Description
Insurance is an “uncertain business,” characterized by competition for premiums that pushes insurers into the unknown.
E3 Journal of Business Management and Economics Vol. 2(6). pp. 223-228, December, 2011
Available onlinehttp://www.e3journals.org/JBME
ISSN 2141-7482 © E3 Journals 2011
Full length research paper
Development of model for insurance risk management
and its application to insurance companies operating in
the Serbian market
Mirjana M. Ili?
1*
, Veselin Avdalovi?
2
and Milica D. Obadovi?
3
1
The College of Tourism, Belgrade;
2
Faculty of Technical Science, University of Novi Sad
3
Insurance company, DDOR Novi Sad, Serbia
Accepted 21 November 2011
The literature on the topic of risk management in insurance generally separately treat insurance risk and
insurance company risk, however such a separate treatment of risk excludes a third type of risk which is
defined here, that is the risk of incorrectly calculating insurance risk, which causes uncertainties and
disruptions in the operations of an insurance company and its concept of risk management arising from its
activities. This paper presents a Model developed for insurance risk management and its attempt to assess the
calculation of insurance risk. Also, the Model has been applied to the 2005 to 2010 results of five insurance
companies in the Serbian market.
Keywords: Risk; Insurance; Management
INTRODUCTION
Insurance is an “uncertain business,” characterized by
competition for premiums that pushes insurers into the
unknown. The insurance industry is as much in the
business of uncertainty as it is in risk, with notions of
quantification and actuarial principle increasingly
evaporating in an ever more competitive, vibrant and
amorphous insurance market (Ericson and Doyle, 2004).
Insurance companies face numerous risks arising from
the insurance industry itself on a daily basis, as well as
risks arising from insurance company operations, such as
placing available funds, fulfilling obligations under
insurance premiums, and harmonizing resources and the
placement of free funds.
Insurance literature mostly addresses several types of
risk that insurance companies are facing. IAA (2004)
distinguishes five main categories that can be further
classified into parts. The main categories are:
Underwriting risk, Credit risk, Market risk which also
includes ALM or mismatch risk, Operational risk and
*Corresponding author email: [email protected]
Liquidity risk. Doff (2006) added another risk category:
Business risk, which is the risk of losses due to
unexpected changes in the competitive environment of
the firm or in the extent that it can flexibly adapt to these
changes.
For the purpose of this paper, we have classified
insurers risk into two main categories: the insurance risk
and the insurance companies risk. Insurance risk is the
main risk and represents the risk of the insurers. It may
be defined as the inability of insurance companies to
absorb risks taken on the basis of concluded insurance
contracts. Depending on the type of work covered by the
insurance company, insurance risk is shared in the risk of
life insurance, the risk of non-life insurance, and as a
separate type can be extracted catastrophic risk.
Apart from insurance risks, insurance companies also face
the risks originating as a direct result of insurance company
operations. Just like other financial entities operating in the
financial market, insurance companies face market risk, risk
of maturity and structural mismatch of assets and liabilities,
risk of depositing and investing the company’s assets, and
other risks arising from operations, such as operational,
legal, and reputational risk.
224 E. J. Bus. Manage. Econ.
The aim of this paper is to present the relationship
between these two types of risk in insurance and to
develop a model that will quantify the connection. In other
words, this paper quantifies a third type of insurance risk
called here “the risk of wrong assessment of insurance
risk” that will measure a loss that insurers face because
of wrong assessment of insurance risk. Insurance risks
very often are not reliably calculable except in hindsight,
at which point the risk has already been transformed into
an all-too-measurable loss (Alborn, 2009).
The risk of wrong assessment of insurance risk is
causing disturbances in the business of an insurance
company and its concept of risk management arising
from its activities. Therefore, this risk shows that there is
a direct relationship between insurance risk and
insurance company risk and that deviation from the set of
risks in insurance lead to deviation from the set of risks
arising from operating an insurance company, which
could endanger the stability of the company.
Given that the insurer plans their investment activities
by the amount of available funds to which the size the
Insurer came by the amount of the insurance risk
assessment, the logical conclusion is that the wrong
assessment of insurance risk affects the investment
funds that carry a risk of an insurance company. If there
is a wrong assessment of insurance risk, the insurance
company has to allocate more funds to cover the
underestimated risk or if the risk is overstated, there will
be a surplus of funds that will not be properly used.
