Copernican Journal of Finance & Accounting e-ISSN 2300-3065 p-ISSN 2300-12402014, volume 3, issue 2 Date of submission: August 17, 2014; date of acceptance: September 30, 2014. * Contact information: nvk_66@mail.ru, Financial University under the Govern- ment of the Russian Federation, 49 Leningradsky Prospekt, Moscow, Russia, phone: +7 915 147 32 21. Kirillova N. (2014). Regulation of financial condition insurers in the Russian Federation and As- sessment the Insurers by Insured. Copernican Journal of Finance & Accounting, 3(2), 79–89. http://dx.doi.org/10.12775/CJFA.2014.019 Nadezda Kirillova* Financial University under the Government of Russian Federation regulatioN of fiNaNcial coNditioN iNsurers iN the russiaN federatioN aNd assessmeNt the iNsurers by iNsured Keywords: regulation of the financial condition, Russian insurance companies. J E L Classification: G18, G22. Abstract: In the article describes the main regulations for the financial condition of Russian insurance companies: examined statutory capital requirements of insurers, the solvency margin, formation and placement the insurance reserves, covering equity by assets; are given the main characteristics of indicators, identifies areas of develop- ment; used data from supervisory authorities of the Russian Federation, the official sta- tistics, the results of research consulting, insurance data, regulatory framework; based on the results of the article conclusions are drawn on adequate regulation of insurers’ financial stability in the modern Russian insurance market and the necessity to compli- ance with legal requirements; made the assumption that there is no necessity to tighten regulatory requirements for companies. Regulacje finansowe rynku ubezpieczeń w Federacji Rosyjskiej oraz ocena działalności firm ubezpieczeniowych przez ubezpieczonych Słowa kluczowe: regulacja kondycji finansowej, rosyjskie firmy ubezpieczeniowe. Nadezda Kirillova80 Klasyfikacja J E L: G18, G22. Abstrakt: W artykule przedstawiono podstawowe regulacje dotyczące sytuacji fi- nansowej rosyjskich firm ubezpieczeniowych: zbadano ustawowe wymogi kapitało- we ubezpieczycieli, margines wypłacalności oraz tworzenie i rozwiązywanie rezerw ubezpieczeniowych. Zaprezentowano również główne wskaźniki identyfikujące ob- szary rozwoju rynku ubezpieczeniowego. W pracy wykorzystano dane pochodzące z organów nadzoru Federacji Rosyjskiej, oficjalnych statystyk, wyników badań obcych, danych doradztwa ubezpieczeniowego oraz odpowiednich przepisów regulacyjnych. Na podstawie wyników przeprowadzonych badań przedstawiających regulacje w zakresie stabilności finansowej zakładów ubezpieczeń na współczesnym rosyjskim rynku ubezpieczeń wskazano, że nie ma konieczności, aby zwiększać wymogi regula- cyjne dla tych przedsiębiorstw.  Introduction Insurer financial strength is a major factor in the implementation of insurance liabilities. Currently, insurance becomes one of the real instruments to support the financial condition of the enterprises, the quality of life, solution of social problems, along with the implementation of the investment function. Russian insurance market in 2013 slowed his development. Return on equi- ty of Russian insurance companies in 2013 was equal to 6% (minimum within five years) (Jurgens 2014). Currently the companies of Russian insurance mar- ket, table 1, are faced with many challenges. Table 1. Premiums and payments (type of insurance) in Russian Federation, 2013 Type of insurance Premiums Payments Bln. rub. % % prev. year Bln.rub % % prev. year Life insurance 84.89 9.4 160.5 12.33 2.9 92.4 Personal insurance (non life) 208.73 23.1 113.2 103.14 24.5 110.9 Property insurance 393.82 43.5 104.6 201.73 48.0 111.0 Liability insurance 29.74 3.3 99.4 7.14 1.7 133.0 Business and financial risks 21.95 2.4 110.2 1.66 0.4 79.4 Total voluntary insurance 739.13 81.7 111.4 326.0 77.5 110.3 Compulsory insurance of civil liability motor owners 134.25 14.8 110.3 77.37 18.4 119.0 Regulation of financial condition insuReRs… 81 Type of insurance Premiums Payments Bln. rub. % % prev. year Bln.rub % % prev. year Other than medical and motorcycle 31.48 3.5 109.4 17.4 4.1 144.9 Total compulsory 165.73 18.3 110.2 94.77 22.5 123.1 Total voluntary and compulsory 904.86 100.0 111.1 420.77 100.0 112.9 S o u r c e : The Central Bank of the Russian Federation. In recent years, the basic system calls became a sharp increase in the require- ments for the minimum authorized capital, the wave of lawsuits on compla- ints of policyholders