Name and academic title of the first author Dragana Ikonic
Institution/Affiliation: Higher School of Professional Bussiness Studies
Postal Address: Vladimira Perića Valtera 4
Phone: +38163 8 215 979
Fax: +38121/6350-367
E-mail address: dragana_ikonic@yahoo.com
Name and academic title of the second author Nina Arsic
Institution/Affiliation: Higher School of Professional Bussiness Studies
Postal Address: Vladimira Perića Valtera 4
Phone: +38163 58 66 40
Fax: +38121/6350-367
E-mail address: nina.arsic.vps@gmail.com
GLOBAL FINANCIAL CRISIS AS A PARADIGM AND THE STATE
OF THE SUCCESS OF INSURANCE COMPANIES IN THE REPUBLIC
OF SERBIA
ABSTRACT
Economically developed countries hold much of its total wealth as financial savings, and they
should faster experience higher rates of overall economic growth in the long run. Given the
level of income made by economic entities and according to such correlation, their
propensity to save can be generated. The repercussions of the global financial crisis that is
reflected in the financial market of Republic of Serbia inevitably induce a weakening of
financial strength of financial institutions. This paper will show and interpret theoretically
and scientifically established economic indicators. As a clear reflection of the development of
the financial sector, insurance companies as financial intermediaries, through the
mobilization of savings, contribute to the development of the entire financial sector.
Analyzing the performance of insurance companies in Serbia, CARMEL method will be
applied which includes indicators for the presentation of quantitative criteria for the purpose
of monitoring and analyzing the financial stability of insurance companies consisting of a
model that is the current methodology of the MMF. The presence of financial crisis, which
has already seriously shaken some major economies of the world, such as the USA, Japan
and the European Union, the Republic of Serbia sent a signal that the measures for its
alleviation and overcoming in Serbia must be taken.
Key words: global financial crisis, insurance companies, financial success.
1. OVERALL PARADIGM OF GLOBAL FINANCIAL CRISIS ON THE SECTOR OF
INSURANCE
After the 1930s, which are marked as the years of the most devastating strike on the global
capital market, in the two previous years global economy has faced a dramatic deficit on the
capital market. The year of 2008 is the year when most developed and developing countries
experienced a fall in general economic indicators. The accrued imbalances in the relations of
basic macroeconomic aggregates represent the way in which recession and crisis can be
explained as the phases of business cycles. Attempting not to enter the field of public
discussion on the topic why these imbalances occur, and what is more on the topic why no
one draws any conclusion from financial crisis in order to create economic policies, we shall
consider only the impact of adverse economic conditions on global and national insurance
sector. The significantly lower rates of economic growth diminish the needs for insurance,
whereas the losses on the capital market and a more limited range of premium have a bad
effect on the capability of insurance companies to take risks. Thus insurance companies
become less significant although it cannot be said that insurance sector is equal to banking
sector in terms of consequences due to unfavourable cash flows caused by financial crisis.
Generally speaking, life insurance is more negatively affected than non-life insurance is
because life insurance companies gain a large portion of income by investing of premium
funds in the capital market. Financial crisis undoubtedly has influence on the balance of
insurance companies, but the extent of crisis effect depends on the level of adversities which
a country faces. The credit insurance suffered most and reasons for that lie in genesis and
manifestation of global financial crisis. In addition to credit insurance, vehicle insurance is
among most heavily affected forms of non-life insurance (as a form with the highest premium
on the market).
The repercussions of global financial crisis in the Republic of Serbia as well as in many other
developing countries began to be evident in the latter part of 2008. As a country that depends
largely on external funding, Serbia saw the economic consequences in the latter part of 2008.
As far as modestly developed Serbia’s insurance market is concerned, the premium from
credit portfolio of insurance is insignificant because credit insurance is widespread among
developed economies. The consequences of global financial crisis that are largely seen in our
country are characterized by limited supply of capital, more expensive loans and decreased
demand. With the present problem of getting receivables it is clear that there are no signs of
developing credit insurance sector in Serbia.
