92 Contents 1. EFFECTS OF INSURANCE SECTOR FROM VIEWPOINT OF CAPITAL ACCUMULATION '. 95 1.1. Meaning and Volume of Fund in Insurance Companies 95 1.2. Power and Effect of Insurance Companies Beside Life 96 1.3. Power and Effect of Life Insurance Companies 97 1.4. Life Insurance Guaranty Forms and Implementation in Turkey 97 2. INVESTMENT POSSIBILITIES OF LIFE INSURANC COMPANIES 99 2.1. Investment Types of Companies in Turkey 99 2.2. Investment Possibilities of Companies Located Abroad 100 2. 3. Evaluation of Investment 101 3. EFFECT OF INFLA TION ON LIFE INSURANCE 102 3.1. Development of Life Insurance Under Inflatory Medium....102 3.2. Recommendations for Life Insurance under Inflatory Medium 103 3.2.1. Pre-Calculation 103 3.2.2 Partial Indexing 103 3.2.3 Whole Indexing 104 3.2.4. Average Indexing 104 3.2.5. Insurance With Share 104 3.2.6. Dynamic 104 3.2. 7. Revaluation, 105 3.2.8. Complementing 105 3.2.9. Finalised Insured Top Level Selection 106 3.2.10. Depending on Unit 106 3.3. Status of The Turkish Insurance Companies 107 4. THE TECHNICAL STR UCTURE OF LIFE INSURANCE 108 4.1. Price - List (Tariff) Premium 108 4.1.1 Saving Premium...108 * `S 4.1.2. Risk Premium (Death, Disability Premiums) 108 ?/y>.93 4.1.3. Cost Shares 109 4.2. Profit Share in Life surance 109 4.2.1. Interest Profit 110 4.2.2 Mortality - Death Level Profit 1 10 4.2.3. Cost Shares Profit 110 4.2.4. Technical Reserve Profit 1 1 1 4.3. Profit Share System in Life Insurance and Technical Principles Ill 4.3.1. Mathematical Reserve Calculation Form 112 4.3.1.1. Mathematical Reserve Methods 112 4.3.1.1.1 Mathematical Reserve With Prospective Method 113 4.3.1.1.2. Mathematical Reserve With Retrospective Method. 113 4.3.1.1.3. Re-Occurrence Formula 113 4.3.1.1.4. Internal Transformation and Negative Mathematical Provision 1 14 4.3.1.1.5 Inventory and Zillmer Mathematical Provisions 114 4.3. 1.2. Benefit of Mathematical Provision... 1 15 4.3.1.3. Calculation Methods of Other Mathematical Provisions 116 4.3.1.4. Usage Forms of Mathematical Expressions In Policies 116 4.3.1.4,1. Transformation of Policies 118 4.3.1.5. Date of Directing Mathematical Reserve into Investment 118 4.3.1.6. Profit Share Distribution From Mathematical Reserve Investment 119 4.3.1.7. Profit Share System and Distribution 119 4.3.1.7.1 Importance of Profit Distribution Policy 120 4.3.1.8. The Reasons of Profit Share Implementation /ffi-.%* '<` ^. />şy ?%?? 4.3.1.9. Technical Structure jfj&lyz94 4.3.1.10. Profit Participation Plan 121 4.3.2 Methods Applied in Profit Share Distribution 122 4.3.2.1. Profit Share Distribution From Current Year Interest Income 122 4.3.2.2. Additional Profit Share Distribution to Insured For Whom Due-Period Comes in Current Year 123 4.3.3. Calculation of Investment Income Proportion 123 4.3.4. Addition of Profit Share Capital to Bonus 124 4.3.5. Profit Share Balance 124 4.4. Effect of Inflation On Profit Share 125 4.5. Problems Existing in Turkey 125, ' i95 /. EFFECTS OF INSURANCE SECTOR FROM VIEWPOINT OF CAPITAL A CCUMULA TION. As it is already know that basic purpose and of insurance management is to protect persons and establishments against hazards and risk threatening their economical assets by proper risk management principle. It is becoming more difficult to cover increasing risks by contribution premiums as basic purpose and direct proportion between paid damages and collected premiums gives sometimes inverse results. At our present time, the companies transfer available funds in their hands to various investment fields in compliance with safety, liquidity and profitability principles in order to eliminate such risk. By this way, insurance management both assumes risk management and tries to keep gains of the company at maximum level. There is `purpose - means ` relationship between development rate and capital accumulation. How high development rate is maintained, then capital accumulations should reach so much high levels. Without existence of financing possibility investment plans will be meaningless. If found money is not utilised, then, such type financing will not bear any practical importance for management. Unless real physical plans are integrated with stable monetary model, expected results from money policies can not be obtained and attaining other economical plans and targets will become impossible in developing countries. 1.1. Meaning and Volume of Fund in Insurance Companies. Primary importance of funds ; assurance is granted. When we ^ conclude and execute any contract with insurance company, we will have purchased assurance. If damage is not effected, this promts td96 indemnity will not be paid but if damage is effected, then indemnity will be paid promptly. Because, there is maximum a good faith and intent rule for both involved party. Follow-up procedure related to that subject-matter will be conducted later on. In addition, clarification and answers'will be made to questions such as to what extent premium should be received, how much of this should be allocated as funds and how this fund should be developed. Secondary importance of funds, is to achieve granting much assurance by little premium for the purpose of spreading out insurance idea. These funds will be utilised to widespread social prosperity and welfare. Funds formed by way of insurance system will contribute for formation of a potential usable in development of country. In fund creation subject-matter, conditions in respect with allocation from consumption not from savings in order that created source will be a real fund, to canalise created fund into investments and at the same time to be in capacity and nature of an investment is supported and defended as an economical view. Funds arisen from insurance activities will have effect on saving- investment national income-saving. Since insurance activities have feature to become widespread on large public masses then have possibility to collect income of large section of individuals in the country and of some portion of individual abroad within their respective reserves. Since these funds are transferred to investments fields, they will increase national income. Individuals whose income has been increased, will have the possibility to make savings in more amounts. 