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11Mirusmon KHOLTOEV
Master's student at the Faculty of Economics of the National University of Uzbekistan
WORLD EXPERIENCE OF ASSESSING THE CAPITAL ADEQUACY OF
INSURANCE COMPANIES.
In recent years special attention is paid to the insurance sector along with the large-scale reforms being carried out in the country. In order to develop the insurance industry, various changes are being entered into the legislation and regulations regarding to the industry. The share of the insurance industry in GDP is aimed to reach 0.8% by 2022. During expanding the scope of the field, its quality should be developed too. That is because as insurance premiums increase, so do liabilities. In turn, that demands increasing the financial resources of companies. Insurance companies need to raise enough capital in order to cope with their obligations. In that regard, there are specific requirements in different countries legislations. In the process of reforms, the study of the experience of developed countries in the field of insurance and its further implementation is a modern requirement.
In modern economic dictionary the concept of solvency is defined as: "Solvency is the ability of the state, legal entities and individuals to fully fulfill their payment obligations, the availability of. That's why, their ability is controlled by the state, the necessary and sufficient funds to fulfill these obligations, i.e., the ability to make payments." Consequently, for any participant of market economy, the concept of solvency is particular important in determining the overall financial stability of a company. At the same time, in developed countries, insurance is considered as the main means of ensuring the stability of society and reducing the consequences of accidental negative impact on individuals and legal entities. Thus, it is very important for insurance companies to ensure financial stability and solvency and, if necessary, to be able to fulfill all their obligations. That's why, they are controlled by the state.
In order to prevent a company from going bankrupt and failing to meet its obligations to customers, there are a number of requirements that a company's capital must meet. Such requirements were first specified in 1973 as Solvency I directive. Since the introduction of the directive, many norms have become obsolete and require revision because they were not effective enough and were not sensitive to risks.
The global financial crisis has highlighted the need for insurance companies to introduce more clearly defined requirements for risk
assessment, increased supervision and disclosure of information. Therefore, in November 2009, a new Statute on Solvency II was accepted by the Council of Europe and Parliament. In the EU, the concept of "insurer's solvency" includes not only determining the amount of funds required to prevent a company from going bankrupt, but also a comprehensive approach to assessing all the risks that may arise in insurance activities. In the EU countries, since 2014, the Charter of Solvency II has been fully implemented. Solvency II is an insurance analogue of the Basel II and Basel III regulations that define the requirements for banks and is based on the calculation of the level of financial stability and solvency of companies according to the accepted risks. The Solvency II charter includes quantitative and qualitative requirements in assessing the level of financial stability and solvency of insurance companies. Quantitative requirements to the capital of insurance companies include:
• minimum capital requirement;
• the requirement for the capital supplying Solvency
The minimum capital requirement (MCR) is the minimum amount set for insurance companies to operate, and not to do this requirement will deprive companies of their licenses. Solvency Capital Requirement (SCR) can be calculated using a standard formula or an internal model approved by the company's insurance regulator, depending on the types of risk accepted and the company's specialization. Not to follow the requirements may result in the insurer's inability to meet its obligations in an unusual situation. Solvency Capital Requirement SCR (Solvency Capital Requirement) can be calculated using a standard formula or an internal model approved by the company's insurance regulator, depending on the type of risk. In the following first pic the overall structure of SCR is described. While calculating the SCR for companies operating in the field of general insurance, Solvency II takes into account four risk groups: insurance risks, credit, market and liquidity risks. In Solvency II, insurance risks play a basic role and are considered as insurance coverage exceeding the carrying amount of insurance reserves. For companies operating in general insurance interviews, the insurance risk includes the following:
• Increasing the cost of servicing insurance contracts;
• Happening of insurance events and changing the degree of weight;
• The accumulation of the past period damages;
• Increasing of insurance premiums due to very rare and unusual accidents.
1st picture. Overall structure of the SCR
the the
Source: EIOPA, 2014, p. 120.
EU insurance regulators have developed coefficients for specialization and specific risk types of insurance companies for standard formula of Solvency II. The required amount of SCR and the level of risk affecting it, is determined via these coefficients. There are three models of the standard formula for calculating SCR: for the field of insurance other than life insurance, health insurance and life insurance.
The general formula of SCR is as following:
Basic SCR =
N
^ Corrij x SCRi x SCRj
i,j
According to the standard formula for calculating SCR, SCR consists of the following quantities:
Apart from insuring the life, SCR for fields of insurance;
- SCR for life insurance;
- SCR for medical insurance;
- SCR for market-related risks;
- SCR for risks related to not performing the obligations by agents; To calculate the required capital (SCR), it is necessary to calculate the
required amount for each type of risk. At the same time, a factorial method
«НОВАЯ АРХИТЕКТУРА ПОСТРОЕНИЯ ЭКОНОМИКИ
В ПОСТПАНДЕМИЙНОМ МИРЕ»
is used for some types of risk, such as the risk of undeveloped rewards and the risk of insufficient reserves. For other types of risk, the SCR is calculated as the difference between the amount of the company's net assets (NAV) in the reporting period and one or more risk types adjusted net assets based on the scenario. This method is called the scenario method. Thereafter, based on the received risk payments (SCR), the required capital significance is calculated using a correlation matrix corresponding to VaR of 99.5%.
In this regard, we found it necessary to cite the capital requirements for insurance companies operating in the Republic of Uzbekistan. Capital requirements for insurance companies operating in our country are regulated by the solvency margin. The main document in this regard is the Regulation of the Ministry of Finance of Uzbekistan dated May 12, 2008 No 1806 "On the solvency of insurers and reinsurers." According to this provision, the solvency margin is considered as the ratio between the assets of the insurer (reinsurer) and the insurance liabilities assumed by him.
According to this definition, the solvency margin should be affected by the insurance liabilities assumed. However, the formula given in this regulation itself does not take into account insurance liabilities. According to the requirements of the Regulation, the authorized capital of the insurer, insurance premiums and insurance payments affect the solvency margin. Insurance activity is a risk-based activity. There is a possibility that insurance claims will occur several times more than usual due to some unusual events, and as a result, insurance coverage will increase sharply.
The EU is not the only region that has introduced a calculation of the level of solvency based on accepted risks. While EU countries such as the United States, Canada, Australia, Japan, and Singapore have introduced solvency ratios based on accepted risks, countries such as Mexico and Brazil are trying to move to this system. In China, which has a special place in the world economy, the various components of Solvency II are being introduced with various changes and additions, taking into account the specifics of the national insurance market.
If Uzbekistan also aims to develop the insurance industry, it is necessary to study and apply the experience of developed countries. This has been demonstrated by the pandemic that has been going on around the world since the beginning of 2020. In 2020, the Uzbek insurance market decreased by 5% instead of increasing by the projected 10%, while insurance premiums collected in the life insurance sector fell to 57%. If we take into account insurance premiums are one of the sources of capital for insurance companies, this has a negative impact on the solvency of companies.
The transition to a system of calculating the level of solvency according to the accepted risks is not an easy and quick process. A number of problems
can also occur in this process. Europe and other developed countries have faced a number of problems in transitioning to such a system. In particular, there is a shortage of qualified specialists with specialized knowledge. While several insurance companies ceased operations without meeting the established requirements, some companies merged. While several insurance companies ceased operations without meeting the established requirements, some companies merged. Therefore, in order to develop documents similar to Solvency II and apply foreign experience in the future in our country, first of all, it is important to take into account the specifics of our national insurance market, to train qualified specialists. If we study the experience of developed countries and come to conclusions from the mistakes they have made, we will be able to develop and implement a document like Solvency II in the near future. Through this, we can increase the financial stability and viability of our national insurance market.
References:
1. Act of the President of the Republic of Uzbekistan №4412 "On the Measures for the Reform and Security of the Accelerated Development of the Insurance Market of the Republic of Uzbekistan" dated 02.08.2019
2. Regulation of the Ministry of Finance of the Republic of Uzbekistan No. 1806 "About solvency of insurers and reinsurers" dated 12.05.2008
3. Nasretdinova Sh.S. «Mathematical modeling of financial stability of insurance companies» // Tashkent «Finance» 2014 (188 p.)
4. Khalmirzaev A.A., Egamberdieva U.T. "Development of the world insurance market in the context of the pandemic COVID-19" // "Proceedings of the Republican scientific-practical online conference" 2020. (124 p.)
5. A Partial Internal Model for credit and market risk under Solvency II, Peter Lang. Corvinus University of Budapest, 2015
