Sigorta işletmelerinde sermaye yönetimi

Abstract

T.C. MARMARA ÜNİVERSİTESİ FACULTY OF BANKING AND INSURANC Y DSfSURANCY DEPARTMENT CAPITAL MANAGEMENT IN INSURANCE COMPANIES MASTER THESIS PREPARED BY : ŞEBNEM KUMBASAR ISTANBUL, 1995CAPITAL MANAGEMENT If PARTI BASIC CONCEPTS 1- THE CONCEPT INSURANCY 1.1 Common definitions 1.2 The principles of insurancy 1.3 The functions of insurancy PART II CAPITAL COSTS /- THE IMPORTANCE OF THE CAPITAL COSTS CALCULATION 2- CAPITAL COSTS 3- THE RELATION BETWEEN CAPITAL AND RISK 3. 1 Systematic risks 3.2 Unsystematic risks 4- THE EFFECT OF THE INSTITUTIONAL CAPITAL OF THE INFLATION ON THE INSURER AND THE INSURED PART III BASIC LIMITATIONS TO THE CAPITAL MANAGEMENT IN INSURANCY 1- THE INVESTMENTS OF THE INSURANCE FUNDS 1.1 The legal adjustments made to the Investments of the Insurance companies 1.2 The limitations to the Investments of the Insurance companiesPART IV THE CONCEPTS OF PROFIT IN INSURANCE COMPANIES 1- TECHNICAL PROFIT 2- FINANCIAL PROFIT PARTV THE INVESTMENT AREAS OF THE INSURANCE COMPANIES 1- THE PORTFOLIO MANAGEMENT IN THE INSURANCE SECTOR 2- THE INVESTMENT AREAS OF INSURANCE AND REINSURANCE COMPANIES AND THE INCOMES OBTAINED FROM THESE; shares, drafts, the credits regarding the life insurances and mortgage, real estate PART VI ` SWAP - FORWARD - OPTION - FUTURES ` Procedures as techniques in order to lessen risk (hedging) 1- THE MAIN PURPOSE OF HEDGING APPLICATIONS 1.1 Forward and Swap applications 1.2 Option 1.3 Future applications RESULTPART I : BASIC CONCEPTS 1- THE CONCEPT ` INSURANCY` 1. 1 Common Definitions The basic idea behind insurancy is that anybody who endures a particular loss due to some risks, will take prevention against this loss or even lessen this loss. Besides this, it is not the aim of insurance to compensate everybody's loss one-by-one. Its aim is more to specify the possible risks with statistical methods by bringing together of people who are facing similar risks as much as possible. At this stage insurancy is a risk transfer, in other words we can say mat it functions as risk share mechanism. The risk regarding the insurance, has to be determinable from the standpoint of the insured and the insurer, be homogeneous and measurable with money. In order to establish the idea of insurancy in the society, the individuals belonging to this society have to have reached an economical status which permits them to pay the necessary premiums apart from their daily household costs. As it is clearly understandable, the first and the most important function of insurancy is to provide economical and social security for individuals and institutions throughout their lives. Insurance also assists in obtaining credits; in case any real estate or a ship which is about to be mortgaged, is insured, this enables the person to get the credit more easily Insurance also enables people to have savings. Especially when we talk about the importance of life insurances because of their long-term validity The premiums which are collected by the insurance companies are rather high amounts. When we look at this from the importance of the state's economy, we will notice that these insurance funds have an important role here. In order to protect the benefits of the insureds and to make the insurance companies financially stronger, thestate is keeping these funds under control and determines legally to what kind of investments these will be used for. A condition for the insurance to be successful, the risks have to be spread into a wide field. In order to spread the risk into broader areas, there are two ways: 1- The insurance company opens a branch abroad 2- The insurance company gets in contact via reinsurance method with the insurance companies abroad. The determination of reinsurance (mutual insurance) is as follows: ` A part of the risk that is insured by any insurance company is being transferred to an other insurance company ` Nowadays the insurance sector is active in the following areas: -Fire - Accident - Machine and machine erection - Agriculture - Life insurance Briefly we can say that the insurance companies have to make use of their collected premiums starting from the present in order to meet their responsibilities for the possible risks or the risks which are definite to occur. This means that the companies are forced to have professional portfolio management techniques at their companies. Actually the basic idea behind portfolio management is as follows: ` Goods (stocks and bonds) have to be gathered together via several ways with the purpose of meeting the future responsibilities of individuals or institutions.`1.2 The principles of insurance There are five basic principles for indemnity insurances: a - The principle of Insurable benefit b- The principle of Good-will c- The principle of Indemnity d- The principle of Succession e- The principle of Close relation 1.3 Functions of Insurance a- To guarantee safety b- To make capital c- To provide credit d- To function internationally e- To improve the risk PART H : CAPITAL COSTS 1- THE IMPORTANCE OF THE CAPITAL COSTS CALCULATION The investment decisions are directly related to the financing decisions. Because of this, the approval of an investment project depends on how this project is going to be financed. The actual net value of the investment project has to be positive according to the capital (source) costs which can be expressed in other words as the discount limit calculated before. The approval condition of the project depends on the relation between intern profit ratio and capital costs of which the latter must be lower. An intern profit ratio of an investment project is ` R > x i `.The actual value of the capital costs determines the source for the investment projects which have positive results compared to the capital costs or of which the intern profit ratio is higher than the capital costs. 