1.2. Power and Effect of Insurance Companies Beside Life. It is impossible to calculate fund outlets in sound and healthy way in events of which determination of damage and loss dimensions will take many years such as natural disasters. Pre-determination of fund97 inlets and outlets will effect investment policies of insurance beside life and traditional liquidity criteria is preferred. Liquidity gains importance in insurance beside life. Especially funds accumulated in insurance branches beside life are directed to fixed income stocks and bonds due to being with high interest rate and having convenience of easily convertible into money. 1.3. Power and Effect of Life Insurance Companies The most significant effect assuring realisation of fund creation function of Insurance business is life insurance activity. The most important function of life insurance from economical viewpoint is to provide long term and stable fund accumulation. Life insurance having very large development potential in Turkey bear importance from viewpoints of creating funds with long-term and thus causing to gain debt in financial markets. Share of life insurance is very high in collected premium volume. Especially in our country having saving deficit importance of life funds to be created is very well known. Mathematical reserves formed from saving premiums of life insurance as well as from technical profits added to these premiums and profit shares are presented to utilisation of economy by various means. 1.4. Life Insurance Guaranty Forms and Implementation in Turkey Premium being consisting of two factors as risk and saving factor respectively in life insurance, will provide an investment to insurer which can continue for many years and causes creation of an investment source which should not be ignored for economy of country.98 Amount payable upon death for life form policies can vary in general for each policy at the beginning of each and within limits determined as based on beginning age. Yearly risk premiums will change as per age, selected risk amount and death table of the company. Risk premiums are deducted from values of units allocated yearly. People in large proportion in developed countries where life Insurance has grown, purchase policies automatically needed by them. Whereas in other countries (in Turkey) where its market has not become matured, such policies are only sold through motivation and furnishing information and knowledge by the seller. jW f/X. *» - >'-k99 2. INVESTMENT POSSIBILITIES OF LIFE INSURANCE COMPANIES Major principles in investments for an insurance company are distribution of risk and maximisation of investment income by way of liquidity, safety, security and variety. Payments made, should not definitely shake the structure of the insurance company. This aspect can be measured by being able to make payments for damages with delay by an insurance company in case of occurrence of any delay. In general, investment possibilities of corporate savings bearing assurance element are determined by legal regulations all over the world. In spite of the fact that scientific criteria exist in financial investments, official competent authority brings limits with narrow or wide scope to such investments by various legal legislation and regulations. 2.1. Investment Types of Companies in Turkey Limiting investment fields by law prevents canalisation of funds into contemporary investment means. The most concrete sample of this is that investment partnerships and investment funds encouraged by the state could not be utilised by life insurance companies. Mathematical reserve guaranties are being kept under lock at certain banks and such situation constitutes various obstacles in portfolio management in compliance with market conditions. Physical difficulty experienced in exchange of sharebonds or treasury bonds buying and selling with available, existent stocks and bonds through any bank remaining out of bank where guaranty is being kept, and encountered risks, emerge out as problems being grown as portfolio volume is extended for companies. V» 'v X** '.,-?.£ 8100 Insurance companies evaluate their respective mathematical provisions over investment assets specified in the section. It has been stated in 15th Article of Insurance Auditing Law numbered 7397 to which assets Insurance and reassurance companies will have to invest their fixed and temporary reserve funds which are mandatory to be allocated. Cash payments in Turkish lira and foreign currencies which are bought and sold by the Central bank of the Turkish Republic, State internal and external credit debentures treasury bonds income partnership bonds and other stocks and bonds to be issued by the state or being under guaranty of the state, debentures and sharebonds quoted in Stock Exchange in form and quantity to be determined and accepted by the Ministry of Trade of enterprises of which capital belongs to the state in whole or in part as well as of Municipalities, however, these sharebonds cannot be shown as provision for more than 10% proportion of guaranty funds of total of debentures and sharebonds belonging to a company, immovable goods in Turkey, but guaranty provisions to be shown as these immovable goods can not exceed half amount of guaranty funds. In additions, blockages to be made as Turkish Lira and stocks and bonds must be deposited to one of national banks to be indicated by the Ministry of Trade. Pursuant to law, in accordance with circular dated 08.06.1964 and numbered 4/8858/145 of Domestic Trade General Directorate of the Ministry of Trade, guaranties can not be deposited at banks of which insurance companies are founders and shareholders. 2.2. Investment Possibilities of Companies Located Abroad. Persons depositing their respective premiums to insurance companies located abroad, can accumulate their gains in a fund directed and managed by professional managers. Cash money ( ),3ar`w 3}101 percentage of each premium) is deposited to various sharebonds, state debentures or immovable goods. 