Evaluation and use of indicators of insurance companies investment activities

Transcription

1 Investment Management and Fnancal Innovatons, Volume 10, Issue 3, 2013 Olha Kozmenko (Ukrane), Vctora Roenko (Ukrane) Evaluaton and use of ndcators of nsurance companes nvestment actvtes Abstract The paper offers a scentfc and methodcal approach to the evaluaton of nvestment actvtes of nsurance companes, develops nvestment strateges based on the correlaton of nvestment characterstcs, studes the current level of Ukranan companes nvestment actvtes n the area of lfe nsurance and presents recommendatons regardng the choce of the proper nvestment strateges. Keywords: nsurance company, nvestment potental, nvestment rsk, effcency, nvestment actvty. JEL Classfcaton: G20, G22. Introducton The ntensfcaton of globalzaton, the ncreasng convergence phenomena n the fnancal sector, the emergence of new fnancal nstruments as well as the rapd development of nformaton technologes stmulate the nsurance market partcpants to mplement new approaches and methods for nsurance busness management. Today the man challenge for nsurance companes s not only n developng and promotng nsurance products, but also n the effcent allocaton of nternal and borrowed resources. The effcency of an nsurance company s performance, the strengthenng of ts compettve poston n the market, the growth of ts market value largely depend on the level of the nsurance company s nvestment actvty. In ths regard, we need to assess the nsurance companes nvestment actvtes and search for new opportuntes of ther ntensfcaton. A sgnfcant contrbuton to the theoretcal and methodologcal foundatons of organzaton of nsurance companes nvestment actvty was made by Heyman (2006), Rowland, Lebenberg (2010), Potter (2007), Chen (2007), Babbel (2001), Thomas (2005) and others. However, the ssue of quanttatve and qualtatve assessment of nsurance companes nvestment actvtes s not fully dsclosed n spte of ts relevance and practcal sgnfcance. The purpose of ths artcle s to assess the characterstcs of nsurance companes nvestment actvtes and to fnd ways of mprovng ther effcency. The nvestment actvty of nsurance companes means a purpose fully mplemented process of nvestng both nternal and borrowed funds (accordng to the legslaton) n the objects of the economy s real and fnancal sectors n order to obtan economc benefts for both the nsurer and the nsured (for contracts of voluntary lfe nsurance). Therefore, t s proposed to conduct the assessment of nsurance companes nvestment actvty takng nto account the nterdependence of ts followng complex characterrstcs based on ntegrated ndcators: nvestment Olha Kozmenko, Vctora Roenko, potental (characterzes the actual and potental nvestment resources), effcency of nvestment actvtes (defnes the realzaton of nvestment opportuntes) and nvestment rsk (reflects the real or potental lke lhood of occurrence of nsured events that may lead to a partal or complete loss of funds by the nsurance company n carryng out nvestment actvtes). We wll analyze n more detal the mechansm of assessment of ntegrated ndcators for each of the characterstcs of nsurance companes nvestment actvty. We begn our study of nsurance companes nvestment actvtes by assessng the nvestment potental. Havng analyzed the exstng approaches to the assessment of nsurance companes nvestment potental [1, 4, 8, 9], t should be noted that most authors consder t as the sum of nsurance reserves and equty captal. In our opnon, ths approach does not take nto account the complexty of nvestment potental, excludng the role of organzatonal and nformaton provson of the nvestment process. Moreover, these approaches do not consder the potental ncrease of nsurance companes nvestment resources. The elmnaton of drawbacks n the assessment of nvestment potental s possble through the use of