2- Capital Costs The necessary funds for the institutional investments are being provided from two main sources. These are the internal and external sources. There are several fund sources with their costs. We can briefly list these as follows: a) the costs of the debts b) the costs of the special share holds c) the costs of the common share holds (the GORDON Model, CAPM measurement, Bond Plus measurement) d) the costs of drafts changeable to stock holds e) average of capital costs 3- THE RELATION BETWEEN CAPITAL AND RISK INSTITUTIONS We can divide the risks which the institutions may face into two: - Systematic risks - Unsystematic risks 3.1 Systematic risks These type of risks are the ones which are effected by war, international conflicts, inflation and political alterations, namely; i) the risks which occur due to changes in interest rates ii) Inflation risk - Purchase risk iii) Political risk iv) Market riski) Interest rate risks: These can be defined as the loss the investors may face as a result of changes in the interest rates ii) Inflation risks: These can be defined as the risks which occur due to the devaluation of the money iii) Political risks: These can be defined as the risks due to some conflicts between nations, due to political disputes which may even lead to war between the nations, etc. Besides this, the irregularities in the foreign exchanges and the nation's preventions to these following, quotas, foreign capital investment, etc may also lead to political risks iv) Market risks: These can be defined as the ones which occur due to consumer's needs and the government decisions related to foreign trade, and which are at the same time uncontrollable by the companies 3.2 Unsystematic risks These type of risks are hazardous and uncontrollable and they effect only one institution. These can be listed as follows: i) Financial risks ii) Management risks iii) Sectoral risks i) Financial Risks: Financial risks are caused by the irregularities in the capital market Factors like increase in foreign investment, irregularities in prices, strikes, need for cash money do increase the financial risks. On the other hand, technological superiority and other types of advantages decrease the financial risksii) Management Risks: These type of unsystematical risks occur due to wrong decisions taken by the finance managers at companies and the misapplications following these iii) Sectoral risks: These type of risks occur due to economical and social changes in the sector the companies belong to 4- THE EFFECTS OF THE rNSTTTUTIONAL CAPITAL OF THE INFLATION ON THE INSURER AND THE INSURED The collection of the cover premiums in installments without charging any interest for this type of payment, increases the actual costs of the indemnity payments and in this way it effects the loss-premium ratio negatively. Due to their liquidity problems, the insurance companies delay their payments for the pending losses which causes them to make their insureds also loose because of the inflation, while they are obtaining the funds without any interest. Because of the growth in the inflation, personnel and general institutional costs, the statistics are effected negatively and the indemnity payments to be paid in the future will get more than in the past. The ratio between the institutional costs and the premiums is negatively effected by the fixed cover prices and the increase in institutional costs due to the inflation. The high inflation rate has impeded the spread of the insurance concept in Turkey. The individuals whose incomes get less because of the inflation, are trying not to get involved with the little risks. Besides this, the incomes which will be obtained because of the insurance policies, loose their value and this makes the idea of being insured not so much attractive. In a country where the prices increase above the normal standards, the insurance policies cannot function properly and therefore loose their attractivity.The above mentioned factors effect the insureds, but the inflation has also direct effect on the insurer. An example to this is the fact that the costs are continuously increasing although the premium tariffs remain the same. But the life insurances are the most effected one by the inflation. For the insurance companies to be successful in growing and collecting the funds, the prices have to be fixed and the economy must also be stable. The inflation causes the capital costs of the institutions increase and the type of the inflation influences the severity of this need. During the periods of `request inflation`, the institutions' needs for increasing capital, stay at a moderate level. During these periods, by changing the sale conditions, the companies create the opportunity for themselves to shorten the average period of the collection of the premiums and even to take some advance from the insureds and this enables them to limit their needs for extra institutional capitals. On the other hand, during the time the prices are increasing at the time of economical calmness (stagflation) and even keep on increasing during economical slow down (slumpflation), the needs of the companies for institutional capitals increase enormously and together with this the slow down of the collection- transfer process also increases the companies' needs for institutional capitals because the economical calmness effects the insureds' capacity to pay their premiums negatively and increases the amount of suspicious cases. PART m : BASIC LIMITATIONS TO THE CAPITAL MANAGEMENT IN INSURANCY 1- THE INVESTMENT OF THE INSURANCE FUNDS First of all the insurance funds must be used for investments which can be easily and rapidly changed into money when necessary. This is called liquidity. After this, the investments have to bring some income. Whatever the reason may be, it must carry therisk of capital loss, in other words it must be safe. Of course the risks in the investments must be distributed. 1. 1 The legal adjustments made to the investments of the insurance companies These legal adjustments are determined according to the law numbered 7391 and the insurance funds can only be invested in the followings: a) Cash deposits in Turkish Lira and foreign exchange which is approved by the Turkish Central Bank b) Credit drafts of state, treasury bills, income partnership drafts and other kinds of drafts under the guarantee of the state c) Share of drafts of institutions belonging to the State or municipalities' drafts quoted at the stock exchange (But it should be known that the total of drafts and stocks belonging to a company cannot compensate for more than 10 % of the guarantee funds) e) Real estate in Turkey (Real estate can only compensate to 50 % of the guarantee funds) The investment ways for the insurance companies mentioned above are again under the control und supervision of The Office of Supervision Generally we can say that the investments made in real estate are very much appropriate for long-term covers. This is because the liquidity is not as much as it is with the stock shares. With life insurances it is possible to get positive outputs because these policies are long-term ones and because of the importance of the of the interests.In case of indemnity covers, it is very important to convert the investments into money easily and rapidly because this can be reached with stock share better. When we talk about these type of stock shares, drafts are preferred to shares, because the interests are definite with drafts. 1.2 The limitations to the investments of the insurance companies a) According to the 12th condition of the legal adjustments, the insurance companies and their agencies are forbidden to be involved in selling and buying of real estate to obtain commercial profit b) The amounts applied by the insurance companies and agencies to real estate should not exceed their own sources c) After taking our real estate from the own sources of the insurance companies and agencies, the remaining amount must not be under 8 % of the active amount d) The amount of shares belonging to juristic persons who are in contact with insurance companies and their agencies, must not exceed the percentage of 25 in the stock share portfolio e) As a result of this, the real estate which is obtained without the intention to do so, must be given away within three years from the day it is obtained PART IV: THE CONCEPTS OF PROFIT IN INSURANCE COMPANIES 1- TECHNICAL PROFIT The net premium obtained as a result of technical procedures, is the reason for the happening of technical profits due to insurancy procedures. This means that the nettechnical profit is the amount that remains from the collected premiums regarding the covered risks after subtracting the cancellations, commissions and the losses. Technical Profit = Technical Income - Technical costs in other words: Transferred premium reserves + Transferred pending reserves + Collected premiums + Reinsurance share in case of indemnity + Collected commissions + Reinsurance share in the pending loss Given premiums + Paid indemnity + Given commissions + Premium reserves + Pending loss reserves 2- Financial profit These are the incomes obtained from: Financial investments, paid capital, reserves, provisions and unshared profits, banks, shares, drafts belonging to the state and private institutions, receipts carrying profit share, real estate, interest pay-back, draft income, etc. From these incomes the necessary costs happened during obtaining these, amortization costs, interest, reserves and taxes are subtracted. After this has been done, the financial portfolio profit comes out which has to support one of the main sources for the fund creation capacity of the insurance sector. Financial Profit = Financial Income - Financial costsin other words: Share incomes + Draft incomes + Mortgage incomes + Other interests + Real Estate incomes General costs + Decrease in values of shares and drafts + Amortization + Reserves + Tax As it has been made clear the technical profit is the profit obtained from the policies issued by the companies. The financial profit is the profit that occurs due to the benefitting from the collected funds in the financial markets. Let's now look at the profit situations of all the companies during the period 1988 - 1992 excluding life insurances. Profit = Technical Profit + Financial Profit TABLE I As we can see from these results, the financial profits get the (-) value, and the technical profits get the (+) value. This means technical