If the insurance company has to withdraw funds from
the market to cover losses arising from realizing the
major claims than planned, then it disturbs the planned
investment of available funds, and with them the risks
planned. Conversely, if the insurance company has
overestimated the risks, it means that there are available
surplus funds that could be invested. If the insurer has
invested these funds, then he could make some profit
from the investment that would increase his operating
result and thus increase the value of the company. On
the other hand, overvaluation of risk can lead to
increased premiums and thus reduce the
competitiveness of the company. If the premium rate is
too high, an insurance company will not have enough
clients for successful operation. If the premium rate is too
low, the company also may not have sufficient funds to
pay all the claims (Melnikov, 2004).
To meet the challenges that are put before them and to
successfully fulfill their primary role, protection of the
insured, insurance companies must be able to manage in
an integrated manner the overall risk portfolio. Therefore,
the realization of optimization of insurance companies’
business, which includes the most effective use of all
available resources and maximizing the economic value
at a given proficiency level of risk, primarily depends on
efficient risk management that includes integrated
treatment of all risks in order to minimize their potential
destructive effects.
The model for implementation of insurance risk
management that is directly related to the insurance
company risk (hereinafter referred to as the Model) which
shows the impact of realized insurance risk, manifested
as insurance claims based on the payment of insurance
premiums, on insurance company risks, which affect the
amount of free funds available to an insurer after
settlement of claims.
METHODOLOGY
When determining the risk impact described above, the
following terms are suggested as a complex function of
parameters:
• Settled insurance claims,
• Technical insurance premium,
• Total insurance premium,
• Generated profit expressed in percentages in relation to
the total premium collected, mutually related in a specific
manner expressed by the formula:
(1)
(2)
(3)
(4)
Where RIRM is the Result of Insurance Risk and SCTP
represents the share of Settled Claims in the Technical
Premium. The results obtained by equation (4) show how
much the insurance market managed to affect the
increase of the realized market profit by proper insurance
risk management.
Implementation of these ratios in the Serbian market
can produce numerous results, which can give a clear
picture of the status of the Serbian insurance market, and
demonstrate the impact of insurance risk on operations
and the operational risk management of a company.
Results
Implementation of the Model in the Serbian insurance
market can be realized measuring various segments of
Mirjana et al. 225
Figure 1 Division of the Serbian insurance market
since 2008. Source: author’s calculations, National
Bank of Serbia
the market. In this paper implementation has been
carried out in two phases in the period 2005 – 2010 on
business data from five insurance companies that are
selected based on next analysis of the Serbian insurance
market: DDOR and Dunav insurance companies as two
leading insurers in the last decade, Delta Generali
insurance company that joined the leading insurers, and
Takovo and Wiener insurers as the representatives of the
rest twenty insurers that shares the rest of 35% of the
market (Figure 1.).
All data used for obtaining the results in this paper were
taken from regular annual reports on insurance
companies’ operations, published by the National Bank of
Serbia. In phase one, the implementation of the Model
was seperatly done for RIRM (Equation 1) and SCTP
(Equation 2) ratios of non-life insurance operations, life
insurance operations and the overall results of operations
of the selected insurance companies. Table 1 shows the
results of RIRM ratio, obtained by the comparison of
settled claims and total/technical premium of the non-life
insurance business in selected insurance companies.
From a comparative review of RIRM indicators for
companies it can be seen that from year to year, the
share of settled claims had an upward trend in all non-life
operations of the insurance companies. Table 2 shows
the results of RIRM ratio, obtained by the comparison of
settled claims and total/technical premium of the life
insurance businesses in the selected insurance
companies.
From the comparative review of RIRM ratio in life
insurance operation it can be seen that only DDOR and
Dunav insurance companies had indicators that can be
analyzed, while the RIRM ratio in other companies is
extremely low, indicating that the business of life
insurance is not sufficiently or even at all developed (as
in the case in Takovo insurance company) to pay
attention in this analysis. DDOR company had the largest
value of RIRM indicator in 2007, while the value of RIRM
in 2009 has declined to the level of 2006. RIRM indicator
of Dunav insurance company had a declining trend from
2005 to 2009, when it recorded the lowest value of 42%,
indicating that the operations of life insurance over the
years in the insurance company did not develop as well
as non-life insurance operations.