taxonometrc method, whch s based on the matrx of normalzed data defnng a vector of the reference ndcator for a specfc company and comparng t wth separate ndcators. It s offered to carry out the assessment of nvestment potental n terms of three subsystems: the resource subsystem the level of equty captal ( 1 ), the level of net nsurance reserves ( 2 ), the level of debt burden ( 3 ), the rato of nsurance premums to nsurance reserves ( 4 ), the level of unproftablty of nsurance operatons ( 5 ), the share of rensurance n nsurance reserves ( 6 ), the organzatonal subsystem collaboraton wth Asset Management Company (AMC) ( 7 ), the average length of servce of executve offcers ( 8 ), the nformaton subsystem the level of automaton of busness processes ( 9 ), the level of nformaton dsclosure ( 10 ). Therefore, the determnaton of the level of an nsurance company s nvestment potental

2 Investment Management and Fnancal Innovatons, Volume 10, Issue 3, 2013 ncludes the assessment of the followng parameters: the actual level of the nsurance company s nvestment provson; the exstng potental of the functonng partcpants of the lfe nsurance market; opportuntes for ncreasng the nvestment potental wth regard to the exstng condtons of the nsurance market. The next step n assessng the nsurance company s nvestment actvty s the calculaton of ts effcency. The choce of ths ndcator s explaned by the fact that ts calculaton wll help determne the level of effectveness and the qualty of an nsurance company s nvestment actvty and to analyze the degree of ts dependence on nsurance actvtes. Thus, the nvestment and nsurance actvtes are nextrcably lnked n terms of the coverage of operatonal losses due to the nvestment ncome as a result of an ncreased competton n the market and the correspondng dumpng of nsurance servces prces, as well as the occurrence of cumulatve nsured losses. The effectveness of nvestment actvtes s assessed on the bass of parameters that characterze the sze of nvestment ncome (the share of fnancal resources n the structure of assets ( 1 ), the rato of nvestment ncome to total ncome ( 2 ), the rato of nvestment ncome to nvestment premums ( 3 )), the amount of nvested funds ( 4 ), the share of nvestments n the structure of fundng sources ( 5 ), the adequacy of nsurance reserves ( 6 ). A key element n the analyss of nsurance companes nvestment actvty s the degree of ther rsk acceptance. As nsurers perform the role of guarantors of fnancal stablty of ndvdual busnesses and the economy as a whole, there s a clear need n dentfyng nvestment rsks, ther constant montorng and quanttatve assessment, dentfyng the causes and fndng possble ways to mnmze ther negatve mpact. The man methods for the assessment of nsurance companes nvestment rsks nclude: 1. The scenaro approach based on the development of scenaros for varous segments of the fnancal market wth an ndcaton of the forecast prce and proftablty of fnancal assets wth the probablty of occurrence of each scenaro. 2. Stress testng a range of methods used to assess possble changes n the value of nvestment objects n case of fnancal emergences. 3. Methods of statstcal analyss, whch take nto account the value of fnancal assets n the prevous perods, makng t possble not only to evaluate the mpact of system factors, but also to determne the amount of potental losses for a certan perod of tme. The most common methods of statstcal analyss are: value-at-rsk (VaR) the monetary assessment of the mum possble losses from a fnancal nstrument n a specfed perod of tme. To measure the VaR the methods of correlaton analyss, hstorcal smulaton and Monte Carlo method are used; short fall-at-rsk (SaR) determnes the average sze of losses from nvestng n a specfc fnancal nstrument; the mean square devaton; the method of equvalent fnancal nstrument uses a substtute fnancal nstrument wth smlar characte-rstcs whle ts costs consdered a prce of rsk [12]. 