Economic Essence and Objectives of Insurance in the Conditions of Modernization of the Economy of Uzbekistan

Insurance problems are reflected in the works of Western scientists, such as: Cipra Tomas, Bom Patricia, Richter Andreas, Ch. Bernstorff, F.-J. Ermert, D. Famy, R. Koch and others (Cipra, 2010; Bom & Richter, 2010; Frankfurt, 1995; Erment et al. 1990; Famy 1995; Koch et al. 1995;). The problems of the insurance development and certain aspects of the use of insurance as an element of the risk management system for individuals and legal entities were studied in the works of such foreign economists as R. Askari, C. Skavtorm, R. Soits, P. Checcini, and etc. (Ascari, 2007; Scawthom & Kobayashi, 2008; Thoyts 2010; Cecchini et al., 2003).
Issues of insurance development were considered with by the Russian (Arkhipov, 2016; Akhvlediani, 2016; Alexandrov, 1998; Galaguza, 1998; Arkhipov et al., 2016; Orlanyuk-Malitskaya, 2004; Turbina, 2003; Tsyganov & Bryzgalov, 2018; Shakhov, 1997; Yuldashev, 2002). and domestic (Abdurakhmonov, 2019; Askarova, 2001; Mirsadykov & Ashrafkhanov, 2001; Umarov, 2007) researchers
The common vision of the insurance importance at the micro- and macroeconomic levels in relation to classical insurance is given in Table 3.1, and the economic essence of insurance is shown in Figure 3.1.

Table 3.1. The insurance importance at the micro- and macroeconomic levels

Source: Developed by the author on the basis of R. Azimov, 2021, Insurance in Uzbekistan: history, current state, challenges in the process of development, insurance of foreign economic activity, p. 168

The economic essence of insurance is revealed through its functions. In a modernized economy insurance must: at the micro level (the level of individuals and legal entities): implement risk, preventive, savings, controlling, investment functions. In addition, by insuring their risks, individuals and legal entities have the opportunity to effectively manage uninsurable risks.

Figure 3.1. Economic essence of insurance (Azimov, 2021)

The increasing complexity of the risk environment of individuals and legal entities in the context of economic modernization and numerous risk circumstances bring to an objective need for the use of insurance mechanisms to manage their risks, while the risks of the modernized economy are the basis for the emergence of insurance interests and relationships. The risks of a modernizing economy are divided based on the possibility to transfer risks to insurance into insurable and non-insurable risks. Insurable risks include those risks, which probability and damage amount in case of occurrence can be determined. In turn, non-insurable risks are those which probability and damage amount in case of occurrence cannot be determined, or which insurance is impossible due to the current legislation norms (Adamchuk, 2001).

For the stage of the country’s economy modernization it is typical a significant growth in the number and severity of man-made, financial, political and social risks. Moreover, their various combinations lead to the changes in the standard underwriting procedures and regulating the consequences of their implementation. And this, in turn, together with maintaining traditional approaches to insurance, can lead to a substantial increase in the insurance cost and thereby reduce its accessibility as a risk management tool.

Insurance is an essential element of the risk management system in terms of its significance and versatility of application (Shapkin, 2018, p. 544).

In a modernizing economy, the risk management system is of particular importance due to the serious complication of the risk environment and the need to take measures to reduce the consequences of the numerous risks occurrence. Risk management is a priority area for improving the efficiency of a legal entity as a whole, as well as one of the main directions for improving the quality of individuals’ life.

Risk management should be based on scientific knowledge and, ultimately, linked to the protection of property interests of a particular legal entity or individual; comprehensiveness (comprehensive consideration of available threats for their adequate assessment); continuity (the need for constant monitoring and control of risks in the changing risk environment); expediency (the economic effect of risk management should significantly exceed the cost of their implementation).The main processes of risk management are presented in Figure 3.2. It should be noted that these processes follow one from another, they have no clear hierarchical order and delimitation, they are characterized by strong mutual influence.

Figure 3.2. Main risk management processes (Azimov, 2021)

Risk identification and establishment of risk circumstances (risk identification) is a systematic process of collecting information (historical, theoretical, statistical, expert assessments, and etc.) to identify the main risks. In the process of risk identification, threats are identified and the nature of their occurrence impact on the insurance object is established.

The next risk management process when using insurance mechanisms is to determine qualitative and quantitative risk parameters (risk assessment). Risk assessment is a qualitative or quantitative process that links the occurrence probability and the severity of the consequences of occurrence of the risk accepted for insurance (Gurnovich, 2019). To assess risk, insurance companies in most cases use methods based on expert assessments or statistical studies. In the first case, we can talk about the method of individual assessments; it is used to assess new risks for which there are no reliable statistics or there is no way to compare the real risk level with the average risk level. In this case, the valuation is carried out based on the level of competence and knowledge of the expert and is often subjective. The use of this method is justified when it is necessary to insure new, rare risks having a high cost (Yuzvovich et al., 2020). In the second case, the average method and the percentage method are used. Meanwhile, to determine the quantitative characteristics of the risk and calculate the insurance premium amount, statistical data provided by the insured as well as statistical information available to the insurer on similar objects and insureds are used.

