THEME 1. CONCEPT OF THE INSURANCE COMPANY MANAGEMENT Iryna Nyenno, Doctor of Economics, Odessa I.I. Mechnikov National University - презентация

1 THEME 1. CONCEPT OF THE INSURANCE COMPANY MANAGEMENT Iryna Nyenno, Doctor of Economics, Odessa I.I. Mechnikov National University

2 1.Terminology – cases of insurance business-processes 2.Management of captive and real insurers 3.Management of risk to financial stability. 4.Tasks for insurance conract claim calculations Plan

3 Financial Intermediaries Specialness in the Provision of Service are as follows: 1. Informamation costs and transaction costs are usually lower because f the economies of scale. 2. The ability to provide financial claims to hosehould savers with superior liquidity attributes and with lower price risk. 3. Financial institutions can better bear the risk of mismatching the maturities of their assets and liabilities. 4. Financial institution often viewed as the major and sometimes only source of financing for particular sector of the economy. 5. Financial institution has the ability to transfer wealth from one generation to another. There are four main financial stability measurement approaches defined by International Association of Insurers - simple factor based, risk factor based scenario based and principle based Source: Saunders, A., Cornett, M. M., & McGraw, P. A. (2006). Financial institutions management: A risk management approach. New York, NY, USA: McGraw-Hill.

4 Insurance company management is an effective organization of the business process management system of an insurance company whose strategic goal is to ensure the financial stability of the insurer in providing insurers with effective insurance coverage. Classification of insurers from the purpose of creation: Real insurers (life and non-life) Captive insurers The financial stability of the insurer today is considered the main characteristic of its activities. The achievement and maintenance of the financial stability of the insurer is also through the planning of insurance premiums, improvement of the structure of the insurance portfolio and investment activity. Insurance management

5 Italian Insurance Market 2017 Source: Figures/2017/Italian-Insurance-in-figures-2017.pdfhttp:// Figures/2017/Italian-Insurance-in-figures-2017.pdf

6 Captive insurance companies A captive insurer is usually defined in the insurance literature as "a wholly-owned insurance subsidiary with a primary function of insuring the outstanding exposures of the parent organization. The captive might be generally defined either as an insured controlled carrier or as a carrier owned by interests owning or controlling the risks insured therein. Many captive insurance companies are not incorporated in foreign jurisdictions. These captive insurers could not file consolidated returns with their parent corporation. Many captive insurers are incorporated in countries which impose little or no income taxes.Thus, these captive insurers relinquish some of the advantages of tax accounting for insurance companies Source: Barker, W. B. (1986). Federal income taxation and captive insurance. Virginia Tax Review, 6(2),

7 Holdings and non-public industrial companies Using a chain to optimize taxes and withdraw money abroad through insurance companies can be financial-industrial groups that are able to build a reinsurance scheme to offshore insurers Affiliated to the state officers companies Due to insurance, budget funds are transferred in favor of officials and heads of state enterprises that have signed an agreement with an insurance company Medium enterprise Business urgently needs cash to obtain business documents (bribes) and wages of wage earners (wages in envelopes), with such enterprises being able to group together for work with schemes

8 composition and structure of the tariff rate; composition and cost structure, company strategy for costs; warranty funds of the insurer; insurance company's strategy for net profit; marketing policy and management of the insurance company. The main business processes of the insurer include: the process of preparing and signing an insurance agreement (including billing); reinsurance process; investment process; the process of settlement of losses. Source: Zariņa, I., Voronova, I., & Pettere, G. (2018). Assessment of the Stability of Insurance Companies: The Case of Baltic Non-Life Insurance Market. Economics and Business, 32(1), Financial stability factors

9 Source: stabilita/2018-2/en_FSR_2_2018.pdf?language_id=1https:// stabilita/2018-2/en_FSR_2_2018.pdf?language_id=1

10 RISKS TO FINANCIAL STABILITY – FINANCIAL STABILITY REPORT – ITALY The insurance sector is especially exposed to sovereign risk, given the investments needed to cover liabilities towards customers and the high share of government securities in these companies portfolios. On average, solvency ratios are well above the minimum requirements; they have, however, recorded a significant reduction. Further large drops in the prices of government securities could have significant effects on the solvency position of insurers As in the main European countries, for Italian companies the risks stemming from investment activities remain predominant. Given the significant share of private sector debt securities in the asset portfolios of insurance companies the risk of a widening spread between bond yields and the risk-free rates represents the biggest risk17 and in 2017 absorbed 45 per cent of the capital requirement for market risks. Source: stabilita/2018-2/en_FSR_2_2018.pdf?language_id=1https:// stabilita/2018-2/en_FSR_2_2018.pdf?language_id=1