4. The coeffcent approach, whch makes t possble to dentfy the factors of the realor potental loss of fnancal stablty due to the deteroraton n the qualty of the nvestment portfolo. In ths study, the assessment of the nsurance company s nvestment rsk s carred out n the context of the coeffcent approach by usng a set of ndcators the lqudty level (R 1 ); the rato of assets/labltes (R 2 ); partcpaton n the equty of subsdares (R 3 ); the rato between equty and debt securtes n the portfolo structure (R 4 ); the rato between the lqud and current assets (R 5 ); the level of nvestments proftablty (R 6 ), whch drectly or n drectly determnes the lkelhood of fnancal losses. The algorthm for the assessment of characterstcs of nsurance companes nvestment actvtes and ther qualtatve nterpretaton s presented n Fgure 1, where the followng parameters are used: P + the sum of probabltes for the market condtons n whch the value of the ndcator s hgher than average; the value of the correspondng ndcator; () the average value of the ndcator; N() standard value of the ndcator, the ndcator of devatons that are hgher than average. Thus, the assessment of characterstcs of the nsurance companes nvestment actvty s a lnk between the analyss and manageral decson-makng regardng nvestments. The proposed method allows to make a quanttatve and qualtatve assessment of the nvestment actvty characterstcs and to develop the necessary steps to enhance ts development. The study of modern economc processes makes t possble to defne the potental users who are nterested n recevng nformaton about the quanttatve assessment of characterstcs of nsurance companes nvestment actvty. Therefore, the key consumers of the above mentoned nformaton may be: state regulatory authortes (changng the rules on the dsposton of nsurance funds; ncluson of the results of assessment of nsurance companes nvestment actvty nto analytcal reports of state regulatory agences; defnng the ways of reforms and preparaton of recommendatons regardng the strategc development of nsurance companes nvest- 99

3 Investment Management and Fnancal Innovatons, Volume 10, Issue 3, 2013 ment actvty); fnancal nsttutons (assessng the potental for the expanson of the resource base of fnancal nsttutons due to the accumulaton of nsurance companes resources); nsurance companes (n determnng the possbltes to expand ther nvestment actvty; evaluatng the nvestment postons of competng companes n the market and the choce of nvestment strateges). Assessment of nvestment actvty of an nsurance company (IA) Investment potental () Investment effcency () Investment rsk (IR) Stage 1. Formaton of knowledge base or the assessment of ndcators that drectly or ndrectly affect the level of the structural element of nvestment actvtes (,, IR ) Stage 2. Normalzaton of the system of ndcators to brng them to comparable form (for stmulatng ndcators ( x j ) the method of natural normalzaton, for destmulatng ndcators ( x j ) the Savage method) x j xj mn{ xj} { x } mn{ x } j j P H j P; P ; P ; P ; P ; P P E H E ; E E R H R ; R ; R R ; 10 j 1 2; 3 j 1 2 5; 6 x j { xj} xj { x } mn{ x } P H P ; P P E H E ; E E j j j 3 5; 6 j 4 5; 6 R H j R 3 ; R 4 Stage 3. Introducton of reference quanttatve characterstcs of nsurance companes nvestment potental 3.1. Estmaton of the optmal value of the normalzed ndcator (P) for every group of nsurance companes (g) 3.2. Adjustment of ndcator for sem-quadratc devaton Stage 3. Estmaton of adjusted postve ( ) and negatve ( ) sem-quadratc devaton on the bass of the ndcators standard values 1 P n 2 ( x N ( x)) 1 a 1, f x > N ( x), a 0, f x < N ( x) P a 1 n 2 ( x M ( x)) P 1 a, f x > M ( x) 1 a 0,f < M ( x) x P a 1 n 2 ( x N ( x)) P 1 a 1, f x > N ( x) P a Stage 4. Quanttatve assessment of the structural element of nvestment actvty (,, IR) for the partcular nsurance company durng the analyzed perods IP m j 1 m j 1 P j P j P j P j IE m j1 m j1 E E j j IR Stage 5. Qualtatve assessment of the structural element of nvestment actvty (,, IR) based on the fuzzy logc toolbox (low, average, hgher than average andhgh level) X IP IE IR X mn ; X IP mn ; IP IE mn ; IE IR mn ; IR X X X mn X X mn X X mn X X mn X 3 ( X mn X ) 3 ( X mn X ) ; ; ; ; ; ; 4 X mn ; Fg. 1. Algorthm for assessng an nsurance company s nvestment actvty 100