The result of the risk assessment is a quantitative risk measure expressed in the amount of the sum insured and the insurance premium, while the higher the risk degree, the higher the insurance premium amount. When using insurance mechanisms to manage the risks of individuals and legal entities, one of the calculation indicators necessary to determine the liability amount of the insurer under the insurance agreement (sum insured) is the amount of the maximum possible loss for the insured risks in their totality and for each individually. This indicator is also used by the insurer to calculate the amount of its own retention for reinsurance (Makarova, 2014, p. 230). In turn, the amount of the maximum possible loss is determined by the actual value of the insurance object, as well as the likelihood and severity of the consequences of the risk occurrence.

Reducing the likelihood and severity of the consequences of the occurrence of risks accepted for insurance to an acceptable level (carrying out preventive and depressive measures) is performed by the insurer at all stages of the validity period of the insurance agreement (insurance policy) – when signing the insurance agreement, during its execution and when settling the insurance claim – insurance indemnity payment or justified refusal (depressive measures mean measures aimed at reducing loss in case of insured event).

Risk control involves making decisions to reduce and/or accept risks. The goal of risk control is to lower risk to an acceptable level. The extent of risk control efforts should be related to the risk materiality. Decision makers can use various processes, including cost-benefit analysis, to understand the optimal risk control level.

It should be noted that even with effective risk control, insurance loss may occur due to the occurrence of risks that cannot be prevented or the loss amount from their implementation cannot be reduced. There are also risks for which carrying out preventive and depressive measures is not economically feasible. In the above cases, risk financing is necessary.

Risk financing is the payment of insurance premium calculated under the insurance agreement. Risk financing when using insurance risk management mechanisms for individuals and legal entities is more preferable since it is less expensive (Khamidulin & Mirsadykov, 2019).

The widespread introduction of insurance mechanisms to manage the risks of individuals and legal entities in the modernizing economy of Uzbekistan is prevented by such factors as: the adequacy of the insurance premium size for the risks accepted for insurance reducing the insurance availability for a wide range of potential insureds; lack of a national idea of ​​​​using insurance mechanisms to manage the risks of individuals and legal entities; risks of the insurer itself.

In turn, the insurer’s risks are divided into: risks of insurer’s insolvency and compliance risks. The insolvency risks of the insurer are internal risks of the insurance company, and compliance risks can be classified as external risks.

Based on the above, we accept the following hypothesis: 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.

Theoretical and Methodological Aspects of the Development of the Insurance Market of Uzbekistan