2. EFFECTS OF GLOBAL FINANCIAL CRISIS ON THE SECTOR OF INSURANCE
The structure and process of forming of financial institutions largely depend on the extent of
development of financial market. Apart from legal limitations, there are other factors
influencing the development of financial market, such as: political and economic conditions,
currency stability, appropriate level of savings, etc. Contemporary financial markets should
have tendency to create business environment both for classic financial institutions and for
new ones, which will offer a wide selection of financial services.
It can be stated that insurance sector is inadequately developed in Serbia. Not only is the level
of its development below EU average, but there are also other indicators of development (the
relationship between total premium and gross national product, and total premium per capita).
By influencing the rise in the price of risk and fall in the investment income, financial crisis
causes the need for increasing the insurance premium. Graph 1 shows the development of
insurance in some European countries, which can be analyzed in terms of share of premium
in gross national product (GNP) 1. In the period between 2004 and 2008 Serbia held the 62nd
position in the world, and comparing with the group in which it has been placed it can be
concluded that Serbia has the satisfactory position since the countries like Romania and
Turkey are behind Serbia. Switzerland has the highest percentage of share (with the tendency
of decreasing the share), followed by Germany and Spain.
1
Swiss Re, Sigma No2/2005, No5/2006, No4/2007, No3/2008, No3/2009.
Graph 1: The level of development of insurance in some European countries: the share of
premium in gross national product (GNP) 2
The most recent information states that there were 26 insurance companies in the first quarter
of 2010.3 There are 22 companies involved into insurance affairs4, and only four companies
have re-insurance services included.5 Among companies dealing with insurance, there are
seven companies involved in life insurance, nine companies working exclusively with nonlife insurance, and there are six companies dealing with both life and non-life insurance.
Breakdown by ownership shows that 19 insurance companies were in majority foreign and
seven in majority domestic ownership as of 2009.
On the basis of Graph 2 and according to the share of total premium at the global level in the
period between 2004 and 2008 it is seen that the United States had the highest share with
33.84%, 33.36%, 31.43%, 30.28%, 29.06% respectively. The United States, along with Great
Britain and Japan, covered more than a half of global market. During that period Serbia’s
share remained stable with the 68th position in the world and the share of 0.01% in 2004 and
0.02% in 2008.
Graph 2: The share of total premium at the global level in % (2004-2008)6
2
Swiss Re, Sigma No2/2005, No5/2006, No4/2007, No3/2008, No3/2009.
National Bank of Serbia, Insurance sector in Serbia – First quarter report 2010.
4
Insurance activities are considered to be concluding insurance contracts, executing insurance contract
obligations and undertaking the measures for prevention and curb of the risks jeopardizing the insured property
and persons. Law on Insurance, The Official Gazette of the Republic of Serbia, No. 55/2004.
5
Ibid. Reinsurance activities are considered to be concluding and executing contract obligations on reinsurance
of the insured surplus risks exceeding the self retention insurance amount of one insurance company with
another insurance company licensed to conduct reinsurance activities.
6
Swiss Re, Sigma No2/2005, No5/2006, No4/2007, No3/2008, No3/2009.
3
The total premium of insurance sector in the first quarter 2010 accounted for $14.1 billion,
and there is a slight 2.4%-rise comparing with the same quarter in the previous year, which is
expected effect of the global financial crisis. The total premium in 2009 ($53.5 billion)
increased by only 2.6% comparing with the premium in 2008 ($52.2 billion), whereas the
total premium in 2008 had risen by even 16.5% compared to 2007.
The sector grew at a much slower pace (16.5% in 2008 vs. 2.6% in 2009), but its overall
performance may be assessed as encouraging given the crisis environment. The total
premium in 2007 ($44.8 billion) rose by 16.9% compared to the premium in 2006, whereas
the increase in the total premium in 2006 was 10.3% compared to 2005. If we observe the
first quarters in the period between 2006 and 2010, the rise in premium can be noticed (16%,
17.9%, 1.09%, 2.41% respectively). Observing the changes of total premium in the period
from 2005 to the first quarter of 2010, it can be concluded that it had the tendency of rise,
which is seen in Graph 3.
