INVESTMENT ACTIVITY OF THE INSURER Iryna Nyenno, Doctor of Economics, Odessa I.I. Mechnikov National University

An important aspect of achieving financial sustainability is the insurer's investment activity. The best way to place insurance reserves is to make an investment strategy. In countries with a well- developed market economy and strong competition, insurance companies are not aiming to receive large profits from insurance activities. The main task of insurance companies is to maximize the insurers and as a result of the collected insurance premiums in order to invest. And in this regard, the insurance company is a participant in the investment process and is forced to know all the subtleties of its market. This is the other side of the investment market, where insurers can act not as investors but as subjects of the insurance market, that is, to insure investment risks for the development and strengthening of investors' positions. This aspect of insurance management is important to consider as an extension of the sphere of influence on the insurance market. Investment activities of insurers

The freedom of action of the insurer in the field of investment and financial activities is directly related to the source of funds used for investing. The insurer has at its disposal two groups of funds: 1) own funds in the form of authorized capital (capital), special and reserve (excluding insurance) funds, free reserves, retained earnings; 2) attracted funds in the form of insurance reserves. Investment activities of insurers

The investment of funds belonging to the first group is carried out by the insurer in accordance with the defined business development plan. Particular attention deserves the formation of an authorized fund of insurers. In particular, the Law of Ukraine "On Insurance" requires the formation of an authorized fund of a newly established insurer or an increase in the authorized fund of an existing insurer at the expense of contributions only in cash. The only exception to this rule is contributions to the statutory fund of the insurer in the form of government securities. The law permits such contributions within the limits of 25% of the total authorized capital stock. Thus, it refers to the indirect incentive to form up to 25% of the authorized capital at the expense of government securities. Restrictions on the total amount of the insurer's contributions to the statutory funds of other insurers of Ukraine (no more than 30% of its own authorized capital, including a contribution to the statutory fund of a separate insurer - no more than 10%) means regulation of financial investments into corporate rights. The prohibition to form a statutory fund for intangible assets makes it impossible to invest its funds in these types of assets. Investment activities of insurers

Investing in insurance reserves is tightly regulated. Thus, the limited ability to receive certain types of income. Regulation is due to the fact that these funds are not property of the insurer, so he must manage them rationally. The amount of these funds corresponds to the volume of insurance liabilities of the company. In order to be able to fulfill obligations to policyholders at any time, the insurer should keep insurance reserves in diversified, profitable, reliable assets characterized by high liquidity levels. Investment activities of insurers

The insurance company, in accordance with the current legislation, has the right to make both capital and financial investments at the expense of insurance reserves. However, capital investment opportunities are limited to the right to purchase real estate. Other types of capital investments for placement of insurance reserves are not provided by the legislation of Ukraine. The insurer's opportunities for financial investment are much more diverse. However, such investments, when it comes to insurance reserves, should be non- direct, but portfolio-based. This means that the insurer is not entitled to invest insurance reserves directly in statutory funds of legal entities in exchange for corporate rights issued by such legal entities. He has the right to make only portfolio investments, that is, to invest in the acquisition of securities. Investment activities of insurers

The investment activity of the insurer is the investment and placement of temporarily free funds that are its property or which it owns (manages). Revenues from this activity are secondary (derived) from primary incomes (collected insurance premiums), but in volume may significantly exceed the primary incomes. When collecting insurance premiums, the insurer accumulates the amount of primary incomes and has the right to dispose of them for a certain time. Investing in temporarily free funds of the insurance fund is based on the probability of the circulation of funds of this fund in the process of insurance activity, since from the moment of receipt of insurance premiums to the insurer's accounts to the payment of insurance compensation always one or another time. Investment activities of insurers

The duration of the period of insurance of insurers' funds with the insurer determines the duration of the insurance contract. The term of insurance can be significant, for example, in personal insurance contracts are concluded for several decades and even for life. In this case, the insurer creates reserve and reserve funds, whose funds for decades may not be used. All this creates an objective basis for the participation of insurers in investing their own and attracted funds (insurance funds) in the real sector of the economy. Investment activities of insurers