Analysis of various aspects of the theory of development of both the insurance market in general and sectoral insurance markets in particular is relevant from both a purely scientific and practical point of view. The empirical base accumulated over the years of independent development of Uzbekistan allows us to draw certain conclusions, however, without theoretical study of the issues of further development of both the insurance market in general and sectoral insurance markets in particular, it is impossible to implement a systematic approach to the modernization of the domestic insurance market.
The foundations of the theory of industry markets development are laid in the works of
E. Chamberlin and D. Robinson. They undoubtedly did a lot to reveal the nature of imperfect competition but all their explanations of this phenomenon were associated, firstly, with the characteristics of the company, not the industry, and secondly, they relied exclusively on the methodology of microanalysis of markets. In other words, all these studies were carried out strictly within the framework of the firm theory, while the theory of industrial markets requires analysis of the functioning peculiarities of the industrial organization.
The initial stage of development of the theory of industrial markets is associated with the activities of representatives of the Harvard School E. Mason and D. Bain who formulated the idea of direct connection between the structure of an industrial market, the behavior of firms operating in it and the performance of the market, which later became known as the Harvard paradigm.
Representatives of the Chicago school, including G. Demsets, D. Stigler, F. Knight and others, criticized the systematic approach for ignoring microeconomic models. They, on the basis of price theory, studied the problem of economic choice. Empirical observations of the actual behavior of market participants were replaced by theoretical postulates of the firm theory and price theory, the focus of which, instead of the issues of the firms’ specific behavior in specific conditions (in industry markets), was on the issue of the market industry structure influence on the resource distribution efficiency. Representatives of the Chicago School focused more on studying the problem of economic choice rather than on the industries’ characteristics. However, the results of their research allow us to consider individual participants in industry markets from the perspective of their optimization decisions.
Thus, there were two main approaches to analyze the organization of industry markets. The first, from the Harvard school, can roughly be called a systematic approach. This is an approach from the point of view of the “structure-behavior-result” paradigm. The second, the Chicago school approach, used microeconomic models to explain the behavior of firms and market structure.
A new stage in the development of the theory of industrial markets started in the late 1980s from a new empirical theory of industrial markets characterized by a convergence of both approaches, which was reflected in the works of a later period. Within the framework of the new empirical theory of industrial markets, a new paradigm was formulated – industrial markets develop taking into account internal characteristics (endogenously), while the decisive role of the company becomes one of the main ideas of the new paradigm.
The current stage of development of the theory of industrial markets is characterized by the use of new conceptual approaches in the analysis of industrial markets: Schumpeterian theory of innovative development, institutional and evolutionary theory and strategic management. Theoretically, it can be assumed that the higher the complexity level of the institutional organization of the industry market, the lower the business performance.
Taking into account the dynamic nature of industry markets, it has been established that the optimal approach for their study is a reproduction approach that synthesizes systemic and dynamic methods of analysis. This approach allows us to characterize the evolution of the industry market determined by the resolution of contradictions between the company and market conditions. It is proved that the direct cause of changes in the industry are changes in productive forces, and the direct driving force is the company. By changing, the company creates new conditions in the market, which being accumulated, cause qualitative transformations of the market itself, forcing it to adapt to the changed conditions in a new way.
Prospects for the development of theories of industry markets lie in the synthesis of evolutionary and neoclassical approaches which will combine the processes of evolution and statics, quantitative and qualitative changes, jumps and breaks; most importantly, explain the nature of transition processes related to technological innovations and institutional changes (reforms). It should be noted that in the modern theory of industrial markets, the state is an important and necessary agent of the market, and the active study of the state policy influence on industrial markets is more in the research focus, which is why the theory itself is often considered as the basis for the state industrial policy.
The analysis of theories of the development of industry markets made it possible to establish that in most of them, industry market is understood as a special structural element of the economy having its own development patterns; secondly, many aspects of the economic systems transformation continue to remain insufficiently studied; thirdly, the long-term practice of developing insurance markets in post-socialist countries is a solid empirical basis for a deeper theoretical study of the issues of the insurance market as an industry market of the country’s financial system and formulating proposals for solving them.
When studying the issues of development of the insurance market as an industry sector for the country’s financial market, most authors assume that this concept is self-evident and does not require additional definition. At the same time, the insurance market undoubtedly has a number of peculiarities compared to other market types, determined by the specifics of the insurance service itself.
Currently, there are several scientific definitions of the insurance market which, however, were given by the authors only in relation to solving their own scientific and practical problems. For example, prof. R. T. Yuldashev offers the following definition (Yuldashev, 2000): insurance market is a system of economic relations that arise in relation the purchase and sale of insurance coverage in the process of meeting public needs for insurance protection. A. K. Shikhov (Shikhov, 2000) proposes to consider the insurance market to be the sphere of specific economic relations that develop between insureds (insured persons, beneficiaries), who, due to the possible accidental occurrence of events unfavorable for their tangible and intangible values (benefits), need insurance protection of property interests, and insurers, ensuring it through the use of insurance funds for these purposes, formed from cash contributions (insurance premiums) paid by the insureds. There are definitions of the insurance market as a sphere of monetary (Skamai, 2020) or public (Turbina, 2003) relations where the object of purchase and sale is a specific product – an insurance service. In the book of the famous Russian insurance researcher prof. V.V. Shakhov it is defined that the insurance market is a special socio-economic environment, a certain sphere of economic relations, where the object of purchase and sale is insurance protection, and supply and demand for it are formed. At the same time, insurance companies are recognized as the primary element in the insurance market (Shakhov, 1997). Based on McConnell and Brew’s classic market definition (McConnell et al., 1995), M. S. Zhilkina (Zhilkina, 2002) points out that the insurance market is an economic mechanism connecting the interests of insureds and insurers in relation to insurance services. All of the above interpretations taken together reveal the basic socio-economic properties of the insurance market.
There are well-founded opinions about the need to include the insurance market in more general socio-economic categories identified in different ways by researchers. For example, there is an opinion about the insurance market inclusion in the so-called insurance industry which is understood as “social relations related to the establishment, organizational structure, activities, management of insurance organizations, as well as relations with state regulation of the activities of insurance companies and other subjects of the insurance market regarding insurance, determining the conditions and prerequisites for the use of insurance in economic relations”. (Turbina, 2003). The book by A. A. Zernov and A. N. Zubets (Zubets & Zubets, 1997) is devoted to an examination of the features of the national insurance system who understand by this term a third-level subsystem that is consistently included in the national financial and national economic systems.
It seems reasonable to join the opinion of Prof. L. A. Orlanyuk-Malitskaya, who believes that the insurance market is not only a “market for insurance services sellers” but a more complex adaptive system capable of self-organization and consisting of several subsystems and being itself part of larger systems. (Orlanyuk-Malitskaya L.A., 2004).
Taking into account the above analysis, our study adopted as a working hypothesis the thesis that the insurance market as an industry market is a set of insurance activities professional participants interacting in the technological, information, economic and managerial spheres. It is accepted that the insurance market is in the process of endogenous evolutionary development the driving factor of which is its inherent internal contradictions and should be studied as a system in motion.
Taking into account the fact that the insurance market is a renewable turnover of financial, labor, institutional and information resources, and in each circulation the initial conditions set its result, and the turnover itself becomes the initial conditions for the next turnover. As a method of researching the insurance market as an industry one, it can be used a reproductive approach that allows not only to combine systemic and dynamic analysis, but also to apply them on the basis of a dialectical research methodology allowing to reveal the sources and patterns of development of the insurance market based on internal motives and forces.
Promoting economic growth and development, the insurance market, its condition, structure, scale and variety of functions performed, in turn, are the reflection of the development of the country’s economy, the quality of its institutions, and the business climate. The performance of the insurance market as a whole and its segments, the demand for certain insurance products and services also depend on the level of well-being and income dynamics of citizens and businesses, trust to public and private institutions, security of property rights and other structural factors.
When starting to study the domestic financial market in terms of insurance relations, we were faced with a number of serious challenges. Firstly, both in the foreign and domestic literature, unfortunately, there are no works that would examine from a theoretical perspective the specific features of the functioning of financial markets in terms of insurance relations in a modernized economy. As a rule, such markets and institutions are viewed simply as a kind of “degraded copy” of the corresponding markets and institutions in countries with developed market economies: say, insurance companies function in every economy in approximately the same way, it’s just that in a modernized economy their size is smaller, they face several large risks, may use controversial methods of conducting their business, and etc. Such an approach, in our opinion, makes it difficult to identify the features of modernized financial markets; in addition, empirical studies and attempts to statistically test hypotheses encounter a narrow information base, determined by the scarcity of published statistical materials.
In this study, we focus on individual issues relating to the current state and prospects for the domestic insurance market development. Currently, the dynamics of the domestic insurance market is constrained by its orientation towards an extensive development way, while in global practice the orientation towards inclusive development prevails.
The insurance emergence is possible only in conditions of a sufficiently developed system of property rights, the legal system as a whole supporting the system of contracts (agreements). In addition to this necessary condition for the insurance emergence in society, it is important to ensure the inclusion of insurance in the set of rules and regulations arising from the customs and traditions accepted in society. At the same time, norms and rules are understood as behavior models or patterns that informally regulate the behavior of individuals and legal entities in certain situations. In this context, the term “insurance culture”, adopted in the socio-political literature on insurance, should be understood as a behavior model suggesting, in conditions of trust in professional participants in the insurance market, the desire to conclude an insurance agreement when insurance risks are identified, as well as constant monitoring of risks during life of an individual or legal entity.
Necessary conditions for the insurance development in the country are both the formation of a legal system adequate to modern times, supporting a system of contracts (agreements) and a system of property rights, and the establishment of informal rules and norms stimulating economic entities to consume insurance services. Such a system will constitute the institutional environment of the insurance market, while the institutional environment will contribute to the insurance market development only if there is a full set of relevant institutions. This is a necessary condition for the sustainable intensive development of insurance; in case of the growth in the paying capacity of the population and business entities this condition becomes necessary and sufficient. At the same time, growth in the paying capacity in conditions of insufficient and inadequate institutional environment of the insurance market to the development of the economy and finance can only lead to extensive growth by taking into account the insurance premiums growth supported by inflation and the introduction of new compulsory types of insurance, which can be observed in domestic practice and the practice of a number of post-Soviet states.
It should be noted that Western-style insurance began to develop in Uzbekistan with the arrival of Tsarist Russia to the region. Before this, the functions of protecting the population from losses were performed by the people’s hashar – a form of material mutual assistance in which everyone voluntarily participated in covering the loss of a particular person and this was considered a charitable deed.
In connection with the above, we consider it prudent to develop the domestic financial market in terms of insurance relations in two directions: classical insurance for part of the population and entrepreneurs conducting their business on the basis of internationally recognized standards, and national insurance using elements of hashar for part of the population and private and small businesses adhering to traditional principles, including those based on the Sunnah. Insurance in all existing and still possibly unknown to us types is a necessary element of the general cultural development of our society, and must take into account the entire spectrum of the mentality and traditions of the people, established socio-economic and other conditions.
Despite the fact that today insurance covers an increasingly wide range of insurance risks inherent in a modernizing economy, understanding the insurance essence in conditions of economy digitalization of the Republic of Uzbekistan requires the development of specific methodological approaches to its research.
Methodological aspects of insurance development in the context of modernization of the economy of the Republic of Uzbekistan are related to the main elements of the risk management process (Figure 3.3). The elements of the risk management process, with all their specificity, do not have exact boundaries. They are closely interconnected with each other and each element is not only subjugating, but also dependent in relation to the other element.
Risk identification is the systematic use of information to identify perils relevant to a risk question or problem description. Risk identification forms the basis for further steps in the risk management process. Risk identification is usually carried out by the insurer independently or with the special experts’ involvement (insurance surveyors). With their help, risks are identified and the nature of their impact on the insurance object is established.