If we compare the results of the non-life and life
insurance types, one can come to the conclusion that life
insurance operations still are not sufficiently developed to
influence the overall result of the business and the result
of insurance risk management can only be attributed to
the result of risk management in non-life insurance, which
is, in two leading companies operating in the market,
amounting up to 90% of all insurance operations. Table 3
shows the overall results of RIRM and SCTP ratios,
which includes both the life and non-life insurance
business in the selected insurance companies.
By comparing the results of SCTP ratios of the two
largest insurance companies DDOR and Dunav, it shows
that there is a trend of adapting the level of technical
premium to good management of insurance risk, which
reduces the overall annual result of settled. However,
these two companies still have room to reduce the
amount of technical premium for approximately 10%, thus
reducing the amount of total premiums.
Results of RIRM analysis shows that over the years
DDOR and Dunav insurance companies have nearly the
same share of settled claims in the total insurance
premiums, growing from 40% to 51%, while in other
companies this participates less. The given results show
226 E. J. Bus. Manage. Econ.
Table 1. Results of RIRM ratio of non-life insurance business in selected insurance companies
Insurance company 2005 RIRM (%) 2006 RIRM (%) 2007 RIRM (%) 2008 RIRM (%) 2009 RIRM (%)
DDOR 42 47 50 51 57
DELTA 15 24 25 30 37
DUNAV 39 48 47 51 46
TAKOVO 19 22 31 22 34
WIENER 33 46 54 56 55
Source: author’s calculations, National Bank of Serbia
Table 2. Results of RIRM ratio of life insurance business in selected insurance companies
Insurance company 2005 RIRM (%) 2006 RIRM (%) 2007 RIRM (%) 2008 RIRM (%) 2009 RIRM (%)
DDOR 24 40 59 37 42
DELTA 3 4 3 4 8
DUNAV 63 56 55 57 42
TAKOVO 0 0 0 0 0
WIENER 3 5 8 5 20
Source: author’s calculations, National Bank of Serbia
Table 3. Results of RIRIM and SCTP ratios of overall business in thevselected insurance companies
Insurance
company
2005 2006 2007 2008 2009
SCTP (%) RIRM (%) SCTP (%) RIRM (%) SCTP (%) RIRM (%) SCTP (%) RIRM (%) SCTP (%) RIRM (%)
DDOR 59 42 67 47 70 50 72 51 85 56
DELTA 19 13 29 21 30 21 36 25 46 30
DUNAV 54 39 67 48 66 47 71 51 73 46
TAKOVO 26 19 29 22 40 31 30 22 48 34
WIENER 27 22 36 30 37 30 44 36 69 40
Source: author’s calculations, National Bank of Serbia
that there is a trend of the adjustment of the level of total
premium to the reduced number of settled claims which
are result of good risk management and that there is still
room for reducing the amount of premium for 10%
without the risk that the company’s operations will be
affected. By reducing the level of premiums, insurance
companies are brought into a position to attract new
policyholders and thus improve their overall position in
the market.
The second phase involves implementation of the
equations (3) and (4) in the selected insurance
companies. The obtained results demonstrate how much
the insurance companies in Serbia affected the increase
of generated profit by successful insurance risk
management. Therefore the impact of insurance risk
management on the financial management of insurance
companies is analyzed, given as the final result of
business performance expressed through generated
company profit. Profit is expressed in percentage
compared to the realized premium (Equation 3 and
Figure 2.) and then related to a corresponding RIRM
indicator (Equation 4 and Figure 3).
Mirjana et al. 227
Figure 2. Realized profit versus collected premium. Source: author’s calculations, National Bank of Serbia
Figure 3. Effect of RIRM on profit realized in the Serbian insurance companies . Source: author’s calculations,
National Bank of Serbia
DDOR insurance company in relation to the total
premium in 2005 generated profit in relation to the total
premium collected amounting to 0.8%, in 2006 generated
profit of 7% which is 11 times higher than in 2005, in
2007, the generated profit to the total premium was 1%
and in the 2008, this relationship is given a score of
0.3%, which is the lowest score observed during the five
years. The level of profit thus calculated has affected the
impact of RIRM on generated profit, because RIRM, over
the years, had greater variations as opposed to profit.
