Current trends in the investment activities of insurers in the Russian Federation

Insurance companies accumulate huge amounts of money in their accounts. Most insurance companies combine investment activities with core activities to maintain the solvency of companies and increase the reliability of insurance of various risks.

Particularly active investors are insurance companies in the UK, USA, Germany and France. In Russia, the investment activities of insurance companies are constrained by legal restrictions of the state and the relatively small amounts of funds allowed for investment activities. Restrictions on the investment activities of insurance companies occur in all of the above countries, which is explained by the state’s protection of clients of insurance companies.

The insurance business itself is distinguished by conservatism and reliability, since its main task is to preserve the investments of its clients.

In Russia, the activities of insurance companies in the field of investment are regulated by:

• Law of the Russian Federation dated December 31, 1997 “On the organization of insurance business in the Russian Federation.”
• Law of the Russian Federation “On investment activities in the Russian Federation, carried out in the form of capital investments” dated February 25, 1999
• Rules for the placement of insurance reserves by insurers (approved by order of the Ministry of Finance of Russia dated August 8, 2005 No. 100n).

The Russian state imposes certain restrictions on insurance companies in the field of investment activities. When investing, they are subject to the following requirements:

1. Ensure return on investment.
2. Ensure profitability of investments.
3. Ensure liquidity of purchased securities.
4. Form a diversified portfolio of assets to comply with all the above requirements.

Accordingly, the investment activities of insurance companies are conservative in nature.

The main thing when choosing investment objects is not their profitability, but reliability, minimum risks and high liquidity.

Specifics of the investment policy of Russian insurers

The main source of profit for Russian insurers is the insurance operations themselves. This is the reason for the priority position of the marketing policy of insurance companies in relation to their investment activities.

The loss ratio of insurance activities in the Russian market is significantly lower than in the West. This does not apply only to pseudo-risk insurance (“salary schemes”), which, despite a significant reduction in volumes, still occupies a significant share of the total volume of insurance transactions, distorting statistical indicators. While for European and American insurers the main center of profit is in the area of ​​asset management, for most Russian companies investment activities are of an auxiliary nature, and insurance companies receive their main income directly from insurance activities, which for most companies are profitable even by Russian standards reporting.

The average ratios of payments and business expenses to insurance premiums for the companies that took part in the study are shown in Figure 1.

Source: Expert RA

The average return on assets for all companies that took part in the study at the end of 2005 was 3.50%, having increased by 1.35 percentage points compared to the figure for 2004. The average return on invested capital at the end of 2005 was 11.88%, the value of the indicator remained virtually unchanged compared to the data in 2004 (a slight increase of 0.14 percentage points).

Dividing the totality of companies that took part in the study into two groups: companies with a high reliability rating from the Expert RA rating agency (ratings “A”, “A+”, “A++” at the time of the study), and companies who do not have a high reliability rating (those with ratings “C”, “B”, “B+”, “B++”, as well as those who did not undergo the procedure for assigning a rating score, but took part in the study), showed a significant difference in average indicators according to these groups (see Figures 2 and 3).

Source: Expert RA

Source: Expert RA

The difference in average indicators for these groups is a consequence of the greater involvement of companies with a high reliability rating in work in the competitive risk insurance market, as well as in mass types of insurance activities.

Receiving the main profit from direct insurance operations or (still) non-risky “schemes”, many Russian insurance companies pay insufficient attention to obtaining investment income from the placement of insurance reserves, risking losing in the competition. However, the development of the insurance market is leading to more and more insurers reconsidering their approaches to investment policy.

Source: Expert RA

The main factors for the growth of investment activity of Russian insurers over the past few years include:

• strengthening competition and development of mass risk types of insurance;
• concentration of capital in the industry;
• growth of quantitative indicators of the insurance business;
• creation of insurance pools and associations;
• combining insurance and banking businesses, strengthening cooperation between insurance companies and professional participants in financial markets;
• curtailment of “salary schemes” in life insurance and, as a result, a reduction in the volume of loans associated with them and various non-traditional types of investment, which eliminates the need to keep a significant part of the funds in current accounts for monthly payments;
• expansion of the range of investment instruments.

The growth of investment activity of insurers led to the fact that at the end of 2005, for the first time, the average return on invested capital of the leading Russian insurers that took part in the study exceeded (albeit slightly) the inflation rate (see Figure 4), amounting to 11.88%. The average return on invested capital for insurance companies with a high reliability rating (ratings “A”, “A+”, “A++”) at the end of 2005 was 13.2%, for companies without a high reliability rating , but took part in the study, the indicator value was 8.9%.