Graph 3: Quarterly movements in total premium (2005-2010)7 in billions of Serbian dinars
(RSD)
Observing the premiums per capita in 2008 it can be seen in Graph 4 that Serbia holds 62nd
position in the world with $126.1, whereas the same indicator for 27 EU countries is $3,061.
The UK holds the first place with $6,858, followed by the Netherlands with $6,849 and
Switzerland with $6,979.4. Hungary and Croatia are in the 41st and 42nd position with the
premiums per capita of $501.4 and $430.7 respectively, whereas Turkey holds the 65th
position with $116.1.
In the period between 2004 and 2008 Serbia on average holds the 65th position in the world
with the decreasing tendency of premium per capita. Turkey holds the 61st position on
average with the average premium per capita of $115 in the given period. Hungary and
Croatia hold on average the 38th and 41st position with the average premium per capita of
$398 and $326 respectively. The Netherlands holds the 5th position with the average premium
of $4,855 per capita. The UK has the 1st place in the world, with the average premium of
$5,909 per capita.
7
National Bank of Serbia, Annual Report 2007 and Annual Report 2009.
Graph 4: Premium per capita in European countries in dollars (2004 - 2008)8
Graph 5 shows that the prevailing share of 48.2% and 53.3% in total premium on the
insurance market in 2009 and 2008 is held by DDOR and Dunav Insurance (which will be
state-owned until at least 20139). The other insurance companies are privately-owned. Graph
5 also shows the fall in the premium of these two insurance companies in the period between
2005 and 2009, whereas Wiener and Delta Generali had an increase in premium in the total
premium of insurance sector.
Graph 5: The share of some insurance companies in the total premium of insurance sector
(2005-2009)10
3. THE SUCCESS OF INSURANCE COMPANIES AS A CONSEQUENCE OF
GLOBAL FINANCIAL CRISIS
Global financial crisis requires the promotion of managing risk and capital, i.e. the size of the
capital for providing the success of insurance companies. The consequences of global financial
crisis include a decrease in profitability at a certain level of costs and reduction of the capital.
Profitability of an insurance company means the achievement of a certain rate of income from
invested capital. Profitability of insurance companies11 is defined in the same way as in case
8
Swiss Re, Sigma No2/2005, No5/2006, No4/2007, No3/2008, No3/2009.
www.emg.rs/vesti/srbija/120378.html, 01.07.2010.
10
National Bank of Serbia, Total insurance premium by insurance companies and types of insurance.
11
The data given in the Uniform Bank Performance Report (UBPR) show profitability of banks. The advantage
of these reports in comparison with typical financial reports is their uniformity while presenting the data.
9
of other entities. Insurance companies tend to achieve the maximum of their profitability with
the tendency to use less capital in order to perform insurance business operations.
The National Bank of Serbia, as a regulatory body, set out six guidelines from the field of
insurance, whose aim is to protect the interests of the insured and insurance beneficiary,
create trust of citizens in financial and insurance sector in order to establish a safe and stable
insurance market. These guidelines include different fields necessary for business operations,
supervision, reporting and development of corporative managing of insurance companies.
Their aim is to suggest a way of organizing and carrying out the business activities to
insurers, so the efficiency can be improved.
The National Bank of Serbia created the guidelines (Carmel indicators) following IMF
methodology so the performance assessment of insurance companies is not only standardized
but simplified. They are criteria for quantitative monitoring and analysis of financial stability
of insurance companies. The indicators of capital adequacy are the first to be applied in
determining profitability of a certain insurance companies.
Financial intermediaries are in need of capital in order to perform insurance business
operations and create stability because of the loss that can have a growing tendency. An
insurance company has several tasks to do in order to attain desirable goals. Some of the
tasks are to satisfy the requirements for adequate size of capital from the perspective of the
insured, rating agency and regulatory bodies as well as from the perspective of their survival.