The year 2006 was the highest impact of RIRM on
generated profit, amounting to 14.8%, while the least
impact was in 2008 and it amounted to 0.5%.
The results of impact analysis of RIRM on the profit for
the companies are very different, as over the years
analyzed in one company, as between companies, which
228 E. J. Bus. Manage. Econ.
can be seen in figure 3 above. Figure 3 shows that the
impact of risk management in the insurance business is
only comparable till 2007, if viewed in DDOR and Dunav
insurance companies, as the two insurance companies
that cover more than 50% of the insurance market. The
results of analysis conducted on data from Takovo and
Wiener insurers are not comparable because they have
operated with loss. From the years 2008 and 2009 it is
clear that the Delta insurance company increased its
market share to 16% and thus joined the previous market
leaders. The biggest contribution to generated profit and
its increase is achieved by Dunav insurance company,
which in the year 2008 amounted to 19.6%.
These results lead to the conclusion that the DDOR,
especially in year 2008, had a chance to increase its
profit, given that they had the ability to place 10% of
premium on financial market as a surplus of funds and
thus increase its profit.
The reasons for such low profit can vary. The state of
the financial market has changed over the years. Thus,
the years 2005, 2006 and 2007 were years of prosperity.
Foreign direct investments were increasing, investment
funds were developing, businesses in the stock exchange
was growing from year to year, in all there was
domination of public confidence in the stability of financial
markets. However, the year 2008 was a year that marked
the beginning of of the global economic crisis. The
weakening economy, looser market conditions and
deterioration in the credit markets are limiting factors for
growth of insurance companies. In addition, volatility in
the securities market contributes to the decline of
investment profit of the overall insurance sector. The
combination of these factors had a negative impact on
growth and profitability of insurance companies and in
some ways led their operations to higher danger. The
current environment sets the conditions for the reduced
volume of business in respect of prior periods, which is
consistent with the value of insurance companies in the
stock market.
All this has led to reduced activity in the financial
market and increasing the risk of doing business. This is
probably the reason why most insurance companies
operating in the Serbian market in 2008 recorded the
lowest profit in relation to the total premium charged.
Conclusion
Insurance companies are facing the challenges of
balancing risk exposure with protection of the insured
from the consequences of adverse events. In order for
insurance companies to meet the challenges they are
exposed to and to successfully fulfill their primary role of
protecting the insured, they have to be able to
comprehensively manage the overall risk portfolio.
With proper management of insurance premiums,
insurance companies can consolidate and improve their
competitive position in the insurance market, and thus
fortify the position and level of the share of the insurance
sector in the overall financial market.
Reducing the cost of the premium is very important,
especially in times of crisis when the solvency of the
insured is substantially reduced. By reducing the cost of
premiums insurance companies can not only prevent the
churn rate of the current insured but even increase their
number, while keeping profits at the same level. Thus
fewer insured paying a higher premium can make the
same profit for insurance companies as when there are
more insured paying a lower premium.
Reducing premiums and increasing the number of the
insured would raise citizens’ standard of living, since their
purchasing power would grow. With an increased
workload, insurance companies would require an
increased number of employees. This would mean
additional jobs for citizens, while for insurance companies
it would mean additional justified loading.
With proper cost-benefit analysis and implementation of
the Model for management of the risks of insurance and
insurance companies, insurance companies could reduce
insurance premiums, enhance profits by increasing the
number of insured, as well as increase the number of
employees without jeopardizing profits, thus participating
in the growth of society’s living standard and general
public prosperity in the country.