Research journal

Review of the article

Gashimova Amina Khalinbegovna Filina Marina Aliyarovna 1. Student. Dagestan State University, Makhachkala, Russia 2. Ph.D., Associate Professor. Dagestan State University, Makhachkala, Russia

Gashimova Amina Halinbegovna Filina Marina Aliyarovna

1. Student. Dagestan State University, Makhachkala, Russia 2. Ph.D., Associate Professor. Dagestan State University, Makhachkala, Russia

Abstract: The study analyzes the specific features and features of the investment activities of Russian and foreign insurance companies. Also, based on the presented results, a conclusion is drawn about the possibilities of using foreign experience by Russian insurers. Abstract: The study analyzes the specific features and features of the investment activities of Russian and foreign insurance companies. Also, based on the presented results, a conclusion is drawn about the possibilities of using foreign experience by Russian insurers.

Key words: insurance, insurance, investments, investment activity, investment investments, finance, financial market, insurance resources, investment resources. Keywords: insurance, insurance, investments, investment, investments, finance, financial markets, insurance resources, investment resources.

Currently, insurance is the fastest growing and rapidly developing segment of the economy of various countries, including the Russian Federation. It seems to us that insurance contributes to balancing and stabilizing economic activity in a market economy [7, p. 91].

Domestic and foreign insurance companies are an integral part of the financial market. Therefore, insurance companies in Russia and foreign countries carry out investment activities, which are necessary for their successful functioning. Consequently, we can say that the investment activity of domestic and foreign insurance companies is based on the investment of free cash assets of the enterprise to generate income in the future.

As part of this study, it is necessary to consider the features and characteristic features of the investment activities of insurance companies, and, therefore, it is necessary to consider the conceptual apparatus. Thus, at the present stage, income from investment activities for both domestic and foreign insurance companies is the main source of profit. The main directions of investment activity of insurance companies is the placement of equity capital and insurance reserves [6, p.233].

As studies show, insurance reserves at the present stage are one of the main sources for an insurance company to make insurance payments in the event of an insured event.

Correctly defined investment activities of an insurance company, providing stable income and bonuses to clients, contribute to increasing the company's equity capital. With the help of increased equity capital, the insurer will be able to increase the insurance portfolio and insurance field [2, p.81].

Foreign experience in the functioning of national insurance markets indicates the high importance of insurers as institutional investors ensuring the flow of investment resources into the real sector of the economy. The total volume of investment potential of insurance companies in individual countries (such as, for example, Great Britain, Germany, USA) is comparable to the investment potential of the banking sector [1, p. 246].

A prominent place in the investment policy of American insurers is occupied by their investments in such areas as banks, real estate, industry, services, etc. The insurance business plays a particularly important role in long-term financing of industry. The practice of providing investment loans to industrial corporations for a period of 15–20 years by insurance organizations has become widespread in the United States [8, p. 147].

Let's consider the structure of investments of insurance companies abroad. Typically, 5-10% of total assets are highly liquid short-term investments, such as short-term bank deposits, certificates of deposit, Treasury bills and commercial bills. Among medium- and long-term investments, the main place is occupied by fixed income securities, stocks, real estate and mortgage loans [4, p. 137].

In Russia there are very few attractive investment instruments that could provide protection against inflation and lead to additional income, and this is one of the main problems, especially in the current conditions of a falling financial market. The question of the structure and volume of investments, periods of reinvestment at the expense of insurance reserves, is a complex task that each insurance company solves independently [1, p.247].

Insurance companies in developed foreign countries have accumulated experience in conducting not only insurance operations themselves, but also investment ones, and therefore it seems interesting and relevant today to study the practice of their investment activities.

It is necessary to note the most important specific features and characteristics of the investment activities of domestic and foreign insurance companies. So, according to the research of various authors, we summarized all the characteristic features and came to the following conclusions:

1. In developed foreign countries, such as the USA, Germany and the UK, a differentiated approach to the management of investment resources is of great importance in investment activities, while in the Russian Federation there are certain rules for insurance reserves. Consequently, the insurance market in Russia is too regulated in our opinion. It is necessary to achieve such minimal government intervention in investment activities in order to increase the activities of Russian insurers to an effective maximum.
2. Abroad, most often, the investment activities of insurance companies have clear boundaries of the principles of compliance of the investment insurance portfolio with costs. And in the Russian Federation there is a certain average structure of the investment portfolio, which includes various debt and securities, deposits and authorized capital.
3. In the USA, Great Britain, France and Germany there are rules by which insurers' funds are invested. In Russia, insurance companies are extremely reluctant to engage in investment activities, which is why the level of investment potential in our country is extremely low.
4. In foreign countries, insurance companies very often provide investment loans to industrial enterprises for long periods of time, for example, 10-20 years, but in Russia insurers are very unscrupulous in their investment activities and rarely invest in the real sector of the economy.
5. In foreign insurance companies, monitoring of the current investment portfolio is carried out almost constantly, while in the domestic market there is no serious approach to this using modern means of analyzing economic information. Therefore, it is so important to introduce and adopt experience in using advanced information technologies from foreign partners.
6. While in domestic enterprises investment activity very often becomes similar to a marketing strategy in one form or another, in foreign companies the marketing component and investment activity as such are clearly distinguished. This means that in our country marketing (advertising) and investment activities are on the same line, while abroad these are 2 different activities.

Thus, the investment activity of domestic and foreign insurance companies is an important element of the socio-economic development of society. The main sources of investment activity of insurance companies are the placement of equity capital and insurance reserves. The placement of insurance reserves ensures the financial stability and solvency of the insurance company [3, p.65].

Russian insurers need to be more based on the principles of repayment, liquidity, diversification and profitability of investments, as is common among foreign representatives.

Bibliography

1. Veshchunova N.L. Investment activity of insurance organizations as a source of financing innovation // Fundamental and applied research in the field of management, economics and trade. — 2021. — p. 246-259. 2. Golodnik A.S. Foreign experience of investment activities of insurance companies // Modern trends of the Russian economy. — 2021. — p. 81-84. 3. Krivtsova V.S. Investment activities of insurance companies. — 2021. — No. 1-3. — p.65-67. 4. Pevchenko E.N. Specifics of investment activities of Russian insurance companies at the present stage // Prospects for the development of fundamental sciences. - 2021. - p.137-139. 5. Rakhmatullina A.I. Investment activity of insurance companies in the Russian Federation // Management. Economic analysis. Finance. - 2021. - p.276-281. 6. Taraskin D.S. Analysis of investment activities of insurance companies in the Russian Federation at the present stage // Regional and municipal finance. — 2021. — p. 233-237. 7. Taraskin D.S. Features of investment activity of domestic insurers in modern Russia // Success factors. - 2021. - No. 1. - With. 91-95. 8. Tomilina E.P. Problems of improving the investment activities of insurance companies in the Russian Federation // Modern Economics: Current Issues, Achievements and Innovations. - 2021. - pp. 147-150.

Investment policy of Russian insurers in retrospect

Until 1998, the priority investment direction for insurance companies was government bonds. After the default, insurers switched to banking instruments and investments aimed at expanding their client base.

Before the crisis of August 1998, insurance companies, keeping up with other participants in the financial markets, invested funds from insurance reserves mainly in GKOs, which had high liquidity and excess profitability. This was also facilitated by regulatory requirements: the Order of the Federal Service of Russia for Supervision of Insurance Activities dated March 14, 1995 “On the introduction of rules for the placement of insurance reserves” established that the share of government securities should be at least 20% of reserves formed for life insurance , and at least 10% of reserves for other types of insurance. According to the Center for Economic Research under the Government of the Russian Federation, in the mid-90s, up to 87% of insurers placed some part of their reserves in government securities, while the share of insurance companies investing in corporate securities was almost half as much (45%), and only 23% of insurers used bank investment instruments. The share of GKOs in covering the total insurance reserves of Russian insurers reached 30% by 1998. The August 1998 default dealt a significant blow to the solvency of insurance companies. In addition, insurers for some time lost their usual investment instruments.

Ultimately, the crisis had a positive impact on the development of the insurance industry, contributing to the recovery of the financial market. After the restoration of the banking system, insurers began actively placing insurance reserve funds in banking instruments; later, the opportunity arose to invest in liquid corporate securities - shares and bonds of leading Russian companies. However, insurers made little use of the latter opportunity in 2000-2003 - investments mainly came from bank investments, and the average return on invested capital did not exceed the inflation rate.

In addition to banking instruments, a significant part of the insurers' investments was in bills of exchange of non-banking organizations, which cannot be classified as either liquid or profitable.

Source: Expert RA

Source: Expert RA

Current state of investment policy of insurance companies

The investment structure of the “average” Russian insurance company is still characterized by the predominance of “forced” investments. However, the study showed that even despite pressure from owners and customers, the share of funds that insurance companies invest in market instruments is gradually increasing.