to delay and the refusal insurance payments (mainly on compulsory motor TPL insurance), the last massive insurance claims in insu- rance tourists (compensation according to various estimates may be required 25 thousands of tourists; for example, the insurance company “Military Insu- rance Company” in August, took two days about 12 thousand applications from customers of travel agency “Labyrinth” for a total amount of 453 million ru- bles) (All-Russian Insurance Association 2014). However, their main task is to perform insurance liabilities. Consider the basic requirements for the financial condition of Russian insurers. The research methodology and the course of the research process The aim of the paper is to present author’s approach to the identification of the financial condition of Russian insurance companies. The author will analyze the legal requirements for the financial condition of Russian insurers. Also, the author will How to change the qualitative and quantitative status of insurance companies, depending on the requirements imposed on them. The paper is di- vided into two major parts. The first part is related to characteristic the basic regulatory requirements for the financial condition of insurance companies in Russia. Author presents in detail the legal requirements for minimum registe- red capital, requirements for the formation (composition) and the placement of insurance reserves and the covering own funds by assets, the solvency margin requirements for insurers, net assets of joint stock companies. The second part is related the assessment the insurers by insured. It contains a brief descrip- tion of idea comprehensive analysis of the insurance company consumers of in- surance services, draws conclusions on the adequacy of the legal requirements Nadezda Kirillova82 for the financial condition of insurance companies. Methodological principles served as the basis of the system approach, methods of comparative analysis, synthesis, construction of classifications. The study is based on the Russian le- gal basis, statistical databases of the Russian supervisory authority, practical experience of the author. Basic regulatory requirements for the financial condition of insurance companies in Russia The main item for the fulfillment liabilities to the insured is a stable financial condition of insurance companies. Requirements for the financial condition defined supervisory authority. Starting from September 2013 it is the Central Bank of the Russian Federation. In accordance with Russian legislation the gu- arantees by the financial stability of the insurer are: ■ economically reasonable insurance tariffs; ■ insurance reserves, sufficient for the fulfillment obligations under con- tracts of insurance, coinsurance, reinsurance, mutual insurance; ■ equity; ■ reinsurance. Mandatory requirements for the financial condition of insurers include fol- lowing items: ■ the minimum authorized capital; ■ solvency margin; ■ placement of insurance reserves; ■ covering own funds by the assets; ■ net assets for Open Joint Stock Company. Consider the contents of these requirements in details. The minimum authorized capital was increased by 4 times from January 1, 2012, and is now 120 mln. r. for insurers other than life; 240 mln. r. for life in- surance and 480 mln. r. for reinsurance table 2. This entailed a sharp decline in the number of insurance companies, table 3, increased market concentra- tion. The total authorized capital of Russian insurers in June 2014 amounted to 219332,4 mln. r. (All-Russian Insurance Association 2014). Regulation of financial condition insuReRs… 83 Table 2. Distribution of insurance companies by authorized capital Authorized capital, th. rub. Number of insurance companies Share Branches Total 402 100 5180 Until 20 000 1 0,2 – from 20 001 to 40 000 – – – from 40 001 to 60 000 23 5,7 115 from 60 001 to 80 000 27 6,7 196 from 80 001 to 100 000 7 1,7 84 More, than 100 000 344 85,6 4785 S o u r c e : Federal State Statistics Service. A steady decline in the number of insurance companies – a consequence of not only increasing requirements to the financial condition, in particular, the size of the authorized capital, but also a set of measures to rid the market of the schemes, unscrupulous insurers. Insurers have to invest their own funds on the terms of diversification, liquidity, repayment and profitability. Insurers do not have the right to invest own funds in the bill of legal entities, individuals and grant loans due