REFERENCES
Alborn T (2009). Regulated Lives: Life Insurance And British Society
1800-1914, University of Toronto Press, Scholarly Publishing
Division; 1 edition
Buhlmann H (1970). Mathematical method in risk theory. New York:
Springer- Verlag
Bowers, N.J.R., Gerber, H., Hickman, D. & Nesbitt, C. (1997). Actuarial
Mathematics, The Society of Actuaries
Doff, R. (2011). Risk Management for Insurers, Second Edition, Risk
Books
Ericson R, Doyle A (2004). Uncertain Business: Risk, Insurance, and
the Limits of Knowledge, University of Toronto Press, Scholarly
Publishing Division
Melnikov A (2004). Risk Analysis In Finance And Insurance, Chapman
and Hall/CRC
National Bank of Serbia (2010) Insurance Companies Operations,
Annual Reports; www.nbs.rs
doc_830154238.pdf
Insurance is an “uncertain business,” characterized by competition for premiums that pushes insurers into the unknown.
E3 Journal of Business Management and Economics Vol. 2(6). pp. 223-228, December, 2011
Available onlinehttp://www.e3journals.org/JBME
ISSN 2141-7482 © E3 Journals 2011
Full length research paper
Development of model for insurance risk management
and its application to insurance companies operating in
the Serbian market
Mirjana M. Ili?
1*
, Veselin Avdalovi?
2
and Milica D. Obadovi?
3
1
The College of Tourism, Belgrade;
2
Faculty of Technical Science, University of Novi Sad
3
Insurance company, DDOR Novi Sad, Serbia
Accepted 21 November 2011
The literature on the topic of risk management in insurance generally separately treat insurance risk and
insurance company risk, however such a separate treatment of risk excludes a third type of risk which is
defined here, that is the risk of incorrectly calculating insurance risk, which causes uncertainties and
disruptions in the operations of an insurance company and its concept of risk management arising from its
activities. This paper presents a Model developed for insurance risk management and its attempt to assess the
calculation of insurance risk. Also, the Model has been applied to the 2005 to 2010 results of five insurance
companies in the Serbian market.
Keywords: Risk; Insurance; Management
INTRODUCTION
Insurance is an “uncertain business,” characterized by
competition for premiums that pushes insurers into the
unknown. The insurance industry is as much in the
business of uncertainty as it is in risk, with notions of
quantification and actuarial principle increasingly
evaporating in an ever more competitive, vibrant and
amorphous insurance market (Ericson and Doyle, 2004).
Insurance companies face numerous risks arising from
the insurance industry itself on a daily basis, as well as
risks arising from insurance company operations, such as
placing available funds, fulfilling obligations under
insurance premiums, and harmonizing resources and the
placement of free funds.
Insurance literature mostly addresses several types of
risk that insurance companies are facing. IAA (2004)
distinguishes five main categories that can be further
classified into parts. The main categories are:
Underwriting risk, Credit risk, Market risk which also
includes ALM or mismatch risk, Operational risk and
*Corresponding author email: [email protected]
Liquidity risk. Doff (2006) added another risk category:
Business risk, which is the risk of losses due to
unexpected changes in the competitive environment of
the firm or in the extent that it can flexibly adapt to these
changes.
For the purpose of this paper, we have classified
insurers risk into two main categories: the insurance risk
and the insurance companies risk. Insurance risk is the
main risk and represents the risk of the insurers. It may
be defined as the inability of insurance companies to
absorb risks taken on the basis of concluded insurance
contracts. Depending on the type of work covered by the
insurance company, insurance risk is shared in the risk of
life insurance, the risk of non-life insurance, and as a
separate type can be extracted catastrophic risk.
Apart from insurance risks, insurance companies also face
the risks originating as a direct result of insurance company
operations. Just like other financial entities operating in the
financial market, insurance companies face market risk, risk
of maturity and structural mismatch of assets and liabilities,
risk of depositing and investing the company’s assets, and
other risks arising from operations, such as operational,
legal, and reputational risk.
224 E. J. Bus. Manage. Econ.
The aim of this paper is to present the relationship
between these two types of risk in insurance and to
develop a model that will quantify the connection. In other
words, this paper quantifies a third type of insurance risk
called here “the risk of wrong assessment of insurance
risk” that will measure a loss that insurers face because
of wrong assessment of insurance risk. Insurance risks
very often are not reliably calculable except in hindsight,
at which point the risk has already been transformed into
an all-too-measurable loss (Alborn, 2009).
The risk of wrong assessment of insurance risk is
causing disturbances in the business of an insurance
company and its concept of risk management arising
from its activities. Therefore, this risk shows that there is
a direct relationship between insurance risk and
insurance company risk and that deviation from the set of
risks in insurance lead to deviation from the set of risks
arising from operating an insurance company, which
could endanger the stability of the company.
