PROBLEMS OF INVESTMENT MANAGEMENT OF INSURANCE RESERVES

PROBLEMS OF INVESTMENT MANAGEMENT OF INSURANCE RESERVES Dr. Irina Kurochkina, Yaroslavl State University after P. G. Demidov, Russia ipkurochkina@yandex.ru The post-graduate student Oleg Bobkov, Yaroslavl State University after P. G. Demidov, Russia Olegtvel@yandex.ru ABSTRACT The article is devoted to the analysis of preconditions of increase in a share of investments of the Russian insurance companies in Russia's GDP. It deals with the features of improving the investment managing methods of their insurance reserves. The causes of enterprises weaken investment activity of insurance are formulated, where a low return on investment insurance companies is the main. There are main reasons of investment insurance's increase: the modernization of Russian Legacy on the one hand and improvement of analysis investment of insurance reserves efficiency methods by introduction of the additional analytical parameters on the other hand. Keywords: insurance reserves, management, investment, an analytical parameter, the financial reporting. 135

INTRODUCTION In economically developed countries (the USA, Japan, Western Europe) insurance companies act as large investors in a national economy, competing with such conventional institutions investors, as banks and investment funds. The share of investments of the insurance organizations makes up to 60-80 % of GDP of the given countries (Okorokova 2012, 36), thus the insurance fund promotes economic progress of a society. The share of investments of the insurance companies In Russia makes less than 3 % of GDP. But at the same time insurance organizations of Russia are on the first place among the Russian investors by the criteria of reliability of investments. The Increasing of investment potential of insurance sphere in Russia is actual and assumes the search of new methods of management by investment of means of insurance reserves. THE REASONS FOR THE LOW VOLUMES OF INSURANCE INVESTMENTS IN RUSSIA Insurance reserves serve as the main source of implementing investments in the insurance companies, represented as funds of money resources, formed by the insurance organizations for maintenance of guarantees payments of insurance compensation and the insurance claims. The low share of insurance investments into GDP of Russia is connected with two principal causes: 1. The Insufficient level of development of the Russian sphere of the insurance, caused by Russian historical development. Insurance has arisen and actively developed in territory of modern Russia from 10-11 AD till 1917. Insurance companies disappeared after October revolution in 1917 and were forgotten for a long time. 70-years period of the Soviet authority, characterized by monopoly of the state for carrying out the insurance operations, the competition was absent and the list of insurance objects and events was limited. The unique insurer was Gosstrah which had no the charter capital and did not form insurance reserves, payments were carried out directly from insurance payments. Insurance were formal, besides it the presence of "Zhelesniy zanaves" (Informative, political and boundary barrier erected in 1919-1920 and interfered USSR and the other countries from the other world during several decades)that prevented of experience exchange with actively developed western countries (Kuzovleva 2011, 16). The given circumstances limited the development of insurance sphere in Russia. The history of modern insurance in the Russian Federation has begun after disintegration of the USSR in 1991 and counts 22 years that causes strong backlog of a economic 136

level, normative, technological and methodological development of the insurance sphere in Russia, in comparison with western countries. According to experts, there is about 10% of all risks is insured in Russia when the same index in the USA is 90%. 2.The Low level of management efficiency investment of insurance reserves. The return on investments of the insurance companies lags behind a rate of inflation The insufficient level of development of the Russian sphere of insurance is connected with rather short history of insurance in the modern Russia which has begun from the moment of disintegration of the USSR in 1991. It is necessary to note the stable positive tendency of growth of the given sphere (on the average 15-20% (Rating Agency Expert RA 2013) a year). The problem of increasing effectiveness of investing insurance reserve funds deserves special attention. To our mind, the low level of insurance reserves management efficiency of investment is caused by the following reasons: 1. High return of insurance operations. According to the experts Russian incurrence field filled only up to 10% (Dolgacheva 2008, 132) which stipulate the possibility of emerging development of insurance companies by the way of domesticate new uncompetitive fields instead of fighting for already occupied part this market. That means the possibility of the establishment of high level tariffs and getting the large amount of income from the insurance operations in case of hard competitiveness absence. It is easy to find uninsured client than offer beneficial conditions of insurance for Existing Client of the other insurance companies, and get high benefit for it. The Strategy of development of the insurance companies is based on obtaining returns from insurance operations, instead of investment of reserves 2. The Insufficient level returns on investment operations. Directions of investment of insurance reserves are strongly regulated by the Russian Government that reduces the level of their returns. Rigid regulation always lags behind quickly varying conditions of the economic environment, many insurers have a situation of the backlog of profitableness of investment activity from the rates of inflation by virtue of that the insurance organizations are to some extent obliged to invest a significant share of the actives in safe securities which have in advance certain discount rate, in most cases below inflationary (Yezhova 2008, 102). Besides it investment profitableness of the insurance companies is at low level, in case of following factors: Russian financial market is characterized by a high level of financial risk; Many insurance companies are affiliated from large Russian corporations, carrying out the investments in the parent organization, bringing the minimal income as in most cases they have other purposes, rather than reception of the income; 137

