The effectiveness of the company is determined by the indicators of financial results from all types of activities. It is expressed in the form of profit or loss. The first is a source of capital increase and fulfillment of obligations to creditors and the budget. In the process of activity, the insurance company performs many functions: concludes contracts, calculates rates, collects contributions, assumes responsibility, forms reserves, invests funds in order to generate income. An organization needs funds to complete these actions.
Definition
One of the indicators that characterize the financial reliability of the company is the insurance portfolio. This is a set of concluded contracts for certain amounts. In fact, it is a reflection of the company's obligations to customers. Creating a sustainable portfolio is an important goal of the organization. The degree of responsibility of the structure under the adopted agreements depends on its size. In order to ensure the sustainability of activities, it is rational to create an insurance portfolio with a large number of transactions with a low degree of responsibility. Compensation shall not affect the financial position of the company.
Factors
The number of contracts concluded does not indicate a stable position. The lion's share of customers can be attracted by offering lower rates. A large insurance portfolio means a high amount of liabilities. But if the tariffs are low, the collected funds may not be enough for payments.
On the other hand, a large amount of obligations will allow the insurer to invest in risky facilities. If the company basically concludes short-term contracts, then an additional requirement is presented to its transactions - high liquidity. The organization should be able to quickly realize assets and fulfill its obligations if necessary.
Portfolio Quality
This indicator is characterized in the following areas:
- A value that includes the number of contracts concluded and their total amount.
- Homogeneity of risks. The heterogeneity of obligations with a small portfolio can lead to unpredictable results. In such transactions, it is impossible to use statistical laws to analyze the calculations. Instability can also be caused by a company accepting a large number of uniform risks.
- Equilibrium - the ratio between the number of old and new contracts concluded. Ideally, new transactions should fully compensate for previous ones, with a balance between the amounts due and the amount of risk.
- Stability - the number of contracts that will be paid before the end of their term.
Analysis of the insurance portfolio should be done in order to assess financial capabilities and adjust its structure if necessary.
Risk transfer
The company's insurance portfolio over a different period of time includes a differentiated amount of liability. To reduce the risks of the organization, resort to the help of reinsurers. The company determines the retention limit in accordance with risk groups and its capabilities. The state bodies set the maximum amount of personal responsibility of the organization in the amount of 10% of their own funds. The rest of the company must be reinsured. The Russian market is still characterized by a low level of equity and, accordingly, a limit of liability.
By transferring risks, the organization reduces the size of funds, which ensures financial stability of operations. This is especially true for newly created structures for which the insurance portfolio is not sufficiently developed. Accepting a large number of identical risks, a company may fall into a situation of simultaneous cumulation, when all obligations will have to be covered immediately. In practice, this becomes the cause of the bankruptcy of organizations, since the payment of funds requires not only created reserves, but also the company's capital. Therefore, the insurance portfolio is a source of resources, on the quality of the structure of which depends on the financial stability of the organization.
Benefits
Transfer of responsibility allows solving some of the problems:
- Compensate for a very large risk arising from a catastrophic event. For example, in the event of an epidemic, cumulation occurs, which is already extremely dangerous for the insurer, as it increases its costs.
- Stabilize the organization for a long period after adverse results throughout the year.
- Improve market competitiveness.
- Form a balanced insurance portfolio.
- Provide asset protection.
disadvantages
An insurance portfolio is a set of concluded contracts. Although the risk level for them can be high, before transferring part of the obligations to another company, it is worth evaluating the cost-effectiveness of such a solution. Reinsurance operations are carried out for a surcharge. The size of the commission should correspond to the share of shared responsibility. An important point is also the determination of the level of personal retention, which depends on the financial capabilities and profitability of operations. An overestimated limit leads to financial instability, and too low - to non-profit.
Structure
The transfer of risks from one organization to another is possible only under the supervision of government agencies. Moreover, the structure of the insurance portfolio should include:
- contractual obligations corresponding to established reserves;
- assets designed to cover risks.
The insurer transfers the portfolio formed at the time of the decision. It also includes obligations under current contracts and those whose validity has expired, but the obligations have not been fully fulfilled. For a particular object, risks can be transferred to one insurer.
The value of assets may be equal to the formed reserves or be less than them. Extra charges are allowed only if their size does not exceed the difference between the transferred property and the capital of the company. A transaction is prohibited if the amount of assets is less than half of the transported reserves. The exceptions are cases of bankruptcy of the company. In case of insufficiency of the transferred assets, the rest may be compensated by the association of insurers. The amount of payments is determined by federal laws. The value of the assets transferred is equal to their carrying or market price.
Grounds for the transfer of contracts
There are several of them:
- revocation of the license to carry out activities at the initiative of the supervisor;
- in the case of a decision on the liquidation of the organization, the insurance portfolio is subject to full transfer to another company;
- violation of the established solvency requirements, as a result of which the financial condition of the organization has worsened, if the portfolio transfer is provided for by the liquidity recovery plan;
- decision-making on the voluntary abandonment of certain activities;
- exclusion of the company from the association of insurers in cases provided by law.
Conclusion
An insurance portfolio is the number of contracts entered into by a company for certain amounts. He is the main source of cash. But with poor management of the structure, it can cause the bankruptcy of the organization. Therefore, it is important to properly formulate and distribute risks and responsibilities under contracts. However, the services of reinsurers are not free. Therefore, it is necessary to evaluate the economic efficiency of the transaction until its conclusion. The process itself is under strict state control.