Baltic Journal of Economic Studies

Vol. 3, No. 1, 2017

SPECIFICATIONS OF THE SOURCES OF SECURING INSURANCE
COMPANY’S FINANCIAL STABILITY

Mariia BALYTSKA1
Taras Shevchenko National University of Kyiv, Ukraine

Abstract. The purpose is to generalize the methodological concepts of domestic researchers in sources of insurance
companies' financial stability provision. The need in developing and deepening both theory and practice upon the
issues of improving financial stability of the Ukrainian insurance companies facilitated the following tasks: analysis
of methodical approaches of native researchers concerning division of financial stability sources; highlighting the
most important sources of securing financial stability for insurance companies; feasibility of the role and essence of
each factor securing financial stability for insurance companies. Methodology. The study is based on the theoretical
analysis of scientific works and practical activity of enterprises. Methodological basis of the article are methods
of scientific cognition, which enable to expose basic conformities to the law of development of the insurance
companies, priority ways to ensure their financial sustainability. Such methods are in particular used: analysis and
synthesis – during research of financial stability of the insurance companies; systematizations – for revealing factors
of maintenance of financial stability of insurers, their detailed analysis and definition of their interrelation; scientific
abstraction – with the purpose of forming theoretical generalizations and conclusions. Results. The insurance sector
plays an important role in the provision of critical financial services. But insurers are exposed to a number of risks and
can become distressed or fail. The article examines the essence and importance of insurance company’s financial
stability as an important factor in the development and functioning of the insurance market. The economic essence
of the general theoretical issues about the financial stability of insurance companies is reviewed and analysed. The
main features of insurance companies and the factors that affect their financial stability are investigated. Value.
The economic and social importance of insurance is such that the intervention of public authorities, in the form
of prudential supervision, is generally accepted to be necessary. Not only do insurers provide protection against
future events that may result in a loss, they also channel household savings into the financial markets and into the
real economy. The intervention of public authorities has tended to focus on introducing the measures that seek to
guarantee the solvency of undertakings or minimise the disruption and loss caused by insolvency. Therefore, the
study of the legislative regulation of the factors of providing financial stability of insurance companies is of strategic
importance towards creating a stable insurance market in Ukraine.

Key words: insurance company, financial stability of insurer, insurance company equity, reserves of insurer,
reinsurance, tariff policy of insurance company.

JEL Classification: G200, G220, G280

Corresponding author:
1 Department of Insurance, Banking and Risk Management, Taras Shevchenko National University of Kyiv.
E-mail: mari12197@yandex.ru

1. Introduction
Insurance and reinsurance companies are an

important and growing class of financial market players.
They are becoming ever more significant investors and
intermediaries in a wide range of financial markets
across the globe, bringing innovative approaches to
capital markets, providing insurance coverage for
financial risks, mediating in the reinsurance market, as
well as developing new tools that help bridge the gap
between banking and insurance products.

In particular, the gradual blending of boundaries
between the insurance and other financial institutions,
especially in the over-the-counter derivatives market,

entails the increasing role of the insurance industry for
the systemic financial stability.

As a result, a stronger emphasis on the prudential
supervision of the financial risks (as opposed to
underwriting risks) will be important for ensuring
financial stability.

Under market relationship, the prevailing task
of analysing the company status shall be not only
accounting monetary flows but also the research of its
financial and economic status and financial stability.
Financial stability is one of the most important features
of any company status and behaviour in respect of
external and internal changes.

Baltic Journal of Economic Studies

Vol. 3, No. 1, 2017
Security of the insurance company’s financial stability

is quite a complex process related to regular control of
all the insurer’s activities and prompt response of the
company management to external and internal changes.

2. Research analysis and problem statement
Financial stability of the insurer and impact of various

factors on its level have been displayed in numerous
scientific researches of national and foreign scientists
and practitioners, such as M.M. Aleksandrova,
V.D. Bazylevych, V.D. Bigdash, E.N. Bochkaryova,
N.M. Vnukova, N.B. Gryshchenko, N.M. Dobosh,
M.G. Zhygas, O.M. Zaletov, A.A. Kudryavtseva,
S.V. Lukonina, V.V. Maslenikov, O.P. Ovsak,
S.S. Osadets, A.V. Palkina, V.A. Sukhova, Yu.N. Tronina,
V.M. Filonyuk, O.F. Furman and many others.