11 AVERAGE ADJUSTER - a specialist who, on behalf of the insurer (sometimes with the involvement of an expert surveyor) determines the cause, nature and extent of losses and issues an emergency certificate. He can take part in the conduct of preventive measures, as well as the elimination of the consequences of the insured event. Sometimes the insurer may instruct the insurance company to consider claims of the insured. SURVEY REPORT - a document issued to the insured by an emergency commissioner, agent or other authorized representative of the insurer on the basis of the consequences of the inspection of the damaged property. In A. s. possible causes, the nature and extent of the damage caused by the insured event are recorded. A. s. There is a reason for the insured to make a claim to the insurer. However, A. s. cannot be considered as an unconditional proof of liability of the insurer. AGENT OF INSURANCE - a physical or legal person acting on behalf of the insurer and within the limits of powers granted to him. 1. Basic terms and determination of insurance management

12 ACQUISITION - conclusion of new insurance contracts. It is believed that acquisition activities are normal when the number of new insurance contracts exceeds the number of contracts, which expired. INSURERS ASSETS - the insurer's funds invested in securities, purchased real estate, other tangible assets placed on accounts with banks. The sources of these funds are the statutory fund, insurance reserves and other liabilities. On the magnitude and structure of A. s. the solvency of the insurer depends. ACTUARY - an officially authorized person, a specialist who, with the help of methods of mathematical statistics, calculates insurance rates. A. is responsible for ensuring that insurance funds are sufficient at a time when companies will have to meet their obligations under the policies. ACTUARIAL CALCULATIONS - a system of mathematical and statistical methods for calculating insurance rates. The methodology of an algorithm is based on the application of the probability theory, demographic statistics, and long-term financial calculations of the insurer's investment income. A. r. Make it possible to determine the share of each insurer in the creation of an insurance fund. 1. Basic terms and determination of insurance management

13 ACCEPTANCE - agreement of one side of insurance relations (the insured or the insurer) with the proposals of the other party on the conclusion of an insurance or reinsurance contract on the terms corresponding to these proposals. UNDERWRITER - a) in insurance - a highly skilled and responsible person of the insurer, authorized to perform the necessary procedures for consideration of proposals and acceptance of risks for insurance (reinsurance); A. draws up insurance policies, assesses the risk, determines the rates of premiums and other insurance conditions; b) in a banking business - a person who guarantees the issuer of placement on the market of his bond loan or a block of shares on agreed terms for a special remuneration; c) the broker in securities transactions. ANNUITY - an insurance contract for pensions or rent, which is paid a specified annual amount of income during the life of the annuity instead of prepayment of a one-time insurance premium. 1. Basic terms and determination of insurance management

14 ASSISTANCE - a list of services (under the insurance contract), which are provided at the right time through medical, technical and financial assistance. Widely used in foreign countries to ensure the safety of travelers traveling abroad (in case of illness, accident). BENEFICIARY - a person in whose favor the insured has entered into an insurance contract, the third party - the beneficiary of the insurance policy. INSURANCE BROKER - a legal entity or individual authorized to act as an intermediary between insurers and insurers. B. s. acting on behalf of and on behalf of the insured. His tasks include the search for an insurance company (companies), where it would be possible to place the risk under the optimum conditions in terms of the insurer's reliability and the amount of insurance premiums. In the case of an insurance case, B. s. provides assistance to the policyholder in obtaining a refund, and is also involved in the placement of risks transferred to reinsurance. Payment for services B. с. carries out the insurer. 1. Basic terms and determination of insurance management

15 GROSS PREMIUM - the total amount of insurance premiums, determined on the basis of the sum insured and gross rate (insurance rate). GROSS RATE - the amount of the specified net bonus and load. These gross-rate components have different purposes. A non-residential unit should provide for the reimbursement of expenses for covering losses from the risk types of insurance and for life insurance payments. The load is intended to secure the financing of the insurer's expenses for the conduct of business and to receive planned profit from insurance operations. MUTUAL INSURANCE is a form of insurance coverage in which insurers with related property interests and risks are simultaneously members of an insurance company. V. s. - long-term agreement between a group of individuals (legal and physical) about indemnification in certain shares of losses to each other in case of occurrence of insurance cases. Now vs. has a significant distribution in foreign countries, especially in personal insurance, insurance of agricultural and maritime risks. V. s. in Ukraine has not yet received proper development. 1. Basic terms and determination of insurance management