4 Investment Management and Fnancal Innovatons, Volume 10, Issue 3, 2013 Consderng the system-formng role of nvestment actvty n the development of the nsurance busness as well as the strengthenng of the company s compettve postons n the market, ths paper offers a detaled study of strategc aspects n the development of nvestment actvtes. The proposed approach to the formaton of nvestment strateges s based not only on the research of nvestment envronment n whch the nsurance company operates, but also takes nto account nvestment opportuntes of the company and provdes for the achevement of a certan level of fnancal performance by the nsurance company durng the realzaton of ts nvestment strategy. In other words, the process of nvestment strateges selecton depends on the characterstcs of nvestment actvty (nvestment potental, nvestment performance and nvestment rsk) payng attenton to the nfluence of exogenous factors of the market envronment. Dependng on the combnaton of characterstcs of nsurance companes nvestment actvty t s proposed to use strateges to mantan the acheved nvestment poston (sustanablty strategy, lmted growth strategy) and to expand nvestment actvtes (gradual growth strategy and dynamc growth strategy) (Fgure 2). Notes: low level; ; hgher than ; hgh level. Fg. 2. Types of nsurance companes nvestment strateges The startng ponts of any strategy should be: the nvestment of resources nto nvestment objects must guarantee ther return wth approprate margn; the allocaton of funds should be carred out takng nto account the norms of nsurance legslaton; money flows of a company should be synchronzed wth fulfllment of nsurance labltes, etc. We wll analyze each of nsurance companes nvestment strateges. Sustanablty strategy s typcal for companes, whch wsh to mantan ther acheved nvestment postons and to preserve the exstng growth rates of companes value. Insurance companes that have chosen ths strategy possess a dversfed nvestment portfolo, an extensve use of nvestment potental and hgh economc effcency of nvestments. Lmted growth strategy can also be referred to n terms of mantanng the acheved postons. The man dfference between ths and the prevous strategy s the need to ncrease the volume of nvestment transactons, as the effcency level of nsurance companes nvestment actvty s very hgh. Consequently, the management of an nsurance company needs to focus on the use of the exstng nvestment potental. s recommended for nsurance companes wth low levels of nvestment actvty s effcency despte ther actve partcpaton n t. In ths regard t s necessary to change the exstng approach toward the formaton of nvestment portfolos, ncreasng the share of more proftable fnancal nstruments. 101

5 Investment Management and Fnancal Innovatons, Volume 10, Issue 3, 2013 Dynamc growth strategy s amed at mprovng all characterstcs of nvestment actvty and nvolves a radcal change of approaches to the organzaton of nvestment processes. Companes that have chosen ths strategy should redrect ther sgnfcant unused nvestment potental nto proftable nvestment projects. On the bass of characterstcs of nvestment actvtes and consderng the envronmental factors we can dentfy a set of nvestment strateges for nsurance companes makng t possble to determne the exstng and to develop a desred strategy. Along wth the