The asset structure of the “average” Russian insurer (obtained on the basis of averaging reporting data from about one hundred leading Russian insurance companies) for various dates is shown in Figures 10 - 12. Figures 13 and 14 show the average asset structure as of January 1, 2006 separately for companies with high reliability rating of the rating agency "Expert RA" (ratings "A", "A+", "A++") and companies that have a lower rating or did not apply for a rating, but took part in the study. Dividing the entire population of companies into these two categories demonstrates quite significant differences in the average asset structure. Data on the structure of investments of the “average” Russian insurer are presented in Figures 15 - 17.

Source: Expert RA

Source: Expert RA

Source: Expert RA

Source: Expert RA

Source: Expert RA

The structure of assets and investment investments of Russian insurers is characterized by unstable dynamics, and the shares of different types of assets vary significantly among different companies. There are companies on the market whose share of accounts receivable consistently amounts to more than half of the balance sheet currency, and for some insurers the share of cash in total assets even on non-reporting dates exceeds 30%. Most insurers are characterized by a drop in liquidity levels on non-reporting dates and an increase by the end of the reporting period. The main reasons for this are, firstly, a reduction in accounts receivable by the end of the year due to the receipt of a significant part of payments under current contracts and, secondly, actions to “adjust” the asset structure to comply with regulatory requirements for the placement of insurance reserves.

Investments in shares of different insurance companies are extremely heterogeneous in composition, quality and level of diversification. Some companies (most of them with a high reliability rating) have a portfolio of shares consisting exclusively of blue chips, with investments well diversified across investments, and some have unquoted shares of one or two opaque companies. A similar situation is observed with bonds and other debt instruments. Investments in banking instruments for most insurers are more diversified.

A significant part of the investment investments of insurance companies represents “forced” investments (of which about half are made by affiliated organizations). According to the Expert RA rating agency, in 1999-2002 the average share of “forced” investments was about 70% of total investments; by 2004 it had decreased to approximately 60%. Currently, despite the ongoing decline, “forced” investments still account for more than half of the investment portfolio of the “average” insurer.

The emergence of “forced” investments is associated with the specifics of relationships with the largest clients and/or owners of insurance companies (often these are structures of the same financial group). Of course, such investments are not a “gift”; investments in debt obligations of clients or friendly banks are, of course, accompanied by an analysis of their financial condition, but often this analysis turns out to be quite superficial, and the return on such investments is significantly lower than the market one. Losses in the profitability of investments are usually compensated by additional income from insurance premiums, in particular, work with banking instruments may be accompanied by insurance of collateral when carrying out credit operations, insurance of the bank itself and its employees, clients and partners of the bank, and the offer of joint products.

The purpose of investing in affiliated structures also, in most cases, differs from the purpose of obtaining investment income directly. Often, with the help of such investments, the authorized capital of an insurance company is “inflated”: legal entities that are its owners pay for the authorized capital with their own shares or other securities of affiliated structures. Obviously, such securities are illiquid and do not generate investment income (or it is minimal). In fact, such investments are investments only on paper and have no real economic component.

The situation with investments from insurance companies that are part of large financial and industrial groups is more complicated. Such companies are characterized by regulation of investment policy by the parent organization (which in many cases is also the main client), as a result, naturally, most of the investments of such insurers fall on companies included in the holding. Working with financial instruments of affiliated structures allows insurance companies to save on transaction costs of concluding transactions and, in particular, monitoring the reliability of the counterparty. Although such investments cannot be considered market ones, in many cases their reliability (especially for the largest insurers) is quite high. However, with excessive “passion” for investments in affiliated structures for insurance companies, there is a risk of financial stability due to the emerging high dependence of the insurer’s solvency on one investment object. According to the Expert RA rating agency, the share of such investments in the overall structure of investment investments of Russian insurers is higher than optimal from the point of view of economic efficiency.

The regional distribution of investments by Russian insurers is also largely determined by non-market factors. A common practice in the relationship between insurance companies and regional authorities is the placement of insurance reserves in state or municipal securities of a particular region in exchange for the right to insure, through a tender, objects that are regionally owned. It is also possible to invest in securities of companies close to the regional management, or with a share of the region. As a result, the insurer, along with insurance contracts, acquires on its balance sheet long-term “hanging fruit” - bills of exchange and participation shares in various LLCs, which cannot serve as reliable security for its insurance obligations.

