control has been eliminated and the main control is remote monitoring of the financial stability and solvency of the insurer); justification of methods and selection of procedures for the formation of insurance reserves, provisions and insurance funds and rules for their placement, especially in the life insurance industry; choosing methods for calculating the solvency margin (calculating the assets to liabilities normative ratio of the insurer); establishing forms and deadlines for submitting accounting and statistical reporting to the relevant supervisory and statistical authorities; maintaining registers of insurers and insurance agents; license restriction or suspension and cancellation.

The state law of the Republic of Uzbekistan, based on general civil and special insurance legislation, stipulates for the issues of establishment and functioning of the state body authorized to regulate the activities of professional participants of insurance activities and to protect the rights of the insureds.

The performance and efficiency of supervisory procedures are determined by: stability and predictability of the ASB’s development directions; sufficiency, accessibility and transparency of the legislation necessary for the ASB’s activities; sufficiency of the ASB’s functions, modern supervisory methods and structure to fulfill its tasks; efficiency of joint work to improve insurance and general civil legislation; legality and proportionality of sanctions for the insurer’s violation of the established legal and regulatory framework; and the effectiveness of the supervisory procedures.

Compliance risks in the sphere of governmental legal relations arise when ASBs carry out the following activities:

1. Licensing of insurance activities of insurers (reinsurers) and insurance brokers. Risks arise due to insufficient elaboration of the issues of legal and departmental support of this function.
2. Ensuring transparency in relation to the insurer’s financial position. The reason of occurrence of regulatory risks in this case is the lack of standards for providing such information.
3. Strict compliance with the law and maintaining law and order in the industry by supervising the strict observance of contractual relations by insurance business participants. The ASB conducts scheduled inspections of insurance companies and, in case of violations, has the right to take legal measures against violators. However, to date, there are no regulatory or internal documents defining the rights and obligations of the parties as well as standards for conducting inspections.

Insurers, insureds and the state in determining the costs composition, determining the taxable base of insurers, calculation and payment of taxes and mandatory payments are guided by the norms of financial law. For this purpose, they refer to the following legal acts: “Regulations on the Costs Composition for Production and Realization of Products (Works, Services) and on the Order of Financial Results Formation” (Decree of the Cabinet of Ministers of the Republic of Uzbekistan, 1999); “Tax Code of the Republic of Uzbekistan” (Tax Code of the Republic of Uzbekistan, n.d.) and separate internal acts.

As the example of countries with developed insurance market (USA, Germany, France, and etc.) shows, the transition to remote monitoring to implement financial control makes it possible to significantly increase the supervision efficiency by identifying at an early stage insurer with deteriorating solvency and financial stability and promptly taking necessary measures to them. At the same time, remote monitoring, as a rule, is based on an index approach (coefficients of change in gross premiums written, insurer’s expenses, loss ratio of the sum insured and insurance premiums, and etc.).

Substantial disadvantage of remote monitoring financial control based on reported information is that it is carried out with a frequency of at least three months. There is a significant time interval between consecutive checks of the insurance financial condition during which the financial stability and solvency of the supervision subject may significantly change in a negative direction and the actions of ASBs to protect the rights of insureds (beneficiaries) and insured persons may be delayed.

Practically all local insurers have banks of the republic as the shareholders, and in some cases cross-ownership of each other’s shares is allowed. As foreign experience shows, such ownership of shares may lead to a significant decrease in solvency and financial stability of both participants, so such cases should be the object of careful financial control.

The insurance market is inherently inclined to monopolization of insurance activities, in this connection the financial law provisions on demonopolization of the insurance market are especially suitable. Unfortunately, at the present stage of insurance activity development in the legislation of the republic there are no separate norms aimed at limitation and suppression of monopolistic activity in the insurance market. Following the above-mentioned, we consider it useful to study and adapt foreign experience of insurance activities antimonopoly regulation to local conditions with regard to the establishment of monopolistically high rates of insurance premiums through collusion of insurers and the use of administrative resources and other opportunities for the insurer to occupy monopoly position in a particular insurance services type (accumulation of more than a third of the insurance premium for this services type by the insurer).

The absence of unified rules for the insurance provisions formation and standards for independent actuaries in the life insurance industry may lead to problems with the soundness and sufficiency of provisions formed by insurers.

The insufficient level of development of the country’s financial market leads to problems in insurance provisions investment. Therefore, it is necessary, based on the main principles of the insurer’s investment activity – diversification, liquidity, recoverability and profitability – to significantly expand the authorized investment objects for temporarily free funds of the insurer.

Thus, compliance risks in the sphere of financial law are mainly related to the following procedures: formation, placement and use of insurance provisions; determination of the costs composition, determination of the taxable base of insurers and financial results of the insurer’s activities; preparation of insurer’s financial statements and their submission to the relevant supervisory authorities; taxation of insurers and insureds when conducting insurance and reinsurance operations.

As follows from the above-mentioned, the regulatory compliance risks occurrence is related to potential significant losses of domestic insurers, however, until recently insurance companies of the republic were not concerned about introduction of 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.

Conclusions on the Second Chapter

1. Followed by the large-scale modernization of the economy of Uzbekistan and effective market economy formation, the risk environment of individuals and legal entities is changing. It becomes more complex, new risks appear, as a result of interaction with existing risks the severity of consequences of risk occurrence increases. In the conditions of economy modernization, approaches to the organization of risk management of individuals and legal entities significantly change. In this case, we accept as a working hypothesis that the efficiency of the risk management system of individuals and legal entities in the modernizing economy is largely determined by the quality and completeness of the stage of risks identification and analysis and such a method of risk management of individuals and legal entities is more preferable where risk management of individuals and legal entities is carried out at a professional level by specially trained people according to internationally recognized and tested methods.
2. The development of the domestic insurance market in terms of insurance of specific risks of the digital economy in the near future will be determined by:

• the level of insurance culture of potential insureds and the penetration level of digital technologies in the domestic economy;
• the increase in the share of voluntary insurance types and a cardinal expansion of insurance objects due to the development and sophistication of digital technologies, primarily, artificial intelligence and the Internet of things, including the Internet of things in industry;
• adaptability of domestic legislation to the insurance of cyber-risks and other risks of the digital economy;
• development of digital risk insurance infrastructure, aimed primarily at survey and adjusting;
• level of protection systems against the digital risks occurrence;
• the level of risk management systems of the insurer itself and the availability of effective protection against insurance fraud.

3. Compliance risks in the field of financial law are mainly related to the following procedures:

• insurance provisions formation, placement and use;
• determining the costs composition, the insurers’ tax base and financial results of the insurers’ activities;
• preparing the insurer’s financial statements and submitting them to the relevant supervisory authorities;
• taxation of insurers and insureds when carrying out insurance and reinsurance operations.

The regulatory compliance risks occurrence is related to potential significant losses of domestic insurers. However, until recently insurance companies of the republic were not concerned about introduction of 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.