profit > financial profit. This shows that the profits obtained are as a result of technical profits and that the profits ofthe collected funds are not benefitted from. But in other countries where the concept of insurancy has developed very well, the situation is like this; financial profit > technical profit. This is exactly what we need. In other words, the insurance companies must be more careful when they benefit from the insurance funds collected and use them in fields with higher profit. PART V : THE INVESTMENT AREAS OF THE INSURANCE COMPANIES 1- PORTFOLIO MANAGEMENT IN THE INSURANCE SECTOR The portfolio management includes five stages which are in relation with each other, these are: - The planning of the portfolio - The analysis of shares - The selection of the shares to be put in the portfolio - The evaluation of the portfolio status - The checking of the portfolio at intervals From these five points, the stage of portfolio planning includes the expectations of the investors from the risk-income and the determination of the terms and decisions regarding the management criteria according to this. Because the company will at this stage try to estimate the average term of the portfolio according to the type of risks which is about to be covered and also the risk-income expectations of the insured. After this, the shares which may be put into the portfolio, will be analysed according to the risk-income features and as a result which ones will be taken appropriate to thegoals of the portfolio will be determined. Following this stage, the status of the portfolio has to be evaluated and according to this evaluation the undesired deviations must be determined and again the portfolio should be checked at intervals and in case it will be necessary some shares should be taken out from the portfolio and be replace by new appropriate ones 2- THE INVESTMENT AREAS OF INSURANCE AND REINSURANCE COMPANIES AND THE INCOMES OBTAINED FROM THESE; shares, drafts, the credits regarding the life insurances and mortgage, real estate Insurance companies benefit from the funds obtained in several investment areas which enable them risk and term distribution to meet their financial responsibilities. The investment areas of the insurance companies are formed by real estate, shares and drafts, life insurances and loan money with mortgage guarantee. Some of these funds are put on the bank accounts by the insurance companies as investment. On table 2 following on the next page we can see the investments of the insurance and reinsurance companies over the years and also what they have obtained from these investments. We can see from this table, the investments made by the insurance companies during the period 1988 - 1992 have raised seriously. It is also clear that most of the investment is made in shares and drafts, of which the latter has been the most important one. The second place is taken by real estate but the third place is taken by share. Credits with guarantee of life insurances and mortgages are sharing the bottom places with low percentages. It is also seen that the funds foreseen for the buying of shares are not used for private institutions but for the institutions of the states. This has to be changed because the funds should also be of function for the investors in private sectors who suffer from lack of funds. And this has to be done by the insurance<D JO *-« <D O) O *-^ CO ÇD C CO Ol E 8 <D ü C E CO ç 'e (D.C *-. ?D C CO 8 c 2 CO ç CD co CO E CO c (D E OT (D > ç (D jC h- cSi LU _1 DQ < OS t- o «-< t»` ^H CM »-* CM en` oo` On I e o u ?s ! 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For this reason they block some of their cash money, foreign currency, shares and real estates. More than 50 % of the reserves which are blocked for the guarantee funds are formed by state drafts, and this shows that these investments are made in order to show this as guarantee. Besides this, state drafts provide tax exemption and they are related to risks. This makes the state drafts more attractive PART VI : SWAP - FORWARD - OPTION - FUTURES PROCEDURES AS TECHNIQUES IN ORDER TO LESSEN RISK (HEDGING) 1- THE MAIN PURPOSE OF HEDGING PROCEDURES Banks and trade companies which are active in the foreign exchange and money market, may face the risks like currency risk, liquidity risk and interest rate risk. The aim of hedging is to find ways to lessen these risks to a rninimum, in other words a type of insurance application. One of the most effective ways to stay away from risks, is being active in the installment (maturity) procedures. Generally the most used method of staying away from risks, is buying a good on cheap market but selling in installment (maturity) market1.1 Forward and Swap procedures A forward purchasing system enables to make agreement upon the currency rate of the foreign exchanges on a particular day for the future purchasing of the foreign exchanges. People who purchase foreign exchange, guarantee their payments in foreign exchange, their buying of foreign exchange, selling of foreign exchange or even the foreign exhange procedures in the future against the irregularities in the rates. Forward is an installment (maturity) process. These agreements cannot be transferred to anyone else, but there is the possibility to give guarantee. In such an agreement both of the parties fullfil their responsibilities. There is no possibility for exchange. Although banks do direct their activities to forward procedures