16 AVERAGE ADJUSTER - a specialist in the field of maritime law, which calculates the distribution of costs for a general accident between the ship, cargo and freight. INSURED - a person who takes part in personal insurance, the object of insurance which is life, health and ability to work. 3. can be simultaneously and the insured. 3. has the right, in cases provided for in the contract, to receive a stipulated amount of insurance or payment of a smaller amount. CLAIM - the insurance term has several meanings. Among them: a) loss (damage), subject to reimbursement by the insurer; b) the fact of an insured event (implementation of insurance risk); c) the case containing the insurer's documents on a particular insured event, confirming the justification of the payment. CAPTIVITY INSURANCE COMPANIES are companies created by industrial, commercial, banking and other entities to meet their insurance service needs. This makes it possible to achieve savings on insurance premiums. K. s. K. can do without intermediary services. 1. Basic terms and determination of insurance management

17 COVER NOTE - a certificate of insurance issued by the broker to the policyholder to confirm the conclusion of the insurance contract with the list of insurers. K. s. is not legally binding, serves only reference information. In due time, the broker must hand over to the policyholder the policy. K. s. also applies in reinsurance, where it can legally force and replace the blind. OBJECT OF INSURANCE - the specific property interest of the insured or insured person (property, liability to a third person, life and health, etc.), which may be harmed by natural disaster, accident or other insured event. REINSURER - an insurance organization that accepts objects in reinsurance. A company that carries out exclusively reinsurance operations is called Professional Reinsurers 1. Basic terms and determination of insurance management

18 REINSURANCE is an operation between two insurance companies, in which one of them (the assignor) transfers a part of the risk under its agreement with the insurer, to another company (reinsurer) on its behalf for a certain fee. P. allows to reduce the large risks by dividing them between two or more insurers, which contributes to the balance of the insurance portfolio of each of them. Thanks to P., the financial reliability of insurers increases, their overall capacity to increase the volume of insurance services increases. P is optional (by separate agreements) and contractual (obligatory). The latter obliges the assignor to transfer to the reinsurance within the defined amount all risks, the nature and extent of which is determined by the terms of the contract. There are two forms of P. - proportional and disproportionate. REGRESS - the insurer's right to nominate within the limits of the insured's actual payment of the damage / claim to a third party that is due in the insured event in order to obtain compensation from him for the damage caused. 1. Basic terms and determination of insurance management

19 INSURANCE PREMIUM - the insurer's fee for the fact that he pledged to indemnify the policyholder in the event of an insured event material damage caused to the insured property or to pay the insured amount upon occurrence of certain events. Cases are paid once before the entry into force of the insurance contract or from time to time in the prescribed period. The size of a cabin depends on the insurance tariff (gross rate) and the sum insured, the insurance period, and sometimes some other factors. INSURANCE SUM - the limit of the insurer's monetary obligations in respect of indemnification to the insured (insured) of the losses caused by the insurance event. Pp. for property insurance should not exceed the cost of the object. With the voluntary life insurance of S. s. not limited 1. Basic terms and determination of insurance management

20 INSURANCE AGENT - a trusted physical or legal person who, on behalf and within the limits of the powers provided by the insurer, makes offers to the insurer regarding the insurance of risks and performs some operations for servicing insurance contracts. S. a. can engage in this activity full time or work part-time. Sometimes S. a. can execute mediation orders of several insurers. S. a. receives a commission depending on the number and amount of signed contracts. 1. Basic terms and determination of insurance management

21 INSURED EVENT - a natural disaster, an accident or other event, in which the insurer is obliged to pay the insurer (insured, beneficiary) the insurance indemnity or insurance amount. List S. v. provided by the insurance rules, insurance contract or current legislation. INSURANCE DAMAGE (loss) - damage caused to the policyholder as a result of the insured event. INSURER (insurer) - an organization that, for a fee, undertakes to compensate the insured or the persons whom he has noted for the damage caused by the insurance event. INSURED - a legal or able person who has entered into an insurance contract (or is in accordance with the current legislation), has paid the due contributions and has the right, in the event of an insured event, to obtain compensation within the insured liability or the sum insured specified in the policy. 1. Basic terms and determination of insurance management