Figure 3.3. Elements of the risk management process (Azimov, 2021)

After risk identification the by the insured and the insurer, the parties begin to agree on the scope of coverage. To do this, it is necessary to carry out the next stage of the risk management process – to assess its amount. Assessment (risk analysis) is a qualitative or quantitative process linking the likelihood of occurrence and severity of harm. Risk assessment compares the identified and analyzed risk with specified risk criteria. The result of a risk assessment is a quantitative risk measure or a qualitative description of the range of risk. If the risk is expressed quantitatively, numerical probability is used. Alternatively, risk can be expressed using qualitative descriptors such as “high”, “medium” or “low” which should be stated in as much detail as possible.

Risk prevention (control) is organizational and technical measures carried out with the aim of minimizing the loss amount when accepting a risk for insurance, during the agreement period and when settling claims (in case of insured event). Risk control involves making decisions to reduce and/or accept risks. The goal of risk control is to reduce risk to an acceptable level.

Risk mitigation focuses on the processes of mitigating or avoiding risk if it exceeds set (acceptable) level, however, the application of risk mitigation measures may lead to the introduction of new risks into the system or increase the materiality of other existing risks.

Measures to prevent the insured event occurrence and eliminate its consequences can be carried out by the insured and the insurer separately, as well as jointly. The complex of any activities must be commensurate with the expected results. Risk control costs borne by the insurer are divided into three parts: costs directly related to introducing risk control and loss prevention; inevitable losses that cannot be foreseen and prevented under all circumstances, including careful risk control measures; administrative costs related to risk control.