The insurer acts as an institutional investor, whose main function in a market economy is the attraction of client's free capital in exchange for a guarantee to the client to provide an insurance service. Often, it is the investment activity that provides the insurer with basic income that will offset his losses for the main (insurance) activity and expenses for the development of insurance activities. The directions of the insurer's investment activity depend on the nature of the funds that it uses for investing. These funds are represented by two groups of temporarily free funds: - the insurer's own funds; - means of insurance reserves (insurance fund) of the insurer. Investment activities of insurers

Own funds of the insurer - the authorized fund and retained earnings, special and reserve (except insurance) funds, free reserves - can be invested in any branch of the economy and in any form in accordance with the law. For example, the insurer's statutory fund has the following restrictions on its formation and placement: Own funds of the insurer

- the entire volume of the authorized capital must be formed only in monetary form; - when creating an insurer or increasing the registered authorized capital, it is allowed to form the authorized capital of securities issued by the state at their nominal value, but not more than 25% of the total authorized capital stock. It is allowed to form the share of authorized capital of securities issued by the state, namely, bonds of external and internal state loans, in case the conditions of issue of such bonds provide for mandatory repayment only in monetary form. At the same time, the amount received by the insurer upon the repayment of the bonds must be placed in accordance with the procedure established by the legislation for the formation of the authorized fund of financial institutions; Own funds of the insurer

- it is forbidden to use promissory notes, insurance reserves, budgetary funds and funds received in loans, loans and bail, as well as to make intangible assets for the formation of the statutory fund; - financial investments of the authorized capital into corporate rights of participation in the statutory funds of other insurers are limited to 30% of the authorized capital, in addition, the contribution to the authorized fund of one insurer cannot exceed 10% of the authorized capital. These requirements do not apply to an insurer who carries out insurance types other than life insurance if he has contributed to the statutory fund of the insurer who carries out life insurance. Own funds of the insurer

The funds of the insurance reserves (insurance fund) are the funds raised or linked by insurance liabilities, which are at the temporary disposal of the insurer. Therefore, the direction of investing in insurance reserves is strictly regulated, and the insurer must be extremely careful when placing them. The amount of insurance reserves that the insurer has formed must always be consistent with the amount of obligations that he has taken. In order to fulfill obligations of the policyholders in full and at any time, the insurer should place insurance reserves in such types of diversified assets with the highest rates of profitability, reliability and liquidity. Due to the free resources of the insurance reserves, the insurer can carry out: - Capital Investments; - financial investments. Insurance fund of the insurer

Limitation of the directions of investment of insurance reserves also depends on the types of insurance activities carried out and set separately for life insurance and separately for others, except for life insurance, risk insurance types, as will be discussed further. Capital investment restricts the acquisition of only real estate, in addition, the volume does not exceed 10% of the amount of available insurance (technical) reserves. There are no other types of capital investments for the placement of insurance reserves. The insurer's own funds can be invested in any branch of the economy and in any form according to the legislation: direct investment, participation rights and securities, real estate, etc. Capital Investments

Financial investments are portfolio-based, that is, the insurer is deprived of the opportunity to invest temporarily free funds of insurance reserves into statutory funds of other legal entities in exchange for corporate rights issued by these legal entities. Income from investment activity can be used both for compensation of losses from insurance operations, and for the development of an insurance business for the purpose of investing or for own consumption. This is the way to maintain the normal profitability of the insurer at the optimal market level prices for insurance services. Financial investments

The purpose of the investment activity of the insurer is: - achieving the highest possible level of safety; - getting the most possible profits; - liquidity provision; - optimization of the structure of assets with the structure of obligations. Investment activities of insurers

Insurers invest in using insurance reserves. At the expense of retained earnings, create free reserves. Free reserves are a part of the insurer's own funds, which is reserved for the purpose of ensuring the solvency of the insurer in accordance with the adopted methodology for the implementation of insurance activities. In order to ensure the fulfillment of the obligations of insurers for certain types of compulsory insurance, insurers may form centralized insurance reserve funds and bodies that manage these funds. The provisions on these funds are approved by the Authorized Agency. Sources for the creation of centralized insurance reserve funds may be deductions from the proceeds of insurance payments, contributions of the insurer's own funds, as well as income from the placement of centralized insurance reserve funds. Procedure for formation and distribution of insurance reserves: EU practice