Likewise the company’s interest is to use the capital for making profits. Shareholders, i.e. the
owners of insurance companies have interest in obtaining the income for the capital
(corresponding to the risks taken by placing their share of the capital in an insurance
company); therefore, the reason why insurance companies exist is not only securing the
insured. Optimizing the performances of insurance companies is achieved by managing the
capital and risks. The function of adequacy capital is to absorb risks (for example, insurance
risk, market risk, operation risk etc), which can occur during the business operations and to
maintain the level of profitability of insurance company. The size of capital is not
proportional to the size of insured items, i.e. size of risk. The presence of larger numbers of
independent risks diminishes the probability for disappearing all the risks during the time.
Capital adequacy of an insurance company helps them to survive even during the periods of
significant losses. Also it gives time to renew business operations and avoid the interruptions.
Insurance companies face the problems of possessing enough capital needed to support
insurance and investment operations, i.e. a problem of capital allocation 12. For every single
insurance company needs the capital to make sure that they will settle obligations towards the
insured. Due to large interdependence in insurance business operations, there is always
chance for the insurer’s liabilities exceed the financial means. Capital adequacy helps the
insurance company to overcome unexpected losses more easily as well as unfavourable
changes in implementing insurance processes, calamities and changes in regulatory
environment.
The risk management and insurance company capital management have long been based on
an analysis of particular risk. This approach did not take mutual relationship of several risks
into consideration. However, integral approach to risk and capital management is more and
more applied. The advantage of that approach is analyzing all the risks, i.e. total exposure to
risks that an insurance company has as well as their correlations. Integral risk and capital
Source: Ostojić, Siniša (2003) Applicative aspects of bank′s financial reporting: Analytical framework of a
single banking report, Privredna izgradnja, iss. 1-2, Novi Sad, p. 91.
12
Paul Nealon, Bill Yit, “A Financial Approach for Determining Capital Adequacy and Allocating Capital for
Insurance Companies”, Hamilton, Bermuda, Source: www.actuaries.org/AFIR/colloquia/Tokyo/Nealon_Yit.pdf
management enables the information necessary to covering total exposure to risks. Yet this
approach does not enable an insurance company has the surplus capital that diminishes its
profitability.
Economic capital represents sufficient surplus capital for covering possible damage at a
certain period.13 The concept of economic capital allows establishing the balance between
risk and gains, safety connected to the capital size for risk cover, maximizing profitability as
well as forming adequate capital structure. Insurance companies prefer to apply the concept
of economic capital (which allows them to determine the necessary size of capital due to
types of risks) because it enables profitability and survival.
3.1. Economic and legal generalization of capital adequacy
The analysis of indicators of capital adequacy shows how a certain insurance company is
profitable. Determining capital adequacy according to Carmel methods consists of the
following subgroups of indicators:
C1: Self-insured retention premium/ Total capital
This indicator measures the relationship between self-insured retention premium and total
capital of an insurance company. Self-insured retention premium is the approximation of
risks considered in insurance contracts by insurance companies involved in non-life
insurance. The significance of this premium is reflected in its capability to absorb inadequate
price level of premiums and potential unexpected damage covered by insurance. More
precisely, self-insured retention premium measures the insurance risk,
Total self-insured retention in case of an insurance company relates to the premium of their
own portfolio increased by the premium of received coinsurance and reduced by the sum of
premium transferred into coinsurance and reinsurance, and in case dealing with reinsurance
business operations to the premium for active reinsurance reduced by the premium for
passive reinsurance.14
If the total value of this indicator is high, it can be concluded that the total capital is
inadequate comparing to taken risks considered in insurance contracts (which is measured by
the level of premium). Conversely, a low value after comparing self-insured retention
premium and total capital brings to conclusion that capital resources are not used properly or
that the insurance company has problems and it cannot generate its portfolio.