Given that the insurer plans their investment activities
by the amount of available funds to which the size the
Insurer came by the amount of the insurance risk
assessment, the logical conclusion is that the wrong
assessment of insurance risk affects the investment
funds that carry a risk of an insurance company. If there
is a wrong assessment of insurance risk, the insurance
company has to allocate more funds to cover the
underestimated risk or if the risk is overstated, there will
be a surplus of funds that will not be properly used.
If the insurance company has to withdraw funds from
the market to cover losses arising from realizing the
major claims than planned, then it disturbs the planned
investment of available funds, and with them the risks
planned. Conversely, if the insurance company has
overestimated the risks, it means that there are available
surplus funds that could be invested. If the insurer has
invested these funds, then he could make some profit
from the investment that would increase his operating
result and thus increase the value of the company. On
the other hand, overvaluation of risk can lead to
increased premiums and thus reduce the
competitiveness of the company. If the premium rate is
too high, an insurance company will not have enough
clients for successful operation. If the premium rate is too
low, the company also may not have sufficient funds to
pay all the claims (Melnikov, 2004).
To meet the challenges that are put before them and to
successfully fulfill their primary role, protection of the
insured, insurance companies must be able to manage in
an integrated manner the overall risk portfolio. Therefore,
the realization of optimization of insurance companies’
business, which includes the most effective use of all
available resources and maximizing the economic value
at a given proficiency level of risk, primarily depends on
efficient risk management that includes integrated
treatment of all risks in order to minimize their potential
destructive effects.
The model for implementation of insurance risk
management that is directly related to the insurance
company risk (hereinafter referred to as the Model) which
shows the impact of realized insurance risk, manifested
as insurance claims based on the payment of insurance
premiums, on insurance company risks, which affect the
amount of free funds available to an insurer after
settlement of claims.
METHODOLOGY
When determining the risk impact described above, the
following terms are suggested as a complex function of
parameters:
• Settled insurance claims,
• Technical insurance premium,
• Total insurance premium,
• Generated profit expressed in percentages in relation to
the total premium collected, mutually related in a specific
manner expressed by the formula:
(1)
(2)
(3)
(4)
Where RIRM is the Result of Insurance Risk and SCTP
represents the share of Settled Claims in the Technical
Premium. The results obtained by equation (4) show how
much the insurance market managed to affect the
increase of the realized market profit by proper insurance
risk management.
Implementation of these ratios in the Serbian market
can produce numerous results, which can give a clear
picture of the status of the Serbian insurance market, and
demonstrate the impact of insurance risk on operations
and the operational risk management of a company.
Results
Implementation of the Model in the Serbian insurance
market can be realized measuring various segments of
Mirjana et al. 225
Figure 1 Division of the Serbian insurance market
since 2008. Source: author’s calculations, National
Bank of Serbia
the market. In this paper implementation has been
carried out in two phases in the period 2005 – 2010 on
business data from five insurance companies that are
selected based on next analysis of the Serbian insurance
market: DDOR and Dunav insurance companies as two
leading insurers in the last decade, Delta Generali
insurance company that joined the leading insurers, and
Takovo and Wiener insurers as the representatives of the
rest twenty insurers that shares the rest of 35% of the
market (Figure 1.).
All data used for obtaining the results in this paper were
taken from regular annual reports on insurance
companies’ operations, published by the National Bank of
Serbia. In phase one, the implementation of the Model
was seperatly done for RIRM (Equation 1) and SCTP
(Equation 2) ratios of non-life insurance operations, life
insurance operations and the overall results of operations
of the selected insurance companies. Table 1 shows the
results of RIRM ratio, obtained by the comparison of
settled claims and total/technical premium of the non-life
insurance business in selected insurance companies.
From a comparative review of RIRM indicators for
companies it can be seen that from year to year, the
share of settled claims had an upward trend in all non-life
operations of the insurance companies. Table 2 shows
the results of RIRM ratio, obtained by the comparison of
settled claims and total/technical premium of the life
insurance businesses in the selected insurance
companies.