The total amount of the reserve of long-term liabilities (mathematical reserve) is equal to the sum of reserves of long- term liabilities (mathematical reserves), which are determined on any date separately for each contract of life insurance. If the insured amount for a particular insurance object exceeds 10 percent of the amount of paid charter capital and formed free reserves and insurance reserves, the insurer is obliged to conclude a reinsurance contract. Insurers who have assumed insurance obligations in volumes exceeding the ability to execute them at the expense of their own assets must re-insure the risk of meeting those obligations with resident reinsurers or non-residents. In order to provide insurance liabilities for life insurance and health insurance, insurers form separate reserves at the expense of the receipt of insurance payments and income from investing the funds of the formed reserves for these types of insurance. Procedure for formation and distribution of insurance reserves: EU practice

Insurance reserves are created by insurers in order to ensure future payments of insurance amounts and insurance compensation depending on the types of insurance (reinsurance). Insurers are obliged to formulate and maintain a record of insurance reserves in the order and in amounts established by this Law, as per day. It should be established that insurers who have the right to conclude compulsory civil liability insurance contracts for land vehicle owners form and keep an account of the insurance reserve of losses that have arisen, but not declared, and the insurance reserve of loss fluctuations in a mandatory manner. Insurance reserves in volumes not exceeding technical provisions, and for insurance life insurance companies - mathematical reserves, are formed in the currencies in which they are responsible for their insurance obligations. Insurance reserves are divided into technical reserves and reserves for life insurance (mathematical reserves). Procedure for formation and distribution of insurance reserves: EU practice

The formation of reserves for life insurance, health insurance and compulsory insurance is carried out separately from other types of insurance. Insurers are obliged to keep records of insurance contracts and claims (claims) from policyholders regarding the payment of an insured sum or insurance indemnity in a form that will provide the information necessary to take into account when forming insurance reserves. The authorized body may establish the procedure and the form of keeping records of insurance contracts and claims (claims) of insurers regarding the payment of the sum insured or insurance indemnity. Procedure for formation and distribution of insurance reserves: EU practice

Insurers are obliged to form and keep records of such technical reserves by types of insurance (except life insurance): - unearned premiums (reserves of premiums), which include shares from the sum of insurance premiums (insurance premiums, insurance premiums), corresponding to insurance risks, whose validity has not expired at the reporting date; - losses, which include reserved unspent insurance amounts and insurance indemnities under known requirements of insurers, from which no decision on payment or refusal to pay the sum insured or insurance indemnity has not been made. Procedure for formation and distribution of insurance reserves: EU practice

The amount of unearned premiums reserves at any reporting date is determined depending on the share of receipts of insurance premiums (insurance premiums, insurance premiums) that cannot be less than 80 percent of the total amount of insurance premiums (insurance premiums, insurance premiums) received from the respective types Insurance in each month from the previous nine months (estimated period) and is calculated in the following order: Procedure for formation and distribution of insurance reserves: EU practice

- the share of receipts of insurance premiums (insurance premiums, insurance premiums) for the first three months of the calculation period is multiplied by one quarter; - the share of receipts of insurance premiums (insurance premiums, insurance premiums) for the next three months of the calculation period is multiplied by one second; - the share of receipts of insurance premiums (insurance premiums, insurance premiums) for the last three months of the calculation period is multiplied by three quarters; - the resulting products are added. Procedure for formation and distribution of insurance reserves: EU practice

In this case, the last month of the billing period will consist of the number of days at the settlement date. Insurers may decide to introduce from the beginning of the calendar year, in accordance with the methodology established by the Authorizing Agency, the formation and maintenance of such technical provisions for types of insurance other than life insurance: reserve of unearned premiums; reserve of declared but not paid losses; reserve of losses that have arisen but not declared; disaster reserve; loss fluctuation reserve. In order to provide insurance liabilities for life insurance and health insurance, insurers form separate reserves at the expense of insurance premiums and income from investing the funds of the formed reserves for these types of insurance. Procedure for formation and distribution of insurance reserves: EU practice