22 INSURANCE is an economic relationship in which the policyholder provides himself or a third person with the payment of a monetary contribution in the event of an event determined by the contract or by law, the amount of payment by the insurer, which holds a certain amount of responsibility and, for its maintenance, replenishes and effectively places reserves, carries out preventive measures to reduce the risk, if necessary, reinsure a part of the latter. FRANCHISE (deductible, franchise) - part of the loss provided for by the contract, which in case of an insured event is not reimbursed by the insurer. Distinguish conditional and unconditional F. Conditional F. testifies the right of dismissal of the insurer from liability for damage, if its size does not exceed the size of F., and the damage is subject to full compensation if its size exceeds F. Unconditional F. shows that the liability of the insurer is determined by the size of the damage minus F. 1. Basic terms and determination of insurance management

23 Task 1 The entrepreneur may insure his property for a term of one year for the amount of EUR. Insurance premium rate - 3% (option 1). Under the option two of insurance contract, a franchise amounting to EUR is provided. Subject to the availability of a franchise in the contract, the policyholder has a discount of 40%. The actual loss of the insured occurred EUR. Calculate the size of the insurance premium and insurance claim. Would it be more profitable to accept the franchise? Tasks

24 Task 1 - solved The entrepreneur may insure his property for a term of one year for the amount of EUR. Insurance premium rate - 3% (option 1). Under the option two of insurance contract, a franchise amounting to EUR is provided. Subject to the availability of a franchise in the contract, the policyholder has a discount of 40% to the tariff. The actual loss of the insured occurred EUR. Calculate the size of the insurance premium and insurance claim. Would it be more profitable to accept the franchise? Option 1 Financial Result 1 = – = Option 2 Financial Result 2 = – 4000 – 5400 = 7600 Tasks

25 Task 2 Under the property insurance contract, an insurance case has occurred. The insurance sum is USD. oh., the sum of real damage – USD. What methodology for calculating the insurance indemnity is more favorable to the policyholder? a) deductible - 2% of the sum insured, tariff - 3%. b) franchise - 4% of the amount of the insurance case, the tariff - 4%. c) franchise - 0%, tariff - 7%. Tasks

26 Task 2 - Solved Under the property insurance contract, an insurance accident has occurred. The insurance sum is USD., the sum of real damage – USD. What methodology for calculating the insurance indemnity is more favorable to the policyholder? a)franchise - 2% of the sum insured, tariff - 3%. Financial result A = – – 3000 = USD b) franchise – 4% of the volume of the insurance accident, the tariff - 4% Financial result B = – 800 – 4000 = USD c) franchise - 0%, tariff - 7%. Financial result C = – 7000 = USD. Tasks

27 Task 3 How much will be the sum of the insurance claim for the first- risk system and proportional system for the car, which was insured for the amount of EUR The cost of the car – EUR. The real damage to the insured in connection with the accident of the car amounted to EUR. a) EUR; b) EUR; c) other. Tasks

28 Task 3 - Solved How much will be the sum of the insurance claim for the first-risk system and proportional system for the car, which was insured for the amount of EUR The cost of the car – EUR. The real damage to the insured in connection with the accident of the car amounted to 43, 3 thousand EUR. a) EUR; b) EUR; c) other. First-risk system – EUR Proportional system - ( / )x = EUR Tasks

29 Task 4 How much will be the sum of insurance claims under the system of proportional liability if the value assessment of the object of insurance – million EUR, the insured sum million EUR, damage caused to the policyholder due to the insured event million EUR a) 1.05 million EUR; b) 2.05 million EUR; c) 1.75 million EUR; d) other. Tasks

30 Task 4 - Solved How much will be the sum of insurance claims under the system of proportional liability if the value assessment of the object of insurance – million EUR, the insured sum million EUR, damage caused to the policyholder due to the insured event million EUR a) 1.04 million EUR; b) 2.05 million EUR; c) 1.75 million EUR; d) other. (1.4\2.35) x 1.75 = 1.04 Tasks

31 QUESTIONS TO THE SEMINAR 1.What kind of insurance companies are resented in the market? 2.What is the distinction between Insured and Beneficiary of the insurance claim? 3.What is the distinction between insurance nd reinsurance. Give the total amount of insurance and reinsurance volume in Italy for the 2017 year from ANIA report. 4.List the main business-processes of the insurance company. Explain each of them. 5.What are the reasons for reinsurance? 6.What is the distinction of the captive insurance companies from other insurers?