Despite the control efficiency, there are insured events that cannot be prevented or reduced. In addition, there are risks in which the costs of reducing the likelihood of insured events will be inappropriate since they will exceed the possible damage. In this regard, risk financing is necessary, which is the final stage of the risk management process. Risk financing is the provision of funds for self-insurance, mutual insurance and insurance to protect property interests in case of certain events. The economy modernization increases the likelihood of significant loss as the number of objects exposed to one or another risk increases. At the same time, the insurance technology development leads to improved underwriting and increase in the quality of pre-insurance examination ultimately affecting the insurance premium amount – it becomes comparable to the amount of potential loss.

Problems and Prospects of Using the Insurance Potential as a Factor of Economic and Social Stability in the Conditions of Modernization of the Economy of Uzbekistan

The insurance business, inherent to any economy operating on a market basis, has received significant incentives for intensive development in Uzbekistan in recent years. But at the same time there are many unresolved issues and challenges in the field of insurance introduction. It should be noted that the achieved level of insurance development in the country is extremely low for market economic conditions. According to experts, no more than 10% of insurable risks are insured in the country (in developed countries – up to 90%). The population of Uzbekistan is practically not covered by insurance; the main share of insurance premiums is generated by legal entities. This population attitude towards insurance is explained by the low level of trust in insurance organizations, the insufficient level of insurance culture and the presence of paternalistic sentiments among its significant part which brings to the conviction that the state is obliged to ensure the protection of their property interests in any cases (Azimov, 2021).
The low confidence level of the population of Uzbekistan in insurance is explained, first of all, by the reluctance, and in some cases the inability of domestic insurers to systematically and massively engage in insurance of risks of individuals, especially in rural areas, due to the low profitability of these operations. In addition, the lack of trust in insurance protection mechanisms among the population is due to the poor work quality of insurers in settling claims – insurance payments are often delayed or loss is not compensated in full.
The population coverage by various types of insurance protection is negatively affected by the age and gender composition of clients of domestic insurers; among clients of insurance companies, women make up less than 10%. The age composition of clients of domestic insurers is men born in 1985-1995, that is, aged 35-45 years, and women aged 40-50 years. The main client segment ensuring the insurance market development of Uzbekistan are middle-aged and older people having positive insurance experience during the Soviet insurance period; young people are practically not covered by insurance since most of them do not yet have appropriate assets to be insured. According to the data of the Central Bank of the Republic of Uzbekistan at the beginning of 2020, the main position of household expenditure in the Republic of Uzbekistan is the expenses for essential goods and consumer goods (Central Bank of the Republic of Uzbekistan, 2020).
In order to form an insurance culture among the population, domestic insurers need to develop and carry out not only commercial insurance advertising, but also social advertising aimed at explaining the insurance basics and the use of insurance as an element of the risk management system for individuals, especially among young people.
Today, the main way of selling insurance services to the public is through office sales and sales at the insured’s workplace, which also does not contribute to improving the insurance culture of potential insureds. Sales by the agent network, when insurance agent explains the advantages of using insurance during his presentation, have not yet become widespread when working with the public. The solution to this problem could be facilitated by creation of conditions for the rapid development of retail network for insurance products sale and advanced training of employees of insurance companies involved in the sale of insurance products to the population.
According to the Statistics Agency under the President of the Republic of Uzbekistan, in 2022, by industry, 9.1% of small businesses operate in agriculture, industry – 20.9%, construction – 11%, trade and food – 34.1%, cargo transportation – 5.2% and in other areas of activity – 19.7% (Statistics Agency under the President of the Republic of Uzbekistan, 2022). More than 62% of those employed in small businesses in the country are engaged in private entrepreneurship and only about 16% are from small enterprises and micro-firms, which are the main client base of insurance companies; in this case, they mainly turn to insurers to receive compulsory civil liability insurance: motor, employers, carriers and owners of high-risk objects, as well as to buy insurance policies for imputed insurance – collateral property insurance, borrower’s liability insurance, borrower’s life insurance in favor of the bank, and etc. Thus, private and small businesses do not actually use insurance mechanisms as an element of their own risk management system but use insurance as a means to access credit resources. Low financial literacy of representatives of private and small businesses, especially managers of farms and dekhkan farms, and insufficient understanding of the essence of insurance services limits the use of insurance by private and small businesses to protect their property interests.
Representatives of large and medium-sized businesses mostly buy imputed and compulsory types of insurance, or set condition for conclusion of a voluntary insurance agreement to reinsure risks to reinsurers with international rating not less than A (by the Standard & Poor’s rating agency or equivalent rating by AM Best, Fitch). This turns domestic insurers into suppliers of reinsurance premiums to the international reinsurance markets.
At the initial stage of reforming the domestic insurance market, the main emphasis was on the organization of large and reliable specialized insurance companies with the state capital participation. However, measures to specialize companies in the emerging insurance market did not justify themselves – Uzagrosugurta State Insurance Company (later transformed into Uzagrosugurta JSC) and Uzbekinvest EIIC (later transformed into Uzbekinvest EIIC JSC) are currently universal companies (agricultural risks insurance in the insurance portfolio of Uzagrosugurta JSC is less than 20%, the situation is similar in Uzbekinvest EIIC JSC – foreign economic activity risks insurance is less than one fifth of the gross premiums written).
At the same time, the share of insurance market taken by the companies with state participation has been regularly declining since 1997 – from 97% in 1997 to 31% by the end of 2022 (The Ministry of Economy and Finance of the Republic of Uzbekistan, 2022).
At the current level of insurance culture and solvent demand for voluntary insurance types, compulsory insurance types are a priority to protect the property interests of the population, business and the state and increase the insurance culture level in the country. In order to ensure the effective development of compulsory insurance in the Republic, it is important to adopt a framework law on compulsory insurance and laws defining how to carry out the specific types of compulsory insurance.
Compulsory insurance types defined by the law must ensure effective protection of the property interests of the population, business and the state with minimal expenses from budget funds. To do this, it is necessary to conduct inventory of risk objects, establish their value, and determine the risks against which insurance protection will be provided. Compulsory insurance should be based on the principle of forming insurance provisions to compensate for damage and pay for losses to the insured persons and other beneficiaries and exclude the possibility of insurance payments aimed at concealing facts of organizations mismanagement. The adoption of legal acts should be carried out on the basis of preliminary financial and economic study confirming the possibility of solving the problems of insurance protection in a mandatory form and on the proposed conditions. The main indicators of compulsory insurance in the Republic of Uzbekistan for 2018-2022 are shown in Table 3.2.