mplementaton of the scentfc and methodologcal approach for estmatng the characterstcs of nsurance companes nvestment actvty and development of ther nvestment strateges t s mportant to check the adequacy of the proposed method n practce. In order to ensure the representatveness of the sample we selected 10 lfe nsurance companes of Ukrane, whch account for about 89.8% of collected premums: Prvate Jont-Stock Company GRAWE Ukrane Lfe Insurance, Prvate Jont-Stock Company ALIKO Ukrane, Ukranan Jont-Stock Insurance Company ASKA Lfe, Prvate Jont-Stock Insurance Company UNIQA Lfe, Prvate Jont-Stock Insurance Company Oranta Lfe, Prvate Jont-Stock Lfe Insurance Company Unversal, Prvate Jont-Stock Insurance Company KD-Lfe, Prvate Jont-Stock Insurance Company EKKO, Prvate Jont-Stock Company Ukranan Insurance Company Garant- Lfe, Prvate Jont-Stock Company Jupter Lfe Insurance. Durng the testng of the method to evaluate the nvestment actvty we have used the nformaton and statstcal bass for calculatng the ndcators n the context of a sngle nsurance company (n = 10) for the perod of On the bass of the proposed algorthm for the assessment of nvestment actvty (Fgure 1) we have conducted numerous mathematcal calculatons to assess the levels of nvestment potental, the effcency of nvestment actvty and nvestment rsk, the fnal results of whch are presented n Table 1 (see Appendx), where the followng symbols were used: lower lmt of the ndcator s threshold level, B upper lmt of the ndcator s threshold level. The analyss of the data presented n Table 1 suggests that the majorty of nsurance companes n Ukrane are effcent usng ther nvestment potental, puttng nearly a thrd of ther fnancal resources nto bank deposts. The study of the effcency of nsurance companes nvestment actvty n Ukrane shows the tendency toward the reducton of ts level snce 2008 because of the growth of nvestors negatve expectatons due to the constant structural dsbalances n the domestc stock market, the fallng proftablty of fnancal nstruments and hgher nvestments rsks. In these condtons, there s an objectve need to mprove the system of the assets and labltes management determnng the strategc vector of an nsurance company development. Dependng on the correlaton of nvestment actvty characterstcs t s proposed to form nsurance companes nvestment strateges for the perods of three years, n partcular, for the perods of and (Table 2). Table 2. Formalzaton of nvestment strateges for lfe nsurance companes n Ukrane for the perods and Company name 1.GRAWE Ukrane 2. ALIKO Lfe 3. ASKA LIfe 4. UNIQA Lfe 5. Oranta Lfe 6. Unversal 7. KD-Lfe Jupter 10. Garant-Lfe IP H IE C IR H Perod 1 ( ) Sustanablty strategy IP C IE H IR H IP BC IE BC IR C Lmted growth strategy IP BC IE H IR H IP BC IE H IR H IP C IE Y IR H IP C IE H IR H IP C IE C IR H Lmted growth strategy IP BC IE H IR C IP C IE H IR C Dynamc growth strategy IP H IE B IR H Perod 2 ( ) Sustanablty strategy IP C IE C IR H Lmted growth strategy IP C IE C IR C IP C IE H IR C Dynamc growth strategy IP C IE H IR C Dynamc growth strategy IP C IE H IR H IP BC IE H IR H IP C IE C IR H Lmted growth strategy IP C IE Y IR H IP C IE H IR C Dynamc growth strategy Accordng to the developed method the majorty of nsurance companes should follow the nvestment actvty s expanson strateges of gradual and dynamc growth. A detaled analyss of nvestment strateges wthn the desgnated groups made t possble to dentfy certan patterns: the strategc goal of companes n group 1 s to mantan the acheved nvestment postons; companes n groups 2 and 3 should actvely develop ther nvestment actvtes. Concluson Wth the ncreasng competton n the market the development of nsurance companes s possble through a realzaton of measures amed at boostng nvestment actvtes and determnng ther strategc drectons. In the process of development and selecton of nvestment strateges t s necessary to take nto account the level of nternal nvestment resources of nsurance companes as well as changes n external condtons of ther functonng, whch can cause the need to adjust the set goals and objectves. 102