with speculative aims, they may also direct their activities to `hedging` (take risk under guarantee) of credits in foreign exchange and other kinds of obligations. Swap procedures is a system which includes market and forward procedures, i.e. foreign exchange purchasing can be done any time, but the dates of purchasing these are different and the installments (maturity) can also be interchanged. Generally there are two types of swap. These are real swap and double-party swap procedures. When we talk about real swap, the purchasing process finishes at the same party. But with double-sided swap, this takes place with two separate parties. The aims of swaps are to interchange the foreighn exchanges or apply forward against forward procedures and make profit from the interest differences.With real swap, cash guarantee payment is taken equal to the process amount. The customers are not paying income tax and therefore they obtain a higher income than the incomes obtainable from deposits free from legal cuttings 1.2 Option The Option Contracts are only binding for the party that is selling the option. These contracts give the party that buys the option the right to buy and sell a financial good for a specific without making any promise within a particular time or a determined period. This means that the party which buys the option, is buying the right of purchasing but is not promising anything related to this and is paying commission for this. The part that is buying the option can cease from this right when the conditions in the market go well. For this reason the risk of the one who buys option is limited to the premium paid. CALL OPTIONS give the parry buying the optiion the right to buy for a determined price. On the other hand, PUT OPTIONS give the party that buys the option, the right to sell the good for the determined price. In Turkey these option procedures have not been applied yet. 1.3 Future procedures Future procedures are being purchased at stock-exhange in standard amounts and in determined periods; it can also be done without the stock exchange between the two parties in the desired amount and period but if the forward agreement is going to be cancelled or transferred, the party doing this will need the approval of the other party. There are contract amounts and this contract is made at specific times due to periods determined by the market. During future procedures the profit and the losses are registered daily.When we look at the insurance companies, they make benefit of the funds collected by investing in the fields determined by the laws. While doing this, the investments must be sufficient enough in respect of confidence, safety and liquidity, because the insurance companies are creating variation in portfolio. This is done in order to lessen the risk. Actually it is a simple `hedging` method. The insurance companies in Turkey must also make use of the risk lessening methods mentioned above. But it must be said mat these methods are more used by banks, private institutions, export-import companies. The main reason for this is that the current legal regulations and the possible investment fields are restricted for the insurance companies.CONCLUSION In Western countries insurance companies transfer the funds collected to the capital markets and have a great share in the market but in Turkey this share is very low. When the financial profit - technical analysis is done in the Western countries, we can see that the financial profits are high and the technical profits on a minimum level. But this is just the opposite in Turkey. In other words, in Turkey the technical profits are positive and the financial profits are negative. This means that the insurance companies in Turkey cannot invest on efficient fields. Insurance companies have to make portfolio planning regarding the risk and installment specifications of the collected premiums. The company is trying to estimate the risk-income expectations and the portfolio's average period according to the type of risk subject to the insurance. After this the analysis of stocks and bonds is done in respect of risk-income specifications and the result of this will determine which ones will be put into the portfolio. The probable risks apart from the life insurances are lower than the estimated amount and therefore the need for liquidity should be higher. The investments must be done in consideration of this. The payment of the insurance premiums in installments without charging any interest during the inflation periods, is increasing both the real costs of the indemnity payment as the loss/premium ratio. As the insurance companies are in the need for liquidity, they delay the loss payment which in turn influences the insureds financially in a very negative way. In other words, the inflation influences the insurance companies' financial actions and at the same time it increases their need for capital, especially during the stagflation periods. During request inflations this need is not so high.Capital markets have been spread very much in many developed countries in order to eliminate the risks of future markets and option markets developed against the risk of the unexpected changes in the current interests in share prices and in foreign exchange currency. Although this type of risk lessening methods (hedging) are not appliable in the insurance sector at the moment, it will be widely used as soon as the restrictions have been cancelled.