Table 3.2. Main indicators of compulsory insurance in the Republic of Uzbekistan for 2018-2022, %

Source: Developed by the author based on data from the Ministry of Economy and Finance of the Republic of Uzbekistan

The main directions for the compulsory insurance development in the near future are: the introduction of compulsory insurance types for objects exposed to significant risks and losses, for citizens and legal entities that have suffered significant loss as a result of natural disasters, accidents and catastrophes (real estate insurance against fires and earthquakes, liability insurance for provision of goods and services, insurance of certain types of professional liability, insurance of crops and replanting of priority agricultural crops); further development and improvement of existing compulsory insurance types, such as compulsory motor liability insurance, compulsory employers’ civil liability insurance, compulsory civil liability insurance for owners of high-risk objects.

The entrepreneurship development involves the use of liability insurance for the goods production, work performance, services provision, as a result of which harm may be caused to the third parties, as well as the implementation of professional liability insurance for specialists in the service sector such as arbitration managers, notaries, auditors, bank managers, financial consultants and etc.

The introduction of liability insurance for certain categories of producers of goods and work (services) will allow for effective control over their activities to ensure the protection of the rights of consumers, especially in those economic areas where there are no clear and effective mechanisms of state control and supervision (for example, in mortgage lending, real estate acquisition, leasing and pledging). The insurance development will have a positive impact on the entrepreneurial activity of citizens by providing them reliable insurance protection against business risks; in addition, the insurance development will help to reduce unemployment in the regions.

Mobilization of investment resources in the economy through insurance will require further development of insurance of financial and business risks, development of insurance technologies in the field of industrial, transport, construction and agricultural risks.

The size of the total authorized capital of insurance companies in Uzbekistan as of January 1, 2023 amounted to more than 1.8 trillion Soums (about 160 million US dollars), which is several times less than the assets of the average European insurance company. Over the period 1998-2022, the gross premiums written and insurance liability increased by 1381.1 and 3539.7 times, respectively, and the total authorized capital increased by only 470 times (Azimov, 2023).

From July 1, 2022, insurers providing compulsory insurance had to have a minimum authorized capital of 35 billion Soums (about 2.02 million Euros by the current exchange rate). In turn, insurers operating only on voluntary insurance must have a minimum authorized capital of 20 billion Soums (about 1.62 million Euros by the current exchange rate). Reinsurers carrying out exclusively reinsurance are required to have a capital of at least 45 billion Soums (2.8 million Euros by the current exchange rate).

It should be noted that previously the size of the authorized capital for insurers operating in the non-life insurance industry and the voluntary life insurance industry was established in the amount equivalent to 1.5 million Euros and 2 million Euros, respectively (Decree of the President of the Republic of Uzbekistan, 2011). At the same time, for compulsory insurance, the minimum authorized capital was established in the amount equivalent to 3 million Euros, and for companies engaged exclusively in reinsurance – in the amount equivalent to 6 million Euros.

Thus, as of January 01, 2022, for voluntary insurance, the size of the minimum authorized capital increased by 1.08 times, instead of the growth of the size of the minimum authorized capital for voluntary insurance in the life insurance industry there was an actual decrease by 1.23 times, for compulsory insurance types the reduction amounted to 1.5 times, and for exclusive reinsurance requirements are reduced by 2.1 times in terms of euros by the current exchange rate. Such a change in the requirements for the minimum amount of authorized capital of insurance companies does not correspond to the dynamics of changes in the gross premiums written and total insurance liability and can lead to a deterioration in the financial stability and solvency of domestic insurers.

To develop endowment life insurance types, it is necessary, as a matter of priority, to create an institute of independent professional actuaries and to provide legal support for the provision of actuarial services by actuarial organizations.

Voluntary medical insurance and voluntary accident insurance should become an important element of the “social package” provided by employers to their employees. In this regard, it will be necessary to improve the legislation regulating relations in these types of insurance, as well as the legislation on taxes and fees.