From the comparative review of RIRM ratio in life
insurance operation it can be seen that only DDOR and
Dunav insurance companies had indicators that can be
analyzed, while the RIRM ratio in other companies is
extremely low, indicating that the business of life
insurance is not sufficiently or even at all developed (as
in the case in Takovo insurance company) to pay
attention in this analysis. DDOR company had the largest
value of RIRM indicator in 2007, while the value of RIRM
in 2009 has declined to the level of 2006. RIRM indicator
of Dunav insurance company had a declining trend from
2005 to 2009, when it recorded the lowest value of 42%,
indicating that the operations of life insurance over the
years in the insurance company did not develop as well
as non-life insurance operations.
If we compare the results of the non-life and life
insurance types, one can come to the conclusion that life
insurance operations still are not sufficiently developed to
influence the overall result of the business and the result
of insurance risk management can only be attributed to
the result of risk management in non-life insurance, which
is, in two leading companies operating in the market,
amounting up to 90% of all insurance operations. Table 3
shows the overall results of RIRM and SCTP ratios,
which includes both the life and non-life insurance
business in the selected insurance companies.
By comparing the results of SCTP ratios of the two
largest insurance companies DDOR and Dunav, it shows
that there is a trend of adapting the level of technical
premium to good management of insurance risk, which
reduces the overall annual result of settled. However,
these two companies still have room to reduce the
amount of technical premium for approximately 10%, thus
reducing the amount of total premiums.
Results of RIRM analysis shows that over the years
DDOR and Dunav insurance companies have nearly the
same share of settled claims in the total insurance
premiums, growing from 40% to 51%, while in other
companies this participates less. The given results show
226 E. J. Bus. Manage. Econ.
Table 1. Results of RIRM ratio of non-life insurance business in selected insurance companies
Insurance company 2005 RIRM (%) 2006 RIRM (%) 2007 RIRM (%) 2008 RIRM (%) 2009 RIRM (%)
DDOR 42 47 50 51 57
DELTA 15 24 25 30 37
DUNAV 39 48 47 51 46
TAKOVO 19 22 31 22 34
WIENER 33 46 54 56 55
Source: author’s calculations, National Bank of Serbia
Table 2. Results of RIRM ratio of life insurance business in selected insurance companies
Insurance company 2005 RIRM (%) 2006 RIRM (%) 2007 RIRM (%) 2008 RIRM (%) 2009 RIRM (%)
DDOR 24 40 59 37 42
DELTA 3 4 3 4 8
DUNAV 63 56 55 57 42
TAKOVO 0 0 0 0 0
WIENER 3 5 8 5 20
Source: author’s calculations, National Bank of Serbia
Table 3. Results of RIRIM and SCTP ratios of overall business in thevselected insurance companies
Insurance
company
2005 2006 2007 2008 2009
SCTP (%) RIRM (%) SCTP (%) RIRM (%) SCTP (%) RIRM (%) SCTP (%) RIRM (%) SCTP (%) RIRM (%)
DDOR 59 42 67 47 70 50 72 51 85 56
DELTA 19 13 29 21 30 21 36 25 46 30
DUNAV 54 39 67 48 66 47 71 51 73 46
TAKOVO 26 19 29 22 40 31 30 22 48 34
WIENER 27 22 36 30 37 30 44 36 69 40
Source: author’s calculations, National Bank of Serbia
that there is a trend of the adjustment of the level of total
premium to the reduced number of settled claims which
are result of good risk management and that there is still
room for reducing the amount of premium for 10%
without the risk that the company’s operations will be
affected. By reducing the level of premiums, insurance
companies are brought into a position to attract new
policyholders and thus improve their overall position in
the market.
The second phase involves implementation of the
equations (3) and (4) in the selected insurance
companies. The obtained results demonstrate how much
the insurance companies in Serbia affected the increase
of generated profit by successful insurance risk
management. Therefore the impact of insurance risk
management on the financial management of insurance
companies is analyzed, given as the final result of
business performance expressed through generated
company profit. Profit is expressed in percentage
compared to the realized premium (Equation 3 and
Figure 2.) and then related to a corresponding RIRM
indicator (Equation 4 and Figure 3).