Despite a variety of scientific opinions regarding
essence, theory and practice of securing financial
stability of insurance companies, such issues still remain
not enough investigated.

3. Sources of the financial stability
of the insurance company

Despite the large essence of financial stability of
insurance company, the principal regulatory act upon
insurance – the Law of Ukraine “On Insurance” has
no definition of the essence of insurers’ financial
stability and its security terms; while only Section
III of the Law of Ukraine “On Insurance” devoted to
securing the insurer’s solvency (in particular, Article
30) formulates basic terms to be complied with by
the insurance company for the purpose of securing
solvency, namely:
– Paid insurance fund for resident insurers or guarantee
deposit for branches of non-resident insurers and the
insurer’s guarantee fund;

– Insurance reserves enough for further insurance
payments and insurance reimbursements;
– Exceeding actual stock of the insurer’s solvency over
the estimated standard solvency stock (The Law of
Ukraine “On Insurance”, 1996).
– Meantime the concept of financial stability is quite
broader than the concept of solvency; thus, apart from
legislative provisions, the economic literature contains
the larger list of sources serving as grounds for the
financial stability of insurance companies.

In practice, apart from compliance with legislation,
financial stability of the insurer is grounded on the
following sources:
– Enough scope of the own capital;
– Grounded tariff policy;
– Balanced insurance portfolio;
– Enough scope of insurance reserves;
– Reinsurance.

4. Enough scope of the own capital as the basis
of financial stability of the insurers

Grounds for the insurer’s financial stability are fixed
just in the process of its incorporation. At this stage,
the essential terms are the amount and structure of
share capital required for commencement of its activity,
since for the first time insurance company has no
funds but share capital for the purpose of fulfilment
of its obligations under insurance agreements, while
insurance investments at this stage are quite small. Both
in Ukraine and abroad, share capital shall be formed
in the manner and under the terms prescribed by the
current legislation and constituent documents. The
insurer’s own costs shall be formed at the expense of
founders’ investments as well as by means of additional
share emission. The own capital shall consist of share,
additional, reserve capital and undistributed profit
(Fig. 1).

Fig. 1. Structure of the insurance company own capital

Source: made by the author based on (Bazylevych, 2008; Pikus, 2015)

Baltic Journal of Economic Studies

Vol. 3, No. 1, 2017
Some authors believe that both own capital in general

and share capital, in particular, have no essence for an
insurance company, since, in order to fulfil obligations
against insurants, the target insurance reserves shall
be formed. In our opinion, such an approach is not
correct enough. In order to secure the insurer’s financial
stability both in Ukraine and abroad, the law prescribes
minimum share capital required for commencement
of the business activity. From one hand, it concerns
the fact that at the initial stage insurance company
has no funds for a fulfilment of its obligations under
insurance agreements, but share capital, since insurance
investments are insignificant. From the other hand, a
large amount of share capital facilitates more confident
planning of the entity’s market activity, quite large
operations and the opportunity to gain competitiveness.
Thus, in the process of forming the insurance
organization, a principal attention shall be drawn to the
amount and structure of share capital, i.e. the insurer’s
financial stability shall be based on the process of
incorporating the company. The essence of both share
capital and free reserves shall not decrease even when
the insurer acts in the market for a long time. Their role
in securing financial stability of the current activity
is as much important as the role of insurance reserves
since even the most accurate calculation of insurance
reserves is a mere presumption, which even under the
stable portfolio and reliable statistic grounds preserves
a risk of loss fluctuation, which is unfavourable for the
insurer. It may result from its unsuccessful tariff policy,
undesirable changes in contract structure, devaluation
of assets (stocks, real estate etc.) due to deterioration
of the general economic situation, insurants’ additional
claims upon insurance payment the insurer deemed as
settled etc. It may also occur so that the insurer, in order
to support its market positions, will have to expand the
range of its operation, which may result in additional
risks not secured by the current insurance reserves
covering obligations solely under the current contract
portfolio (Slepukhyna, 2006).