2.3. Evaluation of Investment Organisation structures of private insurance Companies in Turkey do not possess suitability to show activity in capital market. Whereas, there is a investment department attached to the General Directorate in foreign countries, except certain Companies in the Turkish insurance sector, there is no such specialised staff authorisation in Turkey, furthermore number of institutes and their types from which specialisation will be benefited, are limited.102 3. EFFECT OF INFLATION ON LIFE INSURANCE Insurance sector gets effected in adverse way in countries where high inflation rate has become chronic. Although yearly premium increases appear to be high in nominal value, but when analysed as real after being eliminated from effect of inflation, they remain in low level. When high activity expenditures are deducted from premiums which do not show any development in real sense, the remaining technical profits are so low as not to bear any importance in the economy. Inflation rate being high in our country has caused that long-term policies with multi saving purpose are preferred rather than policies having protection purpose and where deposited premiums are not taken back for the reason of bearing short term saving purpose. 3.1. Development of Life Insurance Under Inflatory Medium. The significant drawback and obstacle in the marketing of life insurance during the last twenty years period, hence, in development of long-term-stable life insurance funds has been inflatory medium under which we have already learned to live. In actual fact, life insurance marketing techniques under inflatory medium are already know and these techniques can be summarised in the manner of protection of purchase value of premium. At the present time, in our country, the following implementations are encountered in order to be protected from inflation respectively. - `In fixed rate, premium increase` - `Premium increase indexed to foreign currency` - `Premium increase indexed to inflation` >; >,103 Inflation has entered into economy as a problem which could not be solved. Life insurance price lists arranged till such acceptance, have been only price lists with fixed premium. Such condition has caused effective maturity period to have been lowered of life insurance having long terin contracts and only in this way providing reasonable income. 3.2. Recommendations for Life Insurance under Inflatory Medium. Struggle will be made in life insurance with inflation and certain policy types will be studied and examined. 3.2.1. P re-Calculation. This method is applied to policy types of which guaranties are gradually increasing and where guaranties are assured during period of policy. In other words, Increase of guaranties is not based on owner of policy receiving share from profit. Increases are pre determined as per mathematical base by applying formula and interest rates. 3.2.2 Partial Indexing This method is applied in fixed deferred income insurance. Premiums are increased in same rate as guaranties and guaranties are increased as per an index. This index will be determined by the company and can be consumer price index etc. and similar rates. If premium is increased monthly or yearly depending on an index, then an index showing development of living expenses can be used. Income index of non-ageing investment means (Gold or Silver) can be applied. Consumer prices index can be used.104 3.2.3 Whole Indexing. In this calculation type, premiums are increased as per an index or can be kept fixed. Whereas guaranties will increase with same percentage of indexed premiums. If premium is fixed, then reserves will increase according to index. Israel can be shown as a country applying this index method. 3.2.4. Average Indexing Periodic highness of inflation increase in foreign country may create problems in determination of liberty degree of foreign exchange regime of the country, foreign currency reserves and foreign exchange rate of foreign debts. In case of working with monthly average exchange rates, it may be necessary either to carry out correction procedures at the end of year or these average foreign exchange rates should be approved by public competent authority from viewpoint of protection of consumer. 3.2.5. Insurance With Share Premiums are fixed or variable. Guaranties may change as per increase or decrease of investment portfolio value in which share has been obtained. This method is executed in England. 3.2.6. Dynamic This method is the most widespreadly applied among related methods. Premiums and increases are made depending on various indexes, guaranties increase as per age and insurance period of insured. We can show as an example as a country applying tfiisj^.,-?? T V s.'fc#!105 method, Germany which has developed many methods against effect of inflation on life insurance. Mortality tables for 1986 and 1987 have been mandatorily used for policies with savings and technical interest is 3.5%. The proportion of 90% of profit in all price-lists and products is distributed to insured. When sale condition in products is examined, it is seen that mostly policies with regular premium payment and having minimum 12 years savings are sold. The major reason for this is tax advantage. 3.2.7. Revaluation Policy owner may reject premium increase. Then, premium will remain fixed during policy period. If it is happens, revaluation fund will be prepared to buy variable bonus and will be paid at the end of policy period. 