Unfortunately, many insurers still ignore the principle of matching insurance and investment portfolios. Although Article 27 of the Law of the Russian Federation on the organization of insurance business determines that “investments must be consistent in terms and amounts with insurance obligations,” due to the lack of the possibility of constant control by the regulator, companies actually, on their own initiative, solve (or do not solve) the problem of correlating the structure assets and liabilities by degree of urgency. In modern conditions of rapid growth of the insurance market and the emergence of new types of insurance, almost no insurance company produces a full-fledged analysis comparable to that carried out by leading Western insurers. As a result, some insurers, including well-known ones, have their business looking like a financial pyramid. An example is a number of companies specializing in auto insurance. As long as premiums are rising at a high rate, such insurers are able to pay out premiums collected from new clients and not take asset management seriously. Once the influx of new clients dries up, insufficient attention to the management of insurance reserves will lead to financial problems, including bankruptcy.

Current trends in the investment activities of insurers in the Russian Federation

Introduction

In developed countries, insurance plays an important role in the development of not only the financial market, but also in the development of the country's economy. Sustained growth of the insurance sector in countries with developing economies will improve the competitiveness of the financial market and the country's economy at the international level. Therefore, one of the main priorities of the Central Bank of the Russian Federation as a mega-regulator of the financial market is the development and improvement of the accounting and management system, including for insurance companies.

As part of the implementation of the policy for the sustainable development of a competitive insurance market in the Russian Federation, the Bank of Russia is introducing new Solvency Standards (Solvency II) into the national market. These standards oblige Russian insurers to switch to a risk-based approach (ROA) in the management of insurance companies. If we consider the activities of the insurer as a set of individual technological operations (business processes), then at the level of the insurance company, when transitioning to new solvency requirements, some of them will need to be changed [9] (Kalayda, 2012)

. The new approach to managing the insurance business will primarily affect such business processes of the insurer as “Calculation of capital and insurance reserves”, “Investing”, “Corporate governance”, etc. The investment activity of the insurer is secondary to the insurance activity. The purpose of investing is not only to generate additional income for the insurance company, but also to ensure financial stability and fulfillment of insurance obligations. The presented work analyzes the changes that will be introduced into the process of investing the insurer's own funds and insurance reserves in connection with the transition to a risk-based approach. The introduced changes by providing investment potential with assets of real value will not only increase confidence in the insurance sector on the part of policyholders, but will also help increase the level of financial and investment attractiveness of the Russian insurance market in the international arena. The purpose of the study is to consider and analyze emerging changes in the investment activities of the insurer when introducing a risk-based approach and new solvency standards. The novelty of the study is determined by the identified current changes in the investment activities of the insurer, which will require consideration in practice when managing the company’s business processes. This work was written using the following research methods: analysis of investment activity as a business process of an insurance company, synthesis of the data obtained with the legislative framework for the introduced solvency standards (risk-based approach).

Despite the fact that the investment activity of insurance companies in the Russian Federation is not sufficiently developed, it must ensure the efficient functioning of the company and also generate profit. Many scientific works are devoted to the study of various aspects of this activity of the insurer. In the domestic scientific literature, the topic of the insurer’s investment activities is discussed by G.V. Chernova. [13] (Chernova, 2009)

, Kozlova O.N., Kalacheva E.A.
[10] (Kozlova, Kalacheva, Kalacheva, 2018)
.
Their works reveal investment activity as a separate business process of the insurer and allow one to form an idea of ​​this business process. A. Khurramov notes the importance of the investment activity of the insurer in order to increase the efficiency of insurance activities and the need for regulatory restrictions on assets, and provides statistical country indicators of the investment activity of insurers [17] (Khurramov, 2020)
. H. Grundl, M. Dong, J. Gal [18], studying the volume of investment portfolios of insurers, note the significant role of insurers as institutional investors in ensuring global economic growth. However, the modern period of development of the insurance market of the Russian Federation, characterized by the introduction of new solvency standards and the impact on the activities of insurers, has not been sufficiently studied. The risk-based approach (new standards of solvency) is only being introduced into the management methods of insurers, therefore, in the scientific literature, the issue of changes in investment activities has not been sufficiently studied, which determines the relevance of this work.

Investment as an additional source of income for the insurer

The activities of an insurance company, like any other organization, are determined by maximizing income received, minimizing its expenses, and making a profit. Despite the different classifications of insurance companies, in general, the income and expenses of the insurer are the same in essence [12] (Kovalev, 2007)

. All types of income and expenses can be divided into the following types:

· income and expenses from insurance activities:

o receipts of insurance premiums; compensation for a share of losses for risks transferred to reinsurance; commissions and brokerage fees if the insurer acts as an intermediary of insurance services;

o payment of insurance compensation; contributions to insurance reserves; costs associated with reinsurance;

· income and expenses from investment activities:

o proceeds from investing insurance reserves and own available funds;

o expenses associated with the implementation of investments;

· other types of income and expenses:

o income from leasing the insurer’s property, payments by consumers for consulting