Further development of voluntary health insurance requires the formation of a legal framework taking into account the specifics of this insurance type and improvement of the rules governing the interaction of health insurance subjects and the specifics of taxation of health insurance operations.

Life insurance must play a vital role in pension reform. In the future, it is necessary to formulate a legislative basis for the insurance organizations activities being an element of the compulsory pension insurance system.

A representative of an insurance company, along with professional knowledge, must possess the basics of practical psychology and effective communication skills, he must convince a potential client of the necessity of insurance on the basis of reliable facts and arguments. Considering the insufficient level of practical training of specialists at the republic’s universities, retraining and advanced training of insurance company employees need to be more actively and systematically carried out by the insurance companies themselves. However, practically no work is being done in this direction; even the managers of most insurance companies have not undergone retraining and advanced training over the past few years.

The experience of Uzbekinvest company serves as an example, when in 2019 Insurance School was created for regional specialists. This made it possible to conduct lectures and practical classes on a weekly basis online by the company’s senior staff, as well as invited scientific and practical workers, including from abroad, attracting a large and interested audience. The organization of the Insurance School played invaluable role in improving the qualifications of management and sales personnel of the company’s regional network and led to a sharp with more than 3-fold increase in the volume of gross premiums written in the regions of the republic. This successful experience allowed us to move to the next stage in 2021 – the organize Insurance Academy for the company’s management, heads of departments of the parent company and heads of regional branches who are being trained under special program developed by international experts, both in Uzbekistan and outside the country – in Russian Federation, Czech Republic, Great Britain, Republic of Korea, Turkish Republic and Japan (Azimov, 2023).

In addition to training employees of insurance companies, it is necessary to introduce the system of unified certification of management personnel of insurance companies by the state supervisory authority.

One of the conditions for ensuring financial stability and solvency of any insurance company, along with the system of formed insurance provisions, paid-up authorized capital and tariff policy, is reinsurance. Reinsurance allows insurers with small assets to accept large and huge risks. No matter how large the assets the insurer has, it by itself, without reinsurance, will not be able to form a perfectly balanced insurance portfolio.

The local reinsurance market is currently on the rapid development and formation stage, and the following data indicate the prospects for its development. If in 2019 Uzbekinvest company collected insurance premiums worth 7.4 billion Soums for this type of insurance, then at the end of 2020, despite all the restriction difficulties due to Covid-19 pandemic, 95.0 billion Soums of insurance premiums were collected, with 13 times growth. In 2021-2022, this growth continued and amounted to 644.9 billion Soums at the end of 2022, which is more than 2.9 times more than in 2021 (Azimov, 2023).

In this regard, it should be noted that, by the Ministry of Finance initiative, domestic reinsurance (risk exchange) between domestic insurance companies is limited by the size of the authorized capital objectively leading to a significant outflow of reinsurance operations and foreign currency abroad in the form of high reinsurance premiums. To reduce the negative impact of this situation, the domestic insurance and reinsurance markets capacity should be increased allowing less risks to be transferred for reinsurance abroad. For this purpose, as a rule, either conditions and opportunities are created for local insurance companies to increase their authorized capital, or the state establishes in one form or another reinsurance company with sufficient capacity to meet the needs of the national insurance market.

World practice shows that mutual insurance is one of the important elements of the modern insurance market. With mutual insurance, property and other property interests of legal entities and individuals are insured through the creation of mutual insurance companies.

The mutual insurance necessity is determined, first of all, by the presence of a large number of risks that commercial insurers refuse to accept for insurance for various reasons: frequent losses, high values of the sum insured. The primary task in this area is the formation of an appropriate legislative and regulatory framework.

State regulation and supervision of insurance activities in the Republic of Uzbekistan does not fully meet modern realities, as a result of which we consider it appropriate to:

• increase reliability of the system of insurance mechanisms for protecting the property interests of individuals and legal entities by establishing uniform requirements and standards for insurance services provision, similar to those used in international practice, that are mandatory for all insurance activities professional participants. Unfortunately, the Regulations on Uniform Requirements and Standards for the Provision of Insurance Services for the Business Sector, approved by the Ministry of Finance of the Republic in 2008 are practically ignored by domestic insurers due to the optionality of their use; most private and small businesses remain without proper insurance protection;
• provide conditions for the accelerated formation of prudential supervision. It should be noted that to date there are no recommended methods for calculating insurance rates which can lead to unreasonable understatement of insurance rates; in addition, the existing system for forming insurance provisions is outdated and needs to be replaced with risk-based methods. The low level of actuarial work (42 insurance companies have only 5 certified actuaries), coupled with the lack of the necessary regulatory framework in the republic, leads to cases of dumping, lack of necessary insurance provisions and the risk of insolvency for individual insurers;
• take measures for the financial rehabilitation of domestic insurers, including mandatory capital increase and compulsory measures to manage their assets;
• establish qualification requirements for top management and leading employees of insurance activities professional participants in the republic and the requirement for mandatory improvement of their qualifications (at least once every three years) in certified educational institutions.

Most domestic insurance companies are vulnerable and do not have sufficient financial stability. There are many reasons – an outdated system of standards for the insurance provisions formation and placement, very mediocre risk management, incorrect business model, in particular tariffication and operational inefficiency. The current standards system cannot adequately assess the compliance of the assets and provisions formed by the insurers to assumed obligations.