Therefore, the insurer’s own capital amount provides
terms for optimal organization of the company’s tariff,
investment and reinsurance policy by means of securing
the insurer’s financial stability.

5. Reinsurance on the way of ensuring
the financial stability of the insurance company

Another term facilitating financial stability of
insurance operations and ordinary activity of any
insurance company is reinsurance.

The Law of Ukraine “On Insurance” determined
reinsurance as insurance by one insurer (assignor,
reinsurer) under the contractual terms concerning the
risk of a partial fulfilment of its obligations against the
insurant at the other resident or non-resident (re)insurer
having the status of insurer or reinsurer in compliance

with legislation of its registration country (The Law of
Ukraine “On Insurance”, 1996).

Authors of The Interdisciplinary Glossary of
Insurance and Risk Management determine reinsurance
as financial operation upon assigning the insurer’s risks
accepted before the insurance to another competent
(re)insurer in order to provide the balanced insurance
portfolio as if it secured the insurance company stability
and profitability (Pikus, 2015).

The main function of reinsurance is secondary market
redistribution. It means that insurance company is
able to provide to the insurant the insurance, which
corresponds to its financial capacities. The insurer is
unable to achieve such results by itself. The insurance
company may fulfil its obligations by means of
reinsurance, i.e. share risk between itself and another
insurance company. Under reinsurance, reinsurer shall
assume essential part of risk or guarantee, while the
other part of risk imposed on assignor shall be treated as
its own retention. Each reinsurer usually bears different
shares of insurance cover; therefore, the insurer when
assigning risks to reinsurer increases tenfold its abilities
to accept risks.

In view of financial stability, reinsurance has at least
two aspects. For the primary insurer, the ability to
reinsure accepted risks shall mean strengthening its
financial stability. Meantime it presumes also reinsurer’s
financial stability: being also the insurance organization
rendering services to other insurers, reinsurer shall have
enough solvency level in order to fulfil its obligations in
case of insurance or reinsurance event.

Thus, reinsurance has a crucial impact on securing the
insurer’s financial stability.
1) First, each certain insurance type contains quite
many large risks the insurer is unable to bear in full.
Insurance company probably will defend itself in case of
especially large risks by reducing its responsibility level
as compared to accepted liabilities.
2) Second, the insurer’s financial stability is under
the threat of not only large risks but mass small claims.
Reinsurance agreement concluded in case of catastrophic
insurance event allows the insurer to avoid extreme losses.
Reinsurance provides safe risk level for the company.
3) Third, reinsurance may adjust fluctuations in results
of insurer’s activity for several years. In particular,
results of the insurance company’s activity within one
year may be subject to the impact of either essential
loss due to numerous insurance payments caused by
the single insurance event or negative results upon the
whole insurance portfolio within one year. Reinsurance
adjusts such fluctuations and facilitates stable results of
the company’s activity for several years, which is quite
important for securing the insurer’s financial stability.

Therefore, due to reinsurance, the insurer is able to
bear most of the insurance risks. On these grounds,
we may state that the more agreements the insurance
company concludes the more balanced portfolio it

Baltic Journal of Economic Studies

Vol. 3, No. 1, 2017
obtains and the fewer fluctuations its financial results
face. Reinsurance provides an opportunity for the
insurer to expand the list of insurance risks it is ready to
bear, to cover the greater range of insurance types and
to defend its assets. Reinsurance allows the insurer to
insure such objects whose value or risk level increases
significantly its financial resources.

Today almost all the Ukrainian insurance organizations
need reinsurance. Most of the insurers do not have
enough funds and are unable to bear large risks. Having
assigned partially their responsibility to reinsurers,
insurance organization may guarantee fulfilment of its
obligations against the insurants even in a case when
several large insurance events occur. Reinsurer provides
economic support to insurer: from one hand, it secures
financial stability; from the other hand, it expands the
insurer’s scope of activity.