3.2.8. Complementing This is a policy type developed in England. Attention has been drawn to the fact inflation reduces provisions of life insurance in actual sense and attempt by insured to keep his guaranties (benefits) at same level as new policy has been expressed as a healthy and sound way. Without requesting evidences for additional insurance coverage, right for increasing insured vale will overcome this difficulty. Except term insurance, this right can be seen as complementary, supporting life insurance policy to be added to all plans.,/'.?'106 3.2.9. Finalised Insured Top Level Selection. In this type, premiums can be increased yearly. Premiums can be paid within periods being shorter than policy period. There are numerous ways to carry out such policies. It is not necessary that increase in guaranties (benefits) should be with regular months or at fixed level. Premiums will increase as per age and policy period of policy owner. Guaranties will also increase as per age and policy period of policy owner. We can show United States of America as country applying this type of method. 3.2.10. Depending on Unit Depending on unit concept is used in England. This may be endowment insurance or yearly life insurance with regular or single premium payment and binding an income when a certain age is attained. Reserves of these insurance will be deposited to special funds as units. Participation of policy owner to fund has been divided into units and value of each unit will reflect shares to which fund has been investment and performance of debentures and immovable goods. Unit more than amount deposited by owner of policy to fund will be issued into circulation and added to fund. Price of each unit is division of fund investment value into number of unit. Floating in investment value can be increased or decreased. Fund sale price is sale price of units belonging to policy owner at the end of policy period and early participation. This sale rice is calculated by deduction of management costs and other expenditures from investment value.107 3.3. Status of The Turkish Insurance Companies. In brief, although corporate savings realised in the Turkish Insurance sector show insurance by time, they have insignificant size in proportion to total domestic savings. Insurance companies in Turkey are not seen as financial institutes being able to create fund besides covering risk. Private sector, in general obtain fund demand from banking sector and fund creating capacity of insurance sector is not taken into consideration with so importance. Insurance sector being encouraged in industrialised countries, especially in the West for this feature, but in Turkey has been passed by artificial expressions in development plans. Source of funds formed in this sector is obtained from two main activities. Firstly, income formed as a result of current insurance activities and we call it technical profit and secondly, income obtained by placing of funds formed as a result of mandatory or optional provisions by accumulation of these profits for many years to various markets and we call it financial profit.108 4. THE TECHNICAL STRUCTURE OF LIFE INSURANCE 4.1. Price - List (Tariff) Premium. Life insurance price lists should be arranged in capacity and nature to meet requirements of individuals in the most suitable manner from economical viewpoint. All life insurance price lists are nothing more than different forms of two types insurance. These are combination of insurance attached to life or death. There are 3 factors in this premium collected from insured. Saving premium, risk premium (death or disability), cost shares. 4.1.1 Saving Premium As long as it is collected each year, this premium will be returned to insured at the end of certain period and by reaching to an amount previously promised by yielding interest with stated technical interest percentage. So each year amount of this premium is called MATHEMATICAL RESERVE. The company will record MATHEMATICAL RESERVE calculated by adding new, premiums calculated each year to previous years amount with interest and by yielding interest to Reserve Account in its balance - sheet to be returned to insured at the end of certain period. Saving premium reserve is multiplied each year and reaches to insurance value at the end of insurance period. 4.1.2. Risk Premium (Death, Disability Premiums) Again, as stated above, as long as it is collected every year, this premium will yield interest with technical interest percentage and^*?****^ accumulated. As a matter of fact, company undertaking paid1 4$ * * -,, l persons who die or become disabled each year is deducted from Hh^e-^k 't /109 accumulated amounts and remaining balance is transferred to the following year. So, this amount transferred to the following year is called RISK RESERVE collected premiums should yield interest with compound interest as per mathematical bases in life insurance in order to assure payment to death risk as well as an amount at the end of certain period. So, reserves obtained in this way is called mathematical reserve. In classical life insurance including both saving and death guaranties (benefits), Mathematical Reserve in any insurance year will be in short as follows. Formula : Mathematical Reserve = (R.Reserve transferred from previous year - net premiums collected this year) x (1+ interest percentage) - 0 year paid Death Indemnity Total. Here, net premium is the total of saving and risk premiums. 4.1.3. Cost Shares Cost factors contained in Price List premium (administration, collection and production) are provisions for overhead expenditures of the company and costs made for collection and commissions given to production staff. 4.2. Profit Share in Life Insurance Insurance companies having activities in all branches can only distribute share from interest or risk profit. Profit of life branches is obtained from following 4 factors. Interest profit (from Mathematical Reserves), Mortality Profit (from Risk-death premiums), cost shares profit, Technical Reserve profit respectively. Let us try to explain these factors in detail. r, *:? :.»110 4.2.1. Interest Profit Mathematical Reserve allocated in balance-sheet each year for all insurance for which mathematical reserve can be allocated, will be directed into investment. After deduction of taxes and other expenditures from gross income obtained in consequence of this, it is remaining balance by deduction of amount corresponding to technical interest percentage given to insured in advance and calculated this time essentially within mathematical reserve from remaining net profit as stated above. 