To improve the efficiency of the ASB, it would be advisable to consider the experience of a number of post-Soviet states (Russia, Kazakhstan, and etc.), where similar insurance supervisory bodies are located in the structure of the Central Bank. Since insurance companies, as well as commercial banks, operate on the basis of taking financial risks from the third parties funds, they require strict prudential supervision which central banks are better specialized in from a professional point of view than ministries of finance. This would also allow for a synergistic effect in the insurance and banking sectors development and lead to an increase in the coverage of individuals and legal entities with comprehensive financial services.

In recent years, self-regulatory organizations of the insurance market of Uzbekistan are represented only by the Professional Participants of the Insurance Market Association of Uzbekistan (hereinafter referred to as the Association).

The Association was created in April 2007 by the initiative of the state. The main directions of its activities were established:

• studying the insurance market conditions, developing proposals to ensure its greater transparency, develop competition, increase volumes, expand the range and improve the quality of insurance services;
• providing assistance to potential foreign investors in investing into insurance sector of the Republic of Uzbekistan;
• carrying out active explanatory work among the population of the republic on insurance issues;
• improving the system of training and retraining of personnel for insurance, development of standards of professional ethics for insurance market professional participants” (Decree of the President of the Republic of Uzbekistan, 2007).

The Association carried out its statutory activities only in the first two years after its organization. In recent years, the Association has turned into an inert structure, the results of which are practically not felt in the domestic insurance market. To intensify the activities of the Association, it is necessary to reorganize it taking into account modern realities and strengthen the personnel.

In the above, we examined the main problems facing by the domestic insurance market in the process of its development, and it should be noted that the catching-up strategy for the insurance market development of Uzbekistan did not fully justify the hopes associated with it. In our opinion, the main reason for this was the focus on extractive development without taking into account the national characteristics of the insurance development in Uzbekistan.

A comparative analysis of the current state of insurance in Uzbekistan and abroad made it possible to establish that in terms of basic macroeconomic indicators, the domestic insurance market significantly gives ground not only to economically developed countries, but also to developing countries. The state of insurance allows us to classify the insurance market of Uzbekistan as the so-called “soft” insurance market which is characterized by a relatively large number of participants and low insurance premium rates. At the same time, the level of insurance culture in the country is low, the population for the most part is not insured, its insurance needs are mainly satisfied through non-commercial mutual insurance on the basis of involvement. To increase the efficiency of using insurance, we consider it advisable to:

• develop a strategy for the inclusive development of domestic insurance market based on the national insurance model, taking into account the characteristics of Uzbekistan;
• raise the requirements for financial stability and solvency of domestic insurers in general and the size of authorized capital in particular;
• radically improve the underwriting of domestic companies;
• to provide conditions for accelerated digitalization of the domestic insurance business.

The execution of the above measures will allow to:

• ensure the solution of urgent issues in the development of insurance mechanisms for protecting the property interests of individuals and legal entities and strengthen the systems of state regulation and supervision in the insurance sector;
• raise the protection level of the state, enterprises and the population from the consequences of the occurrence of various groups of risks of the modernized economy and increase the quantity and quality of actually offered insurance products for risk management of individuals and legal entities;
• increase the investment attractiveness of the domestic insurance market in general and individual insurers in particular;
• create conditions for the accelerated development of life insurance and, accordingly, insurance mechanisms for managing the risks of individuals in a modernized economy;

ensure the formation and further development of a legal system for insurance protection of property interests of the population, enterprises and the state.

Conclusions on the Third Chapter

1. To use insurance as an effective method for 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 solvency and compliance risks management. The main function of compliance risk management in insurance is regulatory, i.e. ensuring compliance by the insurance company and its employees with established 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 state regulation system of insurance activities as an element of the risk management system for legal entities and individuals.

2. 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: the traditional Western form for the unorthodox part of the population and entrepreneurs and national insurance using elements of hashar for everyone else. Insurance in all existing and still possibly unknown to us forms is a necessary element of our society general cultural development, must take into account our people mentality, existing socio-economic, geographical, environmental, and etc. conditions.
3. To increase the efficiency of using insurance as an element of the risk management system for individuals and legal entities, we consider it appropriate:

• to develop a strategy for the inclusive development of domestic insurance market based on the national insurance model, taking into account the characteristics of Uzbekistan;
• to raise the requirements for financial stability and solvency of domestic insurers in general and the size of authorized capital in particular;
• to radically improve the underwriting of domestic companies;
• to provide conditions for accelerated digitalization of the domestic insurance business.

The execution of the above measures will allow to:

• ensure the solution of urgent issues in the development of insurance mechanisms for protecting the property interests of individuals and legal entities and strengthen the systems of state regulation and supervision in the insurance sector;
• raise the protection level of the state, enterprises and the population from the consequences of the occurrence of various groups of risks in the modernized economy and increase the quantity and quality of actually offered insurance products for risk management of individuals and legal entities;
• increase the investment attractiveness of the domestic insurance market in general and individual insurers in particular;
• create conditions for the accelerated development of life insurance and, accordingly, insurance mechanisms for managing the risks of individuals in a modernized economy;

ensure the formation and further development of a legal system for insurance protection of property interests of the population, enterprises and the state.