6. Enough scope of insurance reserves
as the basis of financial stability of insurers

To make payments in case of insurance events,
insurance organization shall have special monetary
funds, i.e. insurance reserves. V.D. Bazylevych states that
insurance reserves mean monetary assessment of further
payments under the current insurance agreement, other
than life insurance (Bazylevych, 2008).

Formation and use of insurance reserves, right
and obligation whereon is imposed on insurance
organizations according to the current legislation, serve
as the basis for the insurer’s activity and its financial
stability. Financial stability, solvency of financial
organization and its ability to fulfil insurance payment
obligations against insurants under insurance events
depend on correct calculation of insurance reserves with
regards to non-fulfilled or partially fulfilled obligations.

Pursuant to Article 31 of the Law of Ukraine “On
Insurance”, in order to secure fulfilment of its obligations,
insurance companies shall, in the manner and under
the terms prescribed by the Ukrainian legislation, form
insurance reserves from their insurance investments
required for further insurance payments and insurance
reimbursement depending on (re)insurance types.

As per the standard scheme of insurance reserve
formation, each type of the insurer’s obligations shall be
covered by the relevant type of insurance reserve. Like in
worldwide practice, the current Ukrainian classification
detaches the following groups of insurance reserves:
– Under life insurance agreements (for accumulative
insurance types);
– Under other than life insurance agreements (for risk
insurance types);
– Preventive measure reserves (The Law of Ukraine
“On Insurance”, 1996) (Fig. 2).

Preventive measure
reserves

Insurance
reserves

Life insurance
reserves

Technical reserves

Mandatory Additional

Unearned premium reserves Accident reserves

Loss fluctuation reserves

Other reserves

Loss reserves

Reserves of declared but
unpaid losses

Reserves of arisen but
undeclared losses

Fig. 2. Classification of the insurance company reserves

Source: made by the author based on (The Law of Ukraine “On Insurance”, 1996; Resolution of The National
Commission for State Regulation of Financial Services Markets of Ukraine " On Approval of the Required
Criteria and Standards of Adequacy, Diversification and Quality Assets of the Insurer", 2016; Resolution of
The National Commission for State Regulation of Financial Services Markets of Ukraine "On Approval of the
Methodology of Formation of Insurance Reserves by Type of Insurance Other Than Life Insurance", 2016)

Baltic Journal of Economic Studies

Vol. 3, No. 1, 2017
Insurance reserve distribution in life insurance and

risky types of insurance is facilitated by a different
content of insurance indemnity, risk nature, functions,
tasks and methods of tariff calculation.

Insurance reserve amount, provided that they
conform to obligations under insurance agreements,
as well as their optimal placement and proportion
conformity to the scope of own costs may show the
insurer’s financial stability. That is why the role of the
state in determining methods of insurance reserve
formation is a necessary factor for securing the
insurers’ financial stability.

Financial stability, solvency of financial organization
and its ability to fulfil insurance payment obligations
against insurants depends on the correct calculation
of insurance reserves with regards to non-fulfilled or
unduly fulfilled obligations. If a (re)insurance company
has not enough insurance reserves for insurance
reimbursement, it has to make payment at its own
expense. Such own expenses will form the solvency
stock over the solvency provided by the established
insurance reserves.

EU member states highlight seven principal factors,
which impact on the insurance reserve system
formation:
- Insurance organization cycle inversion;
- Insurance portfolio stability;
- Insurance portfolio risk structure;
- Insurance company organizational structure;
- Insurance company investment activity;
- Reinsurance development market level;

- Inflation.
If the Ukrainian (re)insurers comply with such

principal factors, they will be able to form insurance
reserves, which would facilitate their financial stability
in the insurance market and will fulfil promptly their
obligations against insurants and other (re)insurance
companies.

Insurance reserves consist of insurance premiums
payable by insurants. Insurance payment amount
shall facilitate not only insurance reserve formation
but also the insurer’s opportunity to settle all the
insurance events, to cover case proceedings costs and
to gain income, as displayed in the insurance tariff
structure.