4.2.2 Mortality - Death Level Profit It can only be applied in individual price list group for which death guaranty benefit is granted or in group insurance. Here, it is the amount remaining after deduction of already paid or not paid yet (remaining suspended) death indemnity realised for deaths within same year from net death premiums collected within that year. Some portion of this profit will be granted to insured as advance payment as stated above or additional guaranty to the capital. 4.2.3. Cost Shares Profit This is a complicated a profit share factor being the most difficult to determine. It exists with Price List Premium and if the Company has made lesser overhead and administrative expenditures in comparison with total of these shares received against overhead and administrative expenditures and production costs and has realised directly for many jobs and not granted any commission to agent from these jobs, then profit has been achieved on this subject-matter. However, share can not be granted to insured independently from this profit. Because, in composite (classical, conventional) InsuranceIll companies, determination of cost share is very difficult even, impossible. 4.2.4. Technical Reserve Profit It has been constituted to cover overhead expenditures of the companies and to strengthen structure of companies. Companies gain two types investment income. Profit gained by companies through establishing fund formed after deduction of necessary spending from collected premiums will form first profit and profit gained by establishing blocked assets will form the second profit. Except our few companies, our insurance companies reflect income gained from blocked asset investment to their insured as profit share. Such type share distribution system is applied to all insured contained in company portfolio and having mathematical reserve. 4.3. Profit Share System in Life Insurance and Technical Principles. Work to be executed after determination of yearly profit amount is distribution of profit to insured. Net profit determined after making necessary reserve allocation in companies established in the form of co-operative will belong to insured being shareholders of the company. Whereas in companies established as joint-stock companies, certain percentage of profit will be distributed to shareholders. Remaining balance will be distributed to owners of insurance policy with profit participation. There are various methods for distribution of profit. The simplest method is distribution of profit as per specific, certain scale.112 4.3.1. Mathematical Reserve Calculation Form. Net premium of life insurance is calculated as per equality principle. This value is calculated to cover cost of amounts to be insured which will not leave any profit or loss to insurer. Insured will pay a gross premium. In other worlds he/she will pay a total amount to cover net premium and costs. Let us consider a death insurance attached to life. It should have been arranged t years ago and age of insured at that moment should have been specified by x. Insured capital 1 unit and yearly premium to be paid by insured should have been determined as Px. Let us take into account symbols in the section. 4.3.1.1. Mathematical Reserve Methods There are two parties in an insurance contract, insurer and insured respectively. There are obligations of both parties arisen from the contract. Obligations of insurer as from equality principle of obligations at the beginning of contract are equal to obligations of insured. While conducting premium calculation, at the beginning, undertaking of insured and undertaking of insurer will be accepted as equal. However there is no such actual equality at any time of the contract. Total premiums received at t moment, may be smaller than indemnity being undertaking of the insurer. The Insurer will have to allocate a provision to cover this difference in order to fulfil his obligation. This accumulation called as Mathematical reserve will consist* <?/V'W /, saving premiums remaining after deduction of risk premiums^ qna V.113 production and administrative costs from paid premiums within technical bases as well as technical interest added each year to these premiums and profit share. In other words, Mathematical reserve is value in advance of undertaking of the Company to its insured. 4.3.1.1.1 Mathematical Reserve With Prospective Method It is calculation by prospective method. It is prospective method with obligations to be fulfilled by insured and insurer in future. It means that mathematical provision is difference between value in advance of obligations to be fulfilled by insurer in future and value in advance of premiums to be paid by insured. That will be calculation mathematical provision by prospective method. 4.3.1.1.2. Mathematical Reserve With Retrospective Method. As it is already known that mathematical provision can be calculated by difference between end value of paid premiums and end (resultant) value of encountered risk. It is fulfilling obligations by insured and insurer directed into past. It is deduction of obligation of insurer from total premiums deposited by insured. 4.3.1.1.3. Re-Occurrence Formula This formula will show relationship between mathematical revisions calculated after t and t+1 years have elapsed as from beginning of insurance policy. Re-occurrence formula will indicate how yearly management mechanism of an insurance policy. Mathematical provision and yearly premium total of the insured and yearly interest yielding of these.114 4.3.1.1.4. Internal Transformation and Negative Mathematical Provision. All these procedures will constitute internal transformation. Talking about negative mathematical provision : In general, mathematical provision is calculated by one of prospective or retrospective methods independent from insurance tariff and payment methods of premiums. In other words : Mathematical Provision = End Value of Premiums paid by Insured - End Value of Risk Assumed by Insurer, or Mathematical Provision = Value in advance of obligations of insurer - Value in advance of premiums to be paid by insured. Each of these relationships will define Mathematical provision as a positive difference between two values. In such case, it can be said in advance that it will take a value under zero. In price list with yearly premium, negative mathematical provision is seen since death rate at the beginning of insurance policy during childhood is high. During first years, insurer will extend payments more than his collected premiums, for this reason, negative values will emerge. 