Russian insurance companies don t possess sufficient professionalism of investment in the stock markets, and at the same time they are authorized to transfer in confidential management no more than 20 % of the reserves; Requirements to the certain structure of insurance actives extends not for all period of activity of the insurance company but only for accounting date in this connection the structure of actives is frequently adjusted to the specification by the moment of drawing up of the reporting (Dyad kov 2008, 54), in dynamics it mismatches the established requirements, that negatively affects both financial stability of the insurance companies, and on efficiency of investment activity of insurers. THE DIRECTIONS FOR INCREASING MANAGEMENT EFFICIENCY BY INVESTMENT OF INSURANCE RESERVES The history of insurance sphere development of the developed countries shows that increase of a competition in the market of insurance leads to decrease by the insurance companies of tariffs that reduces returns of insurance operations. Therefore investment operations in such countries have become the main source of obtaining returns by companies in sphere of insurance. It means the necessity of increasing o investment reserves management efficiency by the insurance companies of Russia. There are two offered directions for increasing management efficiency by investment of insurance reserves: 1. Modernization of the state specifications of directions of insurance reserves investment aside increases in the share of more profitable directions; 2. Development of the technique of the analysis of efficiency of insurance reserves investment by the insurance organization. The Scientific publications of the Russian and foreign authors on the topic of returns of various directions of monetary funds investment, the economic analysis of activity of the insurance companies has been studied, and also the financial reporting of some largest Russian insurance companies has been investigated. The Specifications of investment of insurance reserves are approved in Russian Federation Financial Ministry Order from 8/8/2005 100n. The main directions of investment are corrected in the Order with the purpose of increasing effectiveness of the investment activity of the insurers It is offered to raise the maximum share established by the state from invested insurance reserves in such directions as the action and the bond (from 30 % up to 45 %), cost investment shares, share investment funds (from 5 % up to 10 %) and to lower a share of such directions as investments in the state 138

securities (from 30 % up to 25 %), bank contributions (from 40 % up to 25 %) and real estate (from 20 % up to 10 %) to improve the increase of potential returns of insurance reserves investment. The necessity of keeping the low level of finance risks was taken into consideration and that s why the Order changed only several normative in several directions without changing the list of directions themselves. There is a list of recommended changes in normative of the insurance reserves location according to the Order 100-n in the chart below. Tabel 1: Offered normative of the directions in insurance reserve location Section The share of one direction The actives presented to the covering of insurance reserves According to the Order Not more, % Recommended normative 1 The Cost of actions, bonds 30 45 Total cost investment shares, share investment 2 funds and certificates of individual share in the general funds of bank management 5 10 3 Total cost add in the authorized capital of Ltd and contributions in the share capital of companies on belief and cost of the securities which have been not included in the quotation 10 5 by any organizer of trade in the stock market 4 Cost of the Government securities and municipal bonds 30 25 5 Bank contributions and banks bills 40 25 6 The cost of real estate 20 10 7 The total cost of Housing Certificate 5 5 8 The maximal cost of one object of the real estate 10 5 9 Total cost of ingots of gold and silver 10 10 10 The receivables of insures, reinsures, retrocessionaires, insurance intermediary 10 10 11 The maximal size of a share of one reinsures in insurance reserves 15 15 12 Premium deposits on risks reinsured 10 10 13 Total size of a share of reinsures in insurance reserves 60 40 139

Section The share of one subject of investing The share of international investment 1 2 3 4 5 1 2 The actives presented to the covering of insurance reserves Total cost of the securities which emitted by one legal person and have been not included in quotation of the first level by any organizer of trade on a securities market, but included quotation of the second level even one organizer of trade on a securities market Total cost of the securities emitted by one legal person and included in quotation of the first level even by one recognized organizer of trade on a securities market Total cost of securities, the property rights to a share in the authorized capital, means for bank contributions (deposits) and the settlement account, and also in the general funds of bank management of one bank Total cost of Government Securities of one subject of the Russian Federation Total cost of municipal bills of one institutions of local government Total cost of the assets accepted in a covering of insurance reserves, not concerning to be located in territory of the Russian Federation, except for a share of the reinsures, being non-residents, in insurance reserves Total share of the reinsures, being non-residence of Russian Federations, in insurance reserves According to the Order Not more, % Recommended normative 5 5 10 5 15 10 15 10 10 5 20 15 30 20 It is offered six new relative analytical parameters, counted according to the financial reporting of the insurance organizations (Order of the Ministry of Finance of the Russian Federation 109n from 27.07.2012 «On the accounting (financial) statements of insurers»). It contains a plenty of information on formation and investment use of insurance reserves which can be used for efficient control its investment activity. The financial reporting is published and allows spending the comparative analysis of investment activity of the various insurance companies of Russia among themselves, to improve methods of insurance companies' management analyses of its investment activity. 140