Mirjana et al. 227
Figure 2. Realized profit versus collected premium. Source: author’s calculations, National Bank of Serbia
Figure 3. Effect of RIRM on profit realized in the Serbian insurance companies . Source: author’s calculations,
National Bank of Serbia
DDOR insurance company in relation to the total
premium in 2005 generated profit in relation to the total
premium collected amounting to 0.8%, in 2006 generated
profit of 7% which is 11 times higher than in 2005, in
2007, the generated profit to the total premium was 1%
and in the 2008, this relationship is given a score of
0.3%, which is the lowest score observed during the five
years. The level of profit thus calculated has affected the
impact of RIRM on generated profit, because RIRM, over
the years, had greater variations as opposed to profit.
The year 2006 was the highest impact of RIRM on
generated profit, amounting to 14.8%, while the least
impact was in 2008 and it amounted to 0.5%.
The results of impact analysis of RIRM on the profit for
the companies are very different, as over the years
analyzed in one company, as between companies, which
228 E. J. Bus. Manage. Econ.
can be seen in figure 3 above. Figure 3 shows that the
impact of risk management in the insurance business is
only comparable till 2007, if viewed in DDOR and Dunav
insurance companies, as the two insurance companies
that cover more than 50% of the insurance market. The
results of analysis conducted on data from Takovo and
Wiener insurers are not comparable because they have
operated with loss. From the years 2008 and 2009 it is
clear that the Delta insurance company increased its
market share to 16% and thus joined the previous market
leaders. The biggest contribution to generated profit and
its increase is achieved by Dunav insurance company,
which in the year 2008 amounted to 19.6%.
These results lead to the conclusion that the DDOR,
especially in year 2008, had a chance to increase its
profit, given that they had the ability to place 10% of
premium on financial market as a surplus of funds and
thus increase its profit.
The reasons for such low profit can vary. The state of
the financial market has changed over the years. Thus,
the years 2005, 2006 and 2007 were years of prosperity.
Foreign direct investments were increasing, investment
funds were developing, businesses in the stock exchange
was growing from year to year, in all there was
domination of public confidence in the stability of financial
markets. However, the year 2008 was a year that marked
the beginning of of the global economic crisis. The
weakening economy, looser market conditions and
deterioration in the credit markets are limiting factors for
growth of insurance companies. In addition, volatility in
the securities market contributes to the decline of
investment profit of the overall insurance sector. The
combination of these factors had a negative impact on
growth and profitability of insurance companies and in
some ways led their operations to higher danger. The
current environment sets the conditions for the reduced
volume of business in respect of prior periods, which is
consistent with the value of insurance companies in the
stock market.
All this has led to reduced activity in the financial
market and increasing the risk of doing business. This is
probably the reason why most insurance companies
operating in the Serbian market in 2008 recorded the
lowest profit in relation to the total premium charged.
Conclusion
Insurance companies are facing the challenges of
balancing risk exposure with protection of the insured
from the consequences of adverse events. In order for
insurance companies to meet the challenges they are
exposed to and to successfully fulfill their primary role of
protecting the insured, they have to be able to
comprehensively manage the overall risk portfolio.
With proper management of insurance premiums,
insurance companies can consolidate and improve their
competitive position in the insurance market, and thus
fortify the position and level of the share of the insurance
sector in the overall financial market.
Reducing the cost of the premium is very important,
especially in times of crisis when the solvency of the
insured is substantially reduced. By reducing the cost of
premiums insurance companies can not only prevent the
churn rate of the current insured but even increase their
number, while keeping profits at the same level. Thus
fewer insured paying a higher premium can make the
same profit for insurance companies as when there are
more insured paying a lower premium.
Reducing premiums and increasing the number of the
insured would raise citizens’ standard of living, since their
purchasing power would grow. With an increased
workload, insurance companies would require an
increased number of employees. This would mean
additional jobs for citizens, while for insurance companies
it would mean additional justified loading.
With proper cost-benefit analysis and implementation of
the Model for management of the risks of insurance and
insurance companies, insurance companies could reduce
insurance premiums, enhance profits by increasing the
number of insured, as well as increase the number of
employees without jeopardizing profits, thus participating
in the growth of society’s living standard and general
public prosperity in the country.
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doc_830154238.pdf