4.3.1.1.5 Inventory and Zillmer Mathematical Provisions. Till now, mathematical provisions have been calculated without taking into account expenditures and such type mathematical provisions are known by name of net premium mathematical provisions. %115 We shall leave aside production commission and will only, take into account management (Administration) expenditures. Value in advance of management expenditures will be taken into consideration in calculation of obligations (liabilities) of both parties. If we take death insurance for a case with yearly premium payment, so, we can write this. In consequence, we can say that inventory mathematical provision is greater than net mathematical provision or equal to it. Let us include production commission into calculation of mathematical provision. When policy is arranged, insurance company will make a payment to intermediary agent against his work. In case insurance being with yearly premium payment, this amount can be amortised by each years premium payment. After elapsing t years as from beginning of policy (in case of t<m limited payment), production commission could not be amortised in whole. This unamortized portion will be deducted from mathematical provision. This deducted share is known as Zillmer deduction. He is a German actuary named Zillmer who proposed this procedure first time. So, value of inventory mathematical provision found by making Zillmer deduction is called Zillmer mathematical provision. 4.3.1.2. Benefit of Mathematical Provision When we attempt to explain Mathematical provision concept in term of Payment ability (power) of the insurer, it is understood that insurer must maintain a reserve amount for each policy to cover risk at any time. Thus, insurer will be ready to fulfil his obligations towards his insured. At the same time, mathematical provisions will help in determination whether company portfolio management has made r profit or loss or not. When loss occurs, it will be mentioned as ^ ;?-..116 negative profit and when profit is gained, it will be mentioned as positive profit respectively and profit or loss terms will not be used so much. Source of profit may arise from death level, investment interests, management expenditures and final cancellation buying procedures. Allocation of profit to the said sources will form an important guideline for price lists to be calculated in future. Accordingly attempt should be made, to determine proper death level table, good interest rate and well calculated a expenditure percentage. Laws being in force and effect in all countries make formation of such type reserve amount mandatory for companies. 4.3.1.3. Calculation Methods of Other Mathematical Provisions. There are other methods related to calculation of Mathematical Provisions by grouping. Calculation of mathematical provision for each policy each year is a problem faced by insurance companies as being long procedure. However employment of computers has facilitated solution of this problem to a great extent. 4.3.1.4. Usage Forms of Mathematical Expressions In Policies. Laws in all countries grant the right to insured to withdraw from the contract before expire date of policy. Also, it is stated that only if first premium is not paid, then insurer will be entitled to appeal for legal procedure. If the contract is cancelled without paying premium for certain period, then the contract will become void and null, (without any payment of indemnity to the insured) In such case, the contract may be cancelled. If 3 premiums or more premiums have been paid, then insurance policy will remain in force and effect, but insured amount117 will be kept in lower level by a technical calculation. This is called rebated insurance (insurance without payment). If insurance is a definite procedure, then the insured may request cancellation of insurance policy without demanding rebated insurance. In such case, a value called as buying value will be paid to insured in nature of indemnity. Theoretically, buying value is equal to Zillmer Mathematical provision. Actually such type mathematical provision is found by deduction from two results value as per retrospective formula basis unamortized buying resultant values. Also, there is partial rebate procedure. He can get remaining balance insured by rebating (deducting) some portion of insured amount. So, premium payments will not be removed in whole, a reduced amount premium will be paid. Procedure will be carried out as per that model. Calculation rules of buying and rebate values vary to great extent. They change so much that almost all of insurance companies apply different rules and principles. In general buying and rebate procedures will be executed after at least 3 years premium payment. If a premium lesser than this determined 3 years premium payment is paid, in other words, if first or maximum 2 premium is paid, then cancellation procedure is conducted, i.e, insurance company can cancel policy without making any reimbursement. However, stated 3 years premium payment principle is not absolute and definite. It is seen in practice that buying and rebate procedures are made for ones paying 2 years, even I year premium. £®#f ??'