Global structure of balance sheet of insurance companies in Serbia is not stable. One of
disadvantages of insurance companies is the fact that the value of fixed assets exceeds the
value of working capital. Thus in 2008 and 2009 the value of fixed assets was about 35 and
41 billion dinars respectively, whereas the value of working capital was about 20 and 22
billion dinars.15 Immobile assets in the form of intangible assets show that it is difficult to
make distinction between a non-insurance company and insurance company, or in other
words, insurance companies recognize only those funds that are easy to be dealt with and are
called approved funds. All these should be included in the balance sheets of insurance
companies, whereas the permanent assets should be excluded from the balance sheet and thus
“Specialty Guide on Economic Capital”, Society of Actuaries, Schaumburg, Illinois, March 2004, p. 5.
Decision on methods for determining the level of solvency margin “Official Gazette of RS”, no. 31/2005.
15
The relationship between fixed assets and capital are similar in 2007, 2006 and 2005 (30.1 : 24.7 bn dinars,
24.9 : 20.9 bn dinars and 22.5 : 17.6 bn respectively).
13
14
property part of the balance sheet would be underrated.16 The above-mentioned problem and
new institutional regional decisions make insurance companies transfer to property and life
insurance by high capital census and strict division.
C2: Total capital reduced by loss / Total assets
This indicator measures the relationship between the total capital reduced by loss and total
assets of the insurance company. This indicator measures the exposure of insurance company
to market, investment and credit risk. The low value of this indicator may point out to the
high exposure of the insurance company to these types of risks.
Market risk is a risk by which the value of investments is decreased due to the changes in the
market factors. So, it is the risk when the property and liabilities of the insurance company
are under negative influence of changes on financial market, such as the price of shares,
changes of interest rates, exchange rate or the estate prices. This risk is the main threat for the
property section of balance sheet of insurance companies. Allocation of funds and
diversification may decrease the market risk.
Credit risk is a cause of generating financial loss due to negative changes in the clients’
capability to settle the payments. Insurance companies tend to collect information about the
insured in order to reduce the chance of negative selection. The analysis of the obtained
information contributes to the selection of potential insured with high and low risk level.
Thus the insurance company avoid cooperating with the clients with low insurance capability.
As far as investment risk is concerned, which originates from the sensitivity of interest rate of
present value of liabilities and trading activities on financial market, it should be considered
that property section of the balance sheet of insurance companies mostly consists of financial
assets in the form of bonds, mortgages and shares, which are subject to market and liquidity
risk.
C3: Total capital reduced by loss / Technical reserve
This indicator shows the relationship between the total capital reduced by loss and technical
reserve. Based on the level of premium in case of non-life insurance it can be determined
how much risk is concluded in the insurance contracts. Due to the long-term nature of
insurance, in case of life insurance the premium cannot be used in any other purposes. For
determining the level of taken risks and according to the life insurance contract, technical
reserve is used. Thus the liabilities from the insurance contracts can be measured.
If C3 indicator shows very high levels, there is inadequacy of total capital compared to taken
risks according to insurance contracts (measured by the level of technical reserve). The high
level of indicators may signal a bad use of capital resources or failure to generate its
portfolio.
An insurance company is obliged to determine, at the end of accounting period, the technical
reserve for settling liabilities from insurance contracts 17 and they serve for settling liabilities
set forth in the issued insurance policies. Technical reserve is generated from the technical
premium funds. Their level is determined by actuarial methods and it depends on future
liabilities and structure of insurance portfolio.
Ostojić, Siniša (2004) “The necessity for restructuring insurance companies in Serbia”, Privredna izgradnja,
iss. 1-2, p. 93.
17
Law on Insurance “Official Gazette of RS”, no. 55/2004, 70/2004 - red. and 61/2005.
16
In order to have more active insurance companies on financial market, there is an institutional
framework provided where free financial funds can be placed. According to the Law on
Insurance there is a clear picture what portion of technical reserve can be placed by insurance
companies18, but not to cause non-liquidity problems.