Life insurance reserves are not property of the insurer and must be separated from its other property. The insurer is obligated to account for the life insurance reserves on a separate balance sheet and keep separate accounts for them. Funds for life insurance reserves cannot be used by the insurer to repay any obligations other than those corresponding to the accepted obligations under life insurance contracts and cannot be included in the liquidation mass in the event of insolvency of the insurer or its liquidation for other reasons., and subject to transfer to another insurer with the consent of the insured and the insured person or subject to transfer to the insured person. Insurers are obliged to create and maintain a record of such life insurance reserves: long-term liabilities (mathematical reserves); proper payment of insurance sum. Procedure for formation and distribution of insurance reserves: EU practice

The amount of long-term liabilities reserves (mathematical reserves) is calculated actuarially for each contract in accordance with the methodology of forming life insurance reserves taking into account the growth rates of inflation. The method of formation of reserves for life insurance, the volume of insurance obligations depending on the types of life insurance contracts, as well as the minimum terms of life insurance contracts are established by the Authorized Agency. The Cabinet of Ministers of Ukraine may change the list of insurance reserves and the procedure for their calculations. The funds of insurance reserves should be placed taking into account safety, profitability, liquidity, diversification. Procedure for formation and distribution of insurance reserves: EU practice

In Art. 31 of the Law of Ukraine "On Insurance" provides a list of assets in which the technical reserves of insurance companies may be presented. It: - cash on current account; - bank deposits (deposits); - currency investments in accordance with the currency of insurance; - Real Estate; - shares, bonds, mortgage certificates; - securities issuing state; - rights to reinsurers; Assets in which the technical reserves of insurance companies may be presented

- investments in the economy of Ukraine in the directions determined by the Cabinet of Ministers of Ukraine; - bank deposits; - bank metals; - loans to insured citizens who have entered into life insurance contracts within the limits of the redemption amount at the time of issue of the loan and on the security of the redemption amount. In this case, the loan cannot be issued earlier than one year after the entry into force of the insurance contract, and for a term exceeding the period remaining before the expiration of the insurance contract; - Real Estate; - cash at the cash desk in the amount of the limits of cash balances set by the National Bank of Ukraine. Assets in which the technical reserves of insurance companies may be presented

Life insurance reserves can be used for long-term financing of housing construction, including individual developers, in accordance with the procedure established by the Cabinet of Ministers of Ukraine. Insurers are prohibited from performing other types of credit activity. The credit rating of the banking institution, in which the funds of the insurance reserves are placed, must correspond to the investment level according to the national scale defined by the legislation of Ukraine. The credit rating of securities issued in Ukraine, in which the funds of insurance reserves are placed, must correspond to the investment level according to the national scale defined by the legislation of Ukraine. Procedure for formation and distribution of insurance reserves: EU practice

It is interesting to compare with the Ukrainian requirements of the legislation of the "linked" category of assets, in accordance with German law, with a maximum percentage of safe capital: 1) mortgage lending to real estate in EU countries; 2) loans for securities in the Euro zone (1 and 2 together up to 35%); 3) loans issued to countries or local authorities within the Euro zone (up to 10%); 4) securities backed by assets of companies within the Euro zone (up to 7.5%); 5) loans for insurance policies; 6) shares, participation in companies registered on the exchanges of the country within the Euro zone (up to 35%); 7) real estate within the Euro zone (up to 25%); 8) bank deposits. Procedure for formation and distribution of insurance reserves: EU practice

The principle of congruence, according to European experts, when investing is as follows: 1. Assets should be invested in the currency structure of liabilities. 2. Real estate should be invested in the currency of this country; securities - in the currency of the market in which they are registered; Unregistered securities - in the currency of the country where the registered company is located. Procedure for formation and distribution of insurance reserves: EU practice

Investment: Asset allocation (Source: ANIA Insurance report 2017/2018)

1. Describe the procedure for the formation and accounting of the technical and mathematical reserves of the insurer. What is the difference between the unearned premiums reserve and the loss reserve? 2. What program is for the pre-investment restructuring of the business processes of the insurer? 3. What is the financial plan of the insurer, which requires the insurance supervisory authorities in case of non-compliance of the insurer with the solvency margin? 4. What obstacles hinder the development of Ukrainian insurers' investment? 5. Compare the investment asset allocation for Generali Insurance Group. Source: responsibilities/performance/how-we-report-vistahttps:// responsibilities/performance/how-we-report-vista Check questions to section