Under today macroeconomic conditions, insurance
organizations face more difficulties in maintaining
profitability level and securing financial stability,
therefore tariff policy and expense decrease become
prevailing management objects for insurers.

Today the standard insurer performing the large scope
of various insurance types with a small portfolio under
each one faces problems regarding risk assessment on
the grounds of its own experience only. It is necessary
to use either valid market rates or information of large
insurance companies with a large portfolio under the
certain insurance type.

7. Grounded tariff policy as the basis
of financial stability of insurers

The insurer has a lot of risks to break the stable
situation caused by errors in tariff application, e.g.
tariff decrease under the loss increase under the certain
insurance type, or incorrect choice of the insurance
portfolio structure for the certain market under other
equal conditions may cause decrease or loss of financial
stability. Today when insurance is performed by different
insurance organizations, the rate is one of the elements
of competition constantly stimulating insurers to reduce
tariffs, grounded with regards to client involvement
but groundless with regards to the company’s financial
stability. If the insurer performs single agreements under
any type of insurance, tariff amount is not essential as
for impact of the insurance company’s competitiveness,
but in such a case, in order to secure financial stability,
tariff shall take into account the market loss level for the
purpose of this risk assignment to reinsurance without
any problems (Sukhov, 1995).

Therefore, the insurer’s tariff policy optimization
is quite essential in the aspect of securing its financial
stability. Insurance business prosperity is facilitated
merely by the quality of calculations regulating financial
relationships between the insurance subjects. Incorrect
tariff calculation causes a decrease of the insurance
company’s financial stability. In order to optimize
insurance policy, the insurer shall use mathematic
and statistic methods for developing algorithms
of the insurance portfolio structure formation and
modification, which will facilitate a sufficient defence of
the insurance company from the threat of bankruptcy.

8. Conclusions
The financial stability of insurance companies is

the main condition, through which the institution of
insurance can fully carry out its multifaceted role in the
social reproduction process, since it is solvency that acts
as one of the main criteria when potential policyholders
select an insurer, and as the basis for the successful
functioning and development of the said institution.

An adequate level of financial stability of insurers is,
therefore, the main condition for:
– the provision of the insurance coverage for the social
reproduction and for the maintenance of the standard of
living achieved by the population;
– the full and timely compliance with insurance
obligations;
– the efficient and competitive functioning of an
insurer in the future;
– the development of the country 's economy as a
whole.

The economic and social importance of insurance is
such that the intervention of public authorities, in the
form of prudential supervision, is generally accepted to
be necessary. The intervention of public authorities has

Baltic Journal of Economic Studies

Vol. 3, No. 1, 2017
tended to focus on introducing the measures that seek to guarantee the solvency of undertakings or minimise the
disruption and loss caused by insolvency.

Thus, on the grounds of the above analysis we may conclude that financial stability of the insurance company
depends on many aspects of the insurer’s work organization, while their complex and simultaneous improvement
may facilitate effective and stable activity of the company, which will become more confident among competitors and
guarantee proper defence for its clients.