its own funds. Table 3. Number of the Insurance Companies in Russian Federation Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 Number of the insu- rance companies 1075 918 869 814 722 640 587 458 402 S o u r c e : own study based on: Federal State Statistics Service, The Central Bank of the Russian Federation. Solvency margin – in Russia is determined by the type of Solvency 1, when comparing 16% of the premiums per year and the arithmetic mean of 23% of payments per three years; the maximum value (standard margin) must exceed the actual (own funds) more than 30%. If the actual solvency margin exceeds the normative solvency margin less than 30%, the insurer shall submit to the in- surance supervision the plan of improvement a financial situation. The plan im- provement of a financial position includes activities to ensure compliance with the ratio between the actual and normative dimensions of the solvency margin. Nadezda Kirillova84 The calculation of the solvency margin made by insurers on a quarterly basis. Few years there has been discussion about the need and expediency of intro- duction Solvency-II, are developed a set of indicators of risk assessment of in- surance companies, however, now there are only considered solvency margin. Placement of insurance reserves and covering the own funds by the assets. Insurance reserves for non-life include (Ministry of Finance of the Russian Federation 2002): ■ unearned premium reserve; ■ loss reserves: – reserve declared but unsettled losses; – reserves for incurred but not reported claims; ■ stabilization reserve. The structure of insurance reserves for life insurance includes the following re- serves (Ministry of Finance of the Russian Federation 2009): ■ the mathematical reserve; ■ reserve maintenance costs of insurance liabilities; ■ reserve payments reported but unsettled insurance claims; ■ provision of payments of incurred but not reported insurance claims; ■ provision of additional payments (insurance bonuses); ■ equalization reserve. Insurance reserves in 2013 amounted 779.4 billion rubles (per year in- creased by 153.1 billion rubles – 24.4%), life insurance – 99.7 billion rubles (per year increased by 29.5 billion rubles – 42.0%). The ratio of insurance reserves and premiums on life insurance 117.4%; insurance other than life insurance – 83.3%, table 4. Table 4. Insurance reserves in Russian Federation, mln. r., 2013 Insurance reserves, 31.12.2013 Change of insurance reserves Investment income Investment income from insu- rance reserves Total Life insurance Total Life insurance Total Total Life insurance 779413,7 99676,1 153086,3 29494,9 582154,7 25170,6 5681,1 S o u r c e : own study based on: Federal State Statistics Service. Placement of insurance reserves carried out in accordance with the order of the Ministry of Finance the order of placement of insurance reserves by insur- ers. Basically it is government securities, deposits, stocks, bonds, real estate. Regulation of financial condition insuReRs… 85 Not less than 70% of insurance reserves must be invested in the Russian Feder- ation. Similar requirements (slightly differ in structure) are required to cover the assets of equity, table 5. Table 5. The main directions of the investment of insurance reserves and own funds Asset Normative for insurance reserves (not more, than % to total sum of insurance reserves) Normative for own funds (not more, than % to maximum of normative margin of solvency or minimum authorized capital) Government securities of the Russian Federation and municipal securities 40 – life 30 – non life 30 Bank deposits (deposits), including certificates of deposit 50 50 Shares 20 20 Bonds 45 45 Property 25 – life 30 – non life 40 S o u r c e : compiled by author on Ministry of Finance of the Russian Federation (2012); Ministry of Finance of the Russian Federation 2012a. According to a study by KPMG in 2014 increased interest managers of insur- ance companies to invest in more observed in the areas of corporate bonds, de- posits, currency (44%, 30%, 25% of managers reported an increase in interest, respectively) (KPMG 2014). According to the investment attractiveness of Rus- sia is now in 6th place in the world (EY 2013). The insurer in accordance with the law organizes internal control and au- dit. The objectives of internal control are effective and breakeven financial and economic activities, the effectiveness of asset management, the effectiveness of the risk management of the insurer, reliability, completeness, objectivity