Azerbaijan is preparing a new insurance mechanism that could cover all or part of a bank borrower’s debt if the person loses a job under circumstances specified in the rules.
The Central Bank of Azerbaijan has drafted rules for the product, but they have not yet taken effect, according to Vesti Baku. The mechanism is expected to be introduced in the near future.
Who Could Be Covered
The insurance would be available to people working under a valid employment contract. Planned insured events include the liquidation of an employer or workplace, staff reductions, expiration of an employment contract, a change in company ownership and the reinstatement of a former employee under a final court ruling.
If an insured event occurs, a private insurance company could pay all or part of the borrower’s outstanding debt, subject to the policy terms. Voluntary resignation or dismissal for reasons not covered by the rules would not automatically qualify for payment.
Consumer Borrowers Would Retain a Choice
Banks would be required to offer job-loss coverage when issuing loans. For consumer loans, however, purchasing the policy is expected to remain voluntary, allowing customers to decline it.
The proposed product is separate from Azerbaijan’s state unemployment-benefit system. The risk would be transferred to private insurers, and the insurance premium would add to the borrower’s costs.
The final tariffs, maximum payment period, share of debt covered and exclusions have not yet been published. Those details will determine the product’s practical value for borrowers.
Possible Effect on Interest Rates
Central Bank officials have said transferring unemployment risk to insurers could reduce banks’ credit risk and capital requirements, potentially allowing lower interest rates in some lending segments.
Any reduction in the bank’s interest rate would have to be weighed against the insurance premium. Policies could cost more in industries with a higher risk of layoffs, meaning the borrower’s total cost would not necessarily fall in every case.
Source: Vesti Baku.