$$-*? v. :. %-,u/118 4.3.1.4.1. Transformation of Policies. Insured may ask changing only one of policy elements instead of rebate and buying, for example he way request changing mixed insurance period or conversion of insurance depending on life into mixed insurance. Although insurer is not obligated to attempt for such procedure from legal. Viewpoint, it has become a general implementation capacity that insurer has consented to such implementation called as transformation in order to render service to client. Loaning money as per policy basis. In general insurance companies loan money against policies having buying value. Loaned money is determined in proportion to buying value, it is a value related directly to mathematical provision. Taxation is calculated by taking buying value as basis. In order to be convenient for insured, ready buying value tables showing buying values are prepared instead of calculation for tax each year. 4.3.1.5. Date of Directing Mathematical Reserve into Investment. Mathematical reserve calculated as per price list technical bases as from 31-12 date, will be invested by blocking or rendering to the order at one of Trustee Banks determined by the Undersecretariat of Treasury and Foreign Trade from the date of 1.1 latest till the date of 31.5 stipulated by law. After deduction of expenses and taxes from obtained gross income, net income is found. This net income found will be distributed to insured pro rata mathematical reserve pursuant to certified technical bases.119 4.3.1.6. Profit Share Distribution From Mathematical Reserve Investment. This profit share plan is applied to insured having mathematical reserve in existing portfolio of the company. Mathematical reserve calculated as per end of year 31-12 will be directed to investment in the following year and income gained within that year will be distributed to policies as from beginning of the following year. Income gained as from establishing date till the date of 31-12 is investment income and gross. After deduction of tax, outlay, duty and expenses from gross income, yearly net income is found (Assets as provisions of Mathematical Reserve are maintained in a separate blockage account from other provisions and income and expenses to mathematical reserve provisions are followed up from independent accounts). Technical interest percentage belonging to price list is deducted from percentage to be determined as per established mathematical reserves of gained yearly net income. Certain percentage of remaining amount (in general 95% ) will be profit share percentage to be distributed. By taking into consideration found profit share percentage and its own mathematical reserve of each life insurance remaining in force and effect, its accrual will be effected. 4.3.1. 7. Profit Share System and Distribution Profit distribution bears a critical property effecting growth rate of firm, market value, of firm and assets of shareholders. For this reason, it is the most important decision to be made by management of firm how net profit will be divided and on which proportion between profit share to be distributed and undistributed profit.120 There are various profit share distribution policies in companies. Some of these are Distribution infixed amount (Decisive Profit Share Distribution), Profit Share Distribution in fixed proportion, By distributing profit infixed amount and then making extra profit share in addition to this. Procedure finding distributed profit share proportions on price lists conforming with different technical principles on a sample company is explained in Table II. In other tables, case of increasing technical interest is shown. Main idea over here, all gains of the company should be distributed over mathematical reserves calculated separately for all policies. 4.3.1.7.1 Importance of Profit Distribution Policy. Actual profit gained by the company is difference between amount gained from money markets and amount decided to solve damage payments. Insurance companies distribute profit share as per day basis as from working day following transfer o premium to the company in each insurance contract from which saving premium is taken. Profit share is calculated for each insurance company as per the following principles. - Profit share is calculated on policy basis. - Profit share distribution principles for price-list groups may be different.121 - Profit share distribution principles belonging to foreign currency indexed insurance and insurance made over Turkish Lira are made as per characteristic of price-lists. - Profit share is applied to policies being in force and effect. 4.3.1.8. The Reasons of Profit Share Implementation. It has been considered as unjust and unfair to pay on amount which has lost too much its value at the end of long period to insured by yielding interest with Technical interest percentage such as 3% or 5% even 9% of premiums even at a time when inflation is high from this profit gained too much above Technical interest from investment of reserves owned by insured as entitlement of insured and it has been accepted as basis to give share from company profit in order to incite interest decreasing towards Life Insurance due to increasing inflation. 4.3.1.9. Technical Structure Profit shares allocated for insured with Distribution Principles will be paid to owners of entitlements as additional indemnity in case of Death. It is paid as accumulated profit share to owners of entitlement when due-time comes. It is paid as accumulated profit share to owners of entitlement in case of buying. This value is called as profit share in case of mandatory payment of indemnity if insured becomes disabled or leaves from insurance. 4.3.1.10. Profit Participation Plan. After deduction of weighed average technical interest amount of these reserves from investment profit calculated at the end of ye$nk * In stated in above articles as per income, expenditure accounts opened for each asset from investments gathered in these two main*122 categories, net interest profit is obtained. Distribution with profit share proportion will be made under frame of formula and principles stated in concerned section. Profit share will not be given for insurance cancelled without obtaining rebate (insurance without payment) right (before 3 years or lesser period as per terms and conditions of its contract.) in order to allocate any profit share to any insurance, it is compulsory that insurance should be existent in mathematical reserve portfolio (current or rebate) on the date of 31 December. 