Table 2: Parameters of the analysis of efficiency of investment activity Index names Formula Economic sence Conclusion 1. Investment rate of fullness IRF= I/BS 2. High effectiveness share of the investment directions 3. Profitability of investments from life insurance 4. Profitability of investments from insurance of other, than life insurance 5. The investment rate of premiums 6. Factor of the parity of investment and current streams HESID = (So+DbtSec+ +ISC)/I PIli=(Iinc+Eli)/PDli PIo= (Iio+Eo)/PDo IRP=(AcqSub+ +AcqSec,OFI+Lgo ++AcqPPEqu,IntA)/ /Agmt FPICS= (RevSecFI+RD+RIn t+pts+po+revpin t)/ /(PInst+AgmtReins ++PmntRecSub+ +DPmnt) Part of actives of the insurance company which is used for reception of the additional income, i.e. the sum of investments The investment rate shows, what share in the general investments has the most profitable directions (borrow investments in the action, bonds, authorized capitals of developing companies), i.e. quality of carried out investments Profitability of life insurance Profitability of insurance of other, than life insurance The part of the insurance premiums which have acted in the accounting period directed on investment, that is investment activity of insurance firm The investment rate shows, what parity of receipt of proceeds from insurance and proceeds upon investment of reserves The above value of the given parameter, the better for the insurance company, therefore we consider as the positive tendency its increase from one accounting period to the following The factor above, the with other things being equal above efficiency of investment activity, therefore positive dynamics is growth of the given factor, but under condition of professional investments insurance firm of means in securities with minimization of financial risk Comparison of two given parameters allows to reveal priorities from the point of view of increase of efficiency of investment activity a direction of life insurance or other, than life insurance It is necessary to aspire, that its value was as it is possible above and aspired to 1 In connection with growth of a competition profitability of insurance activity constantly decreases, therefore we consider expedient to draw a conclusion, that in the long term long-term development of the insurance company the given parity should increase at comparison of its values for a number of the consecutive accounting periods. The reduction in formulae means: Investment; BS Balance Sheet; where So Shares of other organizations; Dbt Sec Debt securities of other organizations and loans granted; ISC Investment on the share capital of the other organizations; Iinc Investment income: life insurance ; Eli Expences: life insurance; PDli Premiums (dues) Net- reinsurance: life insurance; Iio Investment income: other insurance than life insurance; Eo - Expences: other then life insurance; PDo - Premiums (dues) Net- reinsurance: other then life insurance; AcqSub acquisition of subsidiaries; AcqSec,OFI acquisition of securities and other finance investments; Lgo loans granted for other organizations AcqPPEqu,IntA Acquisition of 141

property, plant, equipmant and intangible assets; PAgmnt Premiums getting from the agreements ; RevSecFI Revenues from selling securities and other finance investment; RD received dividends; RIntRts received Interest rates; Po Proceeds from repayment provided by other organizations; RevPInt Revenue from the sale of property, plant and equipment and intangible objects; PIns Premiums from insurance agreements; AgrmntReins agreements of reinsurance; PmntRecSub payment of recource claims and subrogation; DPmnt demand for payment of compensation for harm on the direct damages. To sums up the generated analytical parameters allow defining such aspects of insurance company investment activity, as total amount of investments in actives of the insurance company; a share in investments of the most profitable directions of investment; comparison of efficiency of investments from the reserves generated from life insurance and insurance of others, than life insurance; comparison among themselves efficiency of insurance and investment activity. CONCLUSION The measures of increase of a management efficiency offered in the article can be used by investment of insurance reserves in practical activities both Russian, and the foreign insurance companies, and for modernization of the national legislation in the sphere of investment of insurance reserves. REFERENCES Rating Agency Expert RA. 2013. Forecast of development of the insurance market by 2013: a difficult growth. http://raexpert.ru/researches/insurance/difficult_growth/. Okorokova O. A. 2012. Foreign experience of investment activity of insurance companies. Journal of Adyghe state University. Series 5: the Economics 1: 98-36. Dolgacheva I. A. 2008. The investments of insurance companies - the current state and problems. Economics of education 1: 244-132. Dyad kov V. N. 2008. Analysis of financial activity of the enterprise in the context of an insurance organization. Insurance business: 158-54. Yezhova A. Yu. 2008. Insurance reserves. Practice of calculation, accommodation and registration. The methodical manual in two volumes. Volume 1. Ed. Reglament. 303-102. Kuzovleva N. F. 2011. The untapped investment potential of the Russian insurance companies is a prerequisite of shadow processes in the sphere of insurance. Finance and credit 28(460): 121-16. Order of the Ministry of Finance of the Russian Federation 100n of 08.08.2005 «On approval of the Procedure of placing the insurer of insurance reserves». Order of the Ministry of Finance of the Russian Federation 109n from 27.07.2012 «On the accounting (financial) statements of insurers». 142