of ac- counting, statistical reports, statements in exercise of supervision, compliance workers insurer with ethical norms, opposition to the legalization of proceeds from crime, and terrorist financing. Internal control is carried out management bodies of the insurer, the Audit Commission, the chief accountant, internal au- ditor, actuary. Internal auditor verifies the effectiveness of internal control of the insurer, the compliance of insurer activities legislation, rules and standards associa- tions of insurers, compliance with the rules of the internal control of counterac- tion to legalization of proceeds from crime and terrorist financing, the accura- Nadezda Kirillova86 cy, completeness, objectivity, accountability and timeliness of the submission; analyzes the causes of the violations; assesses risk management, feasibility and efficiency of transactions; check the safeguarding of assets; analyzes financial condition of the insurer and measures to prevent the bankruptcy; approves re- ports on the implementation of the plan to restore solvency. Failure to comply with the above requirements will result in revocation of the license. In 2012, were revoked 103 licenses from insurance companies, in 2013 – 36, for six months in 2014 – 5. The assessment the insurers by insured Russian insurants are forced not only trust the opinion of the supervisory au- thority about the possibility of finding the company on the market and reali- zation of insurance activity, but also to choose a company guided primarily by the implementation of its insurance liabilities. If private persons are forced fol- low the general information: availability of a license for a period of work in the market, the development of sales networks, quality of sales channels, related services, – the corporate clients are able to evaluate the financial condition of the insurance company in detail, they put forward additional to the legislative requirements. Author has formed several methods for assessing the financial condition of the insurance company by the insured (for large industrial enterprises of fer- rous metallurgy) in different directions with different sets of indicators of fi- nancial condition. Several techniques have been tested on the insurance com- panies – contractors enterprise. In testing involved specialists of enterprise risk management. As a result, the most convenient and informative as a tech- nique for assessing the financial condition of the insurer has been recognized technique in the following areas (table 6): ■ capital; ■ assets; ■ reinsurance; ■ solvency; ■ profit and profitability; ■ the cost of doing business; ■ management. Regulation of financial condition insuReRs… 87 Table 6. Main characteristics of insurance companies Direction of assessment Capital Assets Reinsurance Solvency Profit and Profitability Cost of doing business Business activity, Manage- ment Characteri- stics Structure, volume change of equity own insurance reserves loan Placement of insurance reserves Covering the assets own funds Placement of available assets Investment policy in general Presence of high-risk assets Loans Availability reinsurance program Payments under the reinsurance contracts Ratings of reinsurers Reinsurance in Russia Regulatory compliance Solvency for not insuran- ce liabilities Cost loans of credit institutions Profit and profitability of insurance operations and non-in- sured Profit from insurance operations Profitability of insurance reserves ROI as a whole Costs of the proceedings Commis- sions to insurance agents Salary of ma- nagement Dividends to shareholders Volume of premiums and pay- ments Regional networks Sales chan- nels The absence of com- promising information Number of complaints by insurants Bankruptcy procedures Form of the original data Balance sheet of the insurer (f.1) Report on changes in equity of the insurer (and the net assets ) (f.3) The insuran- ce reserves (f.8-insurer) Balance sheet of the insurer (f.1) Report on financial results of the insurer (f.2) Reinsurance operations (f. 10-insu- rer) Report on financial results of the insurer (f.2) Balance sheet of the insurer (f.1) Report on financial results of the insurer (f.2) The solvency (f.9-insurer) Balance sheet of the insurer (f.1) Report on financial results of the insurer (f.2) Report on changes in equity of the insurer (and the net assets ) (f.3) The struc- ture of the financial results of insurance (f. 11-insu- rer) Report on financial results of the insurer (f.2) The struc- ture of the financial results of insurance (f.11–insu- rer) Balance sheet of the insurer (f.1) Statistical Report №1 “Data on key indicators of insurer” the branches and repre- sentations (f. 12-insu- rer) Share- holders (members) and other affiliated entities (f. 13-insurer) S o u r c e : the author’s method, has been implemented at OAO “Magnitogorsk Iron & Steel Works”. All of these measures can be calculated according to the forms, which are published on the website of the insurance supervision (The Central Bank of the Russian Federation 2014) and according to the data in open publications. At present the additional requirements for the financial condition of Russian in- surance companies are nominated by enterprises with sufficiently developed comprehensive risk management system. Mostly this is the large credit institu- Nadezda Kirillova88 tions, enterprises of energy, metallurgy, fuel and energy complexes. Additional requirements are fixed in the standards, the provisions of the risk policy; the conformity of the insurers these demands – required to be accredited in the in- surance programs. The outcome of the research process and conclusions Recently started a discussion on the possible strengthening of state involve- ment in the insurance market. Such a position seems unproductive. In parti- cular, a clear regulatory compliance with respect to the financial condition of insurance companies, internal and external control and insurance supervision are in able to ensure the insurance liabilities by the market participants. Fol- lowing the requirements of the financial condition is sufficient for insurance liabilities; all the accounting, financial and statistical reports are published on the websites of companies and online insurance supervision, the regulatory re- quirements for the financial condition of Russian insurance companies are cor- respond the requirements of the International Association of Insurance Super- visors and perform basic functions of insurance – to protect consumers, and insurers are able to get all the necessary information. Thus the main directions of development – prudential oversight, improving the quality of settlement of losses, the formalization of contracts and business processes in general, improve the quality of the insurer’s assets, control over the structure and the amount of the cost of doing business.  References All-Russian Insurance Association. Official Site, http://www.insur-info.ru (accessed: 1.10.2014). Efimova O.V. (2012). Sustainability Reporting of Company: evaluation information re- quirements of users. Bulletin of the Russian Peoples’ Friendship University. Series: the Economy, no. 4, 75–82. EY (2013), Investigation of investment attractiveness of Russia. Shaping the Futu- re of Russia, http://www.ey.com/Publication/vwLUAssets/Ras2013-rus/$FILE/ Ras2013-rus.pdf (accessed: 1.10.2014). Federal State Statistics Service, Main indicators of activities of insurance companies. Official Site of the Federal State Statistics Service, http:www.gks.ru (accessed: 1.10.2014). Regulation of financial condition insuReRs… 89 Jurgens I.Y. (2014), All-Russian Insurance Association. Analytical report “The insuran- ce market in 2014: Challenges and Opportunities”. URL: http://autodiscover.ins- -union.ru (accessed: 1.10.2014). KPMG (2014), The new reality: an overview of the insurance market in Russia, July 2014, http://www.kpmg.com/RU/ru/IssuesAndInsights (accessed: 1.10.2014). Ministry of Finance of the Russian Federation (2002), Order of the Ministry of Finance of the Russian Federation from 11.06.2002 N 51n (eds. From 08.02.2012), On appro- val of the Regulations for the formation of insurance reserves by insurance other than life insurance. Ministry of Finance of the Russian Federation (2009), Order of the Ministry of Finance of the Russian Federation of April 9, 2009 N 32n, On approval of the formation of in- surance reserves for life insurance. Ministry of Finance of the Russian Federation (2012), Order of the Ministry of Finance of the Russian Federation of July 2, 2012 N 100n, On Approval of Procedure place- ment of insurance reserves by insurers. Ministry of Finance of the Russian Federation (2012a), Order of the Ministry of Finan- ce of the Russian Federation of July 2, 2012 N 101n, On approval of the require- ments for the composition and structure of assets accepted to cover the insurer’s own funds. The Central Bank of the Russian Federation, http:www.cbr.ru (accessed: 1.10.2014).