4.3.2 Methods Applied in Profit Share Distribution. As per current portfolio, calculation form of an investment income, if there are mathematical reserves belonging to previous year of policies excluded from portfolio, net investment income proportion will be found by dividing total of profit shares to Mathematical reserve remaining after deduction of profit shares from total mathematical reserve. Single important feature of profit share distribution by current and valid portfolio, is distribution of its income obtained by directing mathematical reserve calculated in previous year to investment and policies directed to investment and being in force and effect to its mathematical reserves. 4.3.2.1. Profit Share Distribution From Current Year Interest Income. By directing premiums paid within that year of policies executed newly each year to investment from income gained in the same year, tax will be deducted and then current premium interest income (Gpt) is found. A percentage determined by the company of this income will-123 constitute profit share (Kpt) to be distributed to newly executed policies. So, a distribution factor (Dft) is found for each policy. By dividing distribution factor of each policy to total distribution factor of all policies, a distribution co-efficient (Pt) is found for each policy. By multiplying distribution co-efficient of each policy with Kpt profit share to be distributed to newly executed policies, profit share of that policy belonging to execution year will be calculated. It is explained in related section with samples. 4.3.2.2. Additional Profit Share Distribution to Insured For Whom Due-Period Comes in Current Year. An additional profit share can also be distributed to owners of insurance policy with saving entitled to pension in current year or maturity period is due. It is portion of distributed profit share calculated based on days by per diem cut method. 4.3.3. Calculation of Investment Income Proportion. Net income gained in current year from mathematical reserve investments of previous year, is divided to mathematical reserve of previous year and then net investment income proportion (g) is found. RT = Total of mathematical reserves directed to investment. Rl = Net income gained from investment assets of mathematical reserves. Price-List technical interest is deducted from percentage found by division of net income calculated from mathematical reserve investment to established mathematical reserve and proportion found by multiplying remaining amount with proportion to be distribute, will be accrued to policies in pro rata of its reserve.124 4.3.4. Addition of Prof it Share Capital to Bonus It is the most widespread profit share system. Each profit share is used for increase of insurance capitals of death and endowment insurance. A profit share 'amount entitled by insured is accepted as premium of a new insurance and is employed in formulation belonging to various insurance price-list in order to add at the end of period. Profit share to be distributed for each policy (KP), will form fixed net premium being basis to profit participation capital by not distributing to insured during that year. 4.3.5. Profit Share Balance. After deduction of expenses and tax from gross income to be emerged from Accounting calculations of Mathematical reserve investments and saving investments, 95% proportion of found net income amount differs from profit shares total to be distributed to each policy, then such difference will be added to net income of the following year. Profit share balance (remnant) becomes due to two reasons. Firstly, it is formed by rounding net income proportion found by division of net income found as per accounting records to total mathematical reserve and secondly, it is formed by not distributing profit shares required to be distributed due to reason of buying cancellation of policy and insured leaving from portfolio due to death.125 4.4. Effect of Inflation On Profit Share. Classical premium plans have certain characteristic features in inflatory medium. One of these features is to fix premium for whole period. Profit share of insurance company is increased in order to meet the following inflation. Life Insurance fund account consists of Mathematical provisions belonging to previous years being basis for profit share of insured and assets to which mathematical provisions belonging to current year have been invested and are recorded to life insurance fund account as from first working day following date when premium is included in the company. This aspect is a subject-matter being contained in Life Insurance Regulations draft. So, it is desired to keep gains of insured at highest level. 4.5. Problems Existing in Turkey Life Insurance activities become one of favourite branches of recent years. However, since distributed profit shares remain under inflation rate, policy owners try to stay away from life insurance branch. Not all insurance companies, but it is understood, some insurance companies give profit share under inflation as found out from end of year figures. Common view and opinion of sector is that many companies gain income under inflation by making investment on immovable goods from which only re-valuation can be obtained due to reason of laws being inadequate. It is useful and beneficial to point out that this problem concerns insurance companies and law makers and regulators...?.?^SSÖHi»»-^. '?126 7/ is known that policy cancellations being one of important problems of Life Insurance activities, have occurred in previous years. Even cancellation proportion has climbed to higher levels due to experienced economical crisis. It is very important that an insurance company should maintain its existing portfolio. Because cost of each new policy is very high. Whereas, cost of a policy which continues as from former years is very low or is too small to the extent to be considered as non-existence.