C4: Collateral reserve / Solvency margin
This indicator shows the relationship between collateral reserve and solvency margin. An
insurance company in its business operations, i.e. settling its liabilities, does not use premium
gains or placement from invested funds. The reason for that is the difference in business
operations among insurance companies. That is why forming the reserve is necessary for the
insurance companies. The reserve is formed by taking financial funds from gains, premium
and start-up capital.
Collateral reserve is a form of guarantee that the insurance company will settle liabilities on
the basis of insurance. It is the indicator of solvency. According to the Law on Insurance,
collateral reserve must always be higher than the calculated solvency margin. An insurance
company must have collateral reserve or capital in order to settle its liabilities. The insurance
company is obliged to deposit and invest collateral reserve19 in accordance with the insurance
rules and good business customs. Likewise, the collateral reserve should be defined in the
methods and amounts prescribed by the Law and with the aim of keeping and protecting its
real value.
An insurance company must provide prescribed solvency margin. The solvency margin
represents the quantitative indicator of solvency, i.e. the surplus of liquidity assets over the
liabilities of the insurance company. The level of collateral liquidity must be higher than
established solvency margin, i.e. its amount cannot be less than fixed assets. If there are
variations, or in other words, if collateral reserve does not reach the amount of calculated
solvency margin, the insurance company shall launch the harmonization programme within
30 days from the day of stating irregularities. Solvency margin is a guarantee that the
liabilities of paying insured amount and indemnities will be settled in case the insurance
company has financial problems. Solvency margin also represents the signal for supervisory
board to take certain measures in case there are threats to solvency margin.
In order to provide the unique market at the level of the European Union, the latest
framework for regulation is Solvency II. This act will be applied in Serbia in 2012. Solvency
II acknowledges the influence of all risks that insurance companies face while determining
the level of capital adequacy. For European insurers it is particularly significant that Solvency
II regulations will enable long-term sustainability of the insurance sector as a whole, bearing
in mind the key experience gained during the crisis. Solvency II will have a significant role in
the field of determining the adequacy and efficient allocation of capital, which has a direct
influence on the reduction of costs for the insured, better protection from failure because the
capital is adapted to the appropriate risk and on the promotion of good examples of risk
management.20
18
Decision on limiting certain forms of deposit and investing of technical reserve and on the highest amount of
certain deposit and investing of collateral reserve of insurance companies, “Official Gazette of RS”, no.
83/2005.
19
Decision on limiting certain forms of deposit and investing of technical reserve and on the highest amount of
certain deposit and investing of collateral reserve of insurance companies, “Official Gazette of RS”, no.
83/2005.
20
,,Solvency II: an integrated risk approach for European insurers”, Swiss Re, Sigma No4/2006., str. 9
3.2. Practical application of Carmel indicators
The analysis of profitability indicators brings to a clearer image of success of certain
insurance companies. More detailed analysis of this indicator into parts refers to successful
business operations of insurance companies. The necessary information is obtained from
balance sheet, income statement and notes from financial reports as well as from
consultations from the heads of insurance companies. The notes for 2009 and 2008 at the
example of Dunav Insurance and DDOR Insurance will be presented hereinafter.
Group
Table 6: Overview of subgroups of indicators for Dunav and DDOR Insurance
Amount in thousands
Indicator
2009
2008
C1
Self-insured retention premium/ Total capital
122.1%
111.1%
C2
Total capital reduced by loss / Total assets
40.9%
40.7%
C3
Total capital reduced by loss / Technical reserve
81.1%
81.8%
C4
Collateral reserve / Solvency margin
329.4%
298.5%
C1: The share of the self-insured retention premium in the total capital21 in case of DDOR is
274.6% in 2009, whereas in 2008 it was 314.9%. Since this relationship reflects the capability
of the company to absorb inadequate price level of premium and unexpected damage, its high
value states that the total capital is not adequate comparing to the taken risks22 from insurance
business operations. In case the premium is not adequately measured, the total capital, i.e. its
parts, is used as a guarantee. The changes in indicators in 2008 and 2009 is a consequence of
negative growth of the capital of insurance companies and also there is the fall in self-insured
retention premium. It can be said that every dinar of the invested capital generated 2.75
dinars of self-insured retention premium. The size of this indicator for DDOR is larger than
the one referring to the sector of non-life insurance.