6 References Investment Management and Fnancal Innovatons, Volume 10, Issue 3, Analz nvesttsonnogo potentsala strakhovych kompan Kazakhstana [The analyss of nvestment potental n Kazakhstan nsurance companes]. Vestnk of KazEU named by Ryskulov T., No. 4, Babbel D. (2001). Asset/lablty management for nsurers n the new era: focus on value / D. Babbel, Journal of Rsk Fnance, 3, p Chen X. (2007). Prudent man or agency problem? On the performance of nsurance mutual funds /. Chen, T. Yao, T. Yu, Journal of Fnancal Intermedaton, 16, p Godunok K.U. Investtsony potentsal strakhovych kompan [Investment potental of nsurance companes]. Naukov zapysky NaUKMA: Ekonomchn nauky, Vol. 120, 2011, pp Heyman W.H. (2006). An nvestment management methodology for publcly held property/casualty nsurers / W.H. Heyman, D.D. Rowland, Journal of Appled Corporate Fnance, 18 (1), p Insurance guarantee schemes n the EU. Comparatve analyss of exstng schemes, analyss of problems and evaluaton of optons [Electronc resource]/ European Commsson DG Internal Market and Servces. November Access mode: 7. Lebenberg A.P. (2010). The demand for lfe nsurance polcy loans / A.P. Lebenberg, J.M. Carson, R.E. Hoyt, Journal of Rsk and Insurance, 77 (3), p Mazanova E.V., Tmofeeva T.V. Metodcheske osnovy statstchesko otsenk urovna nvesttsonnogo potentsala strakhovych kompan Ross [Methodologcal bass of statstcal evaluaton of level of nvestment potental n Russan nsurance companes]. Izvestya Orenburzhskogo gosudarstvennogo agrarnogo unversteta. Orenburg: OGAU Publshng Center, 2007, No Mukhna O.V. Tendents formuvanna nvesttsynogo potentsalu strakhovogo rynku Ukranu [Tendences of formaton of nvestment potental n Ukranan nsurance market]. Collecton of scentfc papers of Fnancal- Jurdcal Academy, 1, 2011, pp Potter S.W. (2007). The determnants of prvate debt holdngs: Evdence from the lfe nsurance ndustry / S.W. Potter, Journal of Rsk and Insurance, 74 (3), p Thomas S. (2005). Asset/Lablty Management and Enterprse Rsk Management of an Insurer [Electronc resource] / S. Thomas, Journal of Investment Management, Vol. 3, No. 1, Access mode: papers.cfm?abstract_d= Vasyl ev V.A., Letchkov A.V., Lyaln V.E. Matematcheske model otsenk upravlena fnansovym rskam khozaystvuushchch sub jektov [Mathematcal models of asessment of fnancal rsks management n economc enttes]. Audt and Fnancal Analyss, No. 4, 2006, pp Zakon Ukranu Pro zbr ta oblk ednogo vnesku na zagal noobov azkove derzhavne sotsal ne strachuvanna from July 8, 2007 No VI [Electronc resource] // Supreme Councl of Ukrane. Access mode: 103

7 Investment Management and Fnancal Innovatons, Volume 10, Issue 3, 2013 Appendx Investment potental Table 1. The characterstcs of nvestment actvty of lfe nsurance companes n Ukrane for the perod of GRAWE Ukrane Insurance companes The scale of nvestment actvty ALIKO Lfe ASKA LIfe UNIQA Lfe Oranta Lfe Unversal KD-Lfe Jupter Garant-Lfe levels Low level [0,00-1,70); [1,70-3,40); hgher than [3,40-5,10); hgh level [5,10-6,79] Characterstcs of nvestment actvty Effcency of nvestment actvty Low level [0,00-0,62); [0,62-1,24); hgher than [1,24-1,86); hgh level [1,86-2,49] 104

8 Investment Management and Fnancal Innovatons, Volume 10, Issue 3, 2013 Investment rsk Table 1 (cont.). The characterstcs of nvestment actvty of lfe nsurance companes n Ukrane for the perod of GRAWE Ukrane Insurance companes The scale of nvestment actvty ALIKO Lfe ASKA LIfe UNIQA Lfe Oranta Lfe Unversal KD-Lfe Jupter Garant-Lfe levels Low level [0,00-2,43); [2,43-4,86); hgher than [4,83-7,28); hgh level [7,28-9,71] Characterstcs of nvestment actvty 105