References:
Bazylevych, V.D., Bazylevych, K.F., Pikus, R .V. (2008). Insurance, Znannia, Kyiv, Ukraine.
Lukonin, S.V. The financial stability of insurance companies and the ways of its improvement. Insurance business,
5, р. 28-33
Pikus, R .V., Prykaziuk, N.V., Lobova, O.M. ta in. (2015). Mizhdystsyplinarnyj slovnyk zi strakhuvannia ta ryzyk-
menedzhmentu, Logos, Kyiv, Ukraine.
Slepukhyna, Yu.E. (2006). “Pryntsypy formyrovanyia sobstvennoho kapytala strakhovoj orhanyzatsyy y eho
znachenye dlia rehulyrovanyia urovnia fynansovoj ustojchyvosty”, Yzvestyia Ural'skoho hosudarstvennoho
ekonomycheskoho unyversyteta, vol. № 1 (13).
Sukhov, V.A. (1995). Hosudarstvennoe rehulyrovanye fynansovoj ustojchyvosty strakhovschykov, Ankyl, Moscow,
Russian Federation.
The National Commission for State Regulation of Financial Services Markets of Ukraine (2016). “Resolution
of The National Commission for State Regulation of Financial Services Markets of Ukraine "On approval of
the Methodology of formation of insurance reserves by type of insurance other than life insurance" [Electronic
resource]. – Retrieved from: http://zakon0.rada.gov.ua/laws/show/z0019-05 (Accessed 6 March 2017).
The National Commission for State Regulation of Financial Services Markets of Ukraine (2016). “Resolution
of The National Commission for State Regulation of Financial Services Markets of Ukraine "On approval of the
required criteria and standards of adequacy, diversification and quality assets of the insurer" [Electronic resource]. –
Retrieved from: http://zakon5.rada.gov.ua/laws/show/z0417-16 (Accessed 6 March 2017).
The Verkhovna Rada of Ukraine (1996). The Law of Ukraine “On insurance” [Electronic resource]. – Retrieved
from: http://zakon0.rada.gov.ua/laws/show/85/96-%D0%B2%D1%80 (Accessed 6 March 2017).

Мария БАЛИЦКАЯ
ХАРАКТЕРИСТИКА ИСТОЧНИКОВ ОБЕСПЕЧЕНИЯ ФИНАНСОВОЙ УСТОЙЧИВОСТИ
СТРАХОВОЙ КОМПАНИИ
Аннотация. Целью работы является обобщение методологических концепций отечественных
исследователей на пути поиска источников обеспечения финансовой устойчивости страховых компаний.
Необходимость развития и углубления теоретических разработок и практических наработок по вопросам
совершенствования обеспечения финансовой устойчивости страховых компаний Украины обусловили
постановку следующих задач: анализ методических подходов отечественных исследователей относительно
выделения источников обеспечения финансовой устойчивости страховых компаний; выделить важнейшие
источники обеспечения финансовой устойчивости страховой компании; обосновать роль и значение
страховых резервов в обеспечении финансовой устойчивости страховой организации. Методология.
Исследования проводится на основе теоретического анализа научных трудов и практической деятельности
страховых компаний. Методологической основой статьи являются методы научного познания, позволяющие
выявить основные закономерности развития страховых компаний, приоритетные пути обеспечения их
финансовой устойчивости. В частности используются следующие методы: анализ и синтез – в ходе исследования
финансовой устойчивости страховых компаний; Систематизация – для выявления факторов обеспечения
финансовой устойчивости страховщиков, их детального анализа и определение их взаимосвязи; Метод
научной абстракции – с целью формирования теоретических обобщений и выводов. Результаты. Страховой
сектор играет важную роль в обеспечении критически важных финансовых услуг. Но страховщики, в свою
очередь, тоже подвержены ряду рисков и могут потерять способность отвечать по своим обязательствам.
В статье рассматриваются сущность и значение финансовой устойчивости страховой компании как важного
фактора развития и функционирования страхового рынка. Экономическая сущность, общие теоретические
вопросы о финансовой устойчивости страховых компаний рассмотрены и проанализированы. Основные
характеристики и факторы, влияющие на финансовую устойчивость страховых компаний исследованы.
Значение. Экономическое и социальное значение страхования такова, что вмешательство органов
государственной власти, в форме пруденциального надзора, является общепризнанным необходимым

Baltic Journal of Economic Studies

Vol. 3, No. 1, 2017
фактом. Роль страховых состоит не только в способности обеспечить защиту от будущих событий, которые
могут привести к убыткам, а также перераспределении сбережений населения в финансовые рынки и в
реальный сектор экономики. Вмешательство органов государственной власти, как правило, сосредоточены
на внедрении мер, которые призваны гарантировать платежеспособность предприятия или минимизировать
разрушения и потери, вызванные неплатежеспособностью. Таким образом, изучение законодательного
регулирования факторов обеспечения финансовой устойчивости страховых компаний имеет стратегическое
значение на пути к созданию стабильного страхового рынка в Украине.