Dunav Insurance has a different relationship of self-insured retention premium and the total
capital from that in case of DDOR, but it also has a slightly lower value in comparison with
the indicators of the sector of non-life insurance. The value of C1 indicator in 2009 was
122.1%, and in 2008 it was 111.1%. This change resulted from a more dramatic fall in the
value of capital than it was a fall in the value of self-insured retention premium. The lower
value of this indicator states that the capital is not fully used and that one dinar of invested
capital can be added in order to get 1.22 dinars of self-insured retention premium.
On the basis of the above-stated, it can be concluded that the total capital is not adequate in
comparison with taken risks from the insurance business operations of DDOR, and that in
case of Dunav Insurance it is not fully used.
C2: The share of the total capital reduced by loss in the total assets in DDOR accounted for
19.7% in 2009, whereas it was 17.7% in 2008. This change resulted from the rise in the value
of capital reduces by loss and the rise in the value of assets, so it represents a positive change.
Since this indicator measures the exposure to market, investment and credit risk, its low value
21
The value of the total capital refers to the value of capital and reserve without reducing by loss to the level of
capital and not performed loss on the basis of HoV available for selling.
22
More attention is paid to risk management. For example, Dunav Insurance has functions for actuary, statistics
and risk management, whereas DDOR has the directorate for risk management.
points out to the high exposure of the investment company to these risks. Every dinar of the
assets is covered with 0.197 dinars of the capital resource reduced by loss.
Dunav Insurance has a different relationship between the total capital reduced by loss and the
total assets. The value of C2 indicator in 2009 was 40.9%, whereas it was 40.7% in 2008.
This change resulted from the rise in the values of both assets and capital reduced by loss. In
Dunav Insurance, every dinar is covered by 0.49 dinars of capital resource reduced by loss.
C3: The share of total capital reduced by the loss in technical reserve in DDOR accounted for
28.1% in 2009, whereas it was 23.6% in 2008. This change resulted from the rise in capital
reduced by loss and fall in the value of technical reserve. Very low value of this indicator
refers to inadequate level of capital in comparison with technical reserve. The size of this
indicator for DDOR is roughly equal to the values of this indicator for the sector of life
insurance where technical reserve represents a good approximation.
Dunav Insurance has a different relationship between the total capital reduced by loss and
technical reserve. The value of C3 indicator in 2009 was 81.1%, whereas it was 81.8% in
2008. This change resulted from the rise in the value of the total capital reduced by loss and
the fall in technical reserve. In case of inadequately measured company’s risks this
relationship refers to the reserve of about 80%. The high value of this indicator can refer to a
low level of use of capital resource because most of these funds are not invested. The size of
this indicator for Dunav Insurance is above the values of this indicator for the sector of life
insurance where technical reserve means a good approximation.
C4: The share of collateral reserve in the value of solvency margin in DDOR accounted for
166.3% in 2009, whereas in 2008 it was 117.7%. This change resulted from the fall in the
value of solvency margin and the rise in the collateral reserve. According to the Law on
Insurance, collateral reserve must be larger than the calculated solvency margin so the
company can be assessed as solvent, and it is true in case of DDOR which formed sufficient
collateral reserve provided that unexpected losses in business operation occur. The size of
this indicator for DDOR is lower than the value of this indicator for insurance sector in 2009.
Dunav Insurance has a different relationship between collateral reserve and margin solvency.
The value of C4 indicator was 329.4% in 2009, whereas it was 298.5% in 2008. This change
resulted from the fall in the value of margin solvency and the rise in the collateral reserve.
Dunav Insurance formed a significantly higher level of collateral reserve for covering
unexpected losses in comparison with DDOR Insurance, whereas the calculated insolvency
margin was similar to the one in DDOR. The size of this indicator for Dunav Insurance was
higher than the value of this indicator for insurance sector in 2008 and 2009.
It can be concluded that a higher level of collateral reserve in Dunav Insurance may provide a
higher level of protection due to unexpected losses compared to DDOR Insurance.
By comprising the previously stated indicators of capital adequacy that have been practically
applied, it can be concluded that there are signs of success, i.e. profitability of the insurance
companies. Namely, by analyzing and interpretation of the capital adequacy indicators it is
noticed that DDOR Insurance creates a lower level of profitability compared to Dunav
Insurance.
CONCLUSION
A strong competition among the business entities participating on the market is more and
more present in our region as well so the right observation and analysis of the business
success is of paramount importance. The reason for that lies in the need for better
understanding of the current position and better design of future business operations. Only
companies that make right decisions are able to quick and efficient implement those decisions
and they are characterized as successful companies.
Insurance is today one of the most profitable activities in the economies of European
countries, and such tendency is seen in Serbia. The results of the research in the first part
conclude that the insurance market in Serbia is among so-called developed markets with the
chance to grow and be more prosperous. The conclusion of the National Bank of Serbia is
that the insurance market and the level of its development are not at the satisfactory level. As
indicators of the level of development of insurance market, in the first part of the paper are
given the following: the share of the premium in gross national product in the period between
2004 and 2008, and here Serbia is on average at the 62nd position. Therefore it can be said
that Serbia is at the satisfactory level since Romania and Turkey are behind according to this
ranking. As far as the share of the total premium worldwide for the period between 2004 and
2008, Serbia on average holds 68th place. The movement of the total premium from 2005 to
the first quarter of 2010 has been shown and it is seen that it had risen. The premium per
capita for the period between 2004 and 2008 has been observed, and here Serbia holds 65th
place in the world with rising tendency which is now $80 on average. For example, Hungary
and Croatia hold 38th and 41st place respectively with the average premium per capita of $398
and $326 respectively in the given period. Most reputable experts dealing with the analysis of
business operations of insurance companies point out that Serbia will, after overcoming the
financial crisis, have an increase in the insurance premium that will exceed the growth of the
gross national product.
The results of the research in the latter part of the paper point out that an insurance company
may achieve and keep desirable level of profitability if it has an adequate level of capital. It
has been emphasized that this analysis is based on the indicators of CARMEL methods
adapted to insurance companies. By this method it is possible to increase the extent of
transparency and comparability because the National Bank of Serbia automatically takes all
the indicators of CARMEL methodology into consideration. Transparency of business
operations has been promoted since annual reports of insurance companies are available to
the public on the Internet. Within the analysis of profitability the indicator of capital
adequacy has been used and it is undoubtedly the essence of today’s business operations of
insurance companies because its function is to absorb the risks, create security for the insured
and provide the survival on the insurance market. The capital of insurance companies should
satisfy internal capital requirements as well as the requirements of regulatory bodies or
ranking agencies.
The above-mentioned theoretical assumptions have been applied at the example of DDOR
and Dunav Insurance. In the first parts of papers we attempted to theoretically show and
explain the indicator that would refer to the quality of business operations of the insurance
companies, whereas in the following part of the paper (practical part) theoretical assumptions
were applied and the obtained quantitative results were interpreted. Their interpretation can
be useful to the insurance companies themselves since this will allow them to analyze the
quality of their business performances or profitability and then to find ways to keep them in
the segments where they were proved to be good and to improve the segments that are below
standard. Insurance companies thus will be able to utilize serious and scientifically based and
practically proved ways and to fulfil their inclination towards successful business operations
in comparison with their rivals – now and in the future.
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<Here is the reference for a Journal Article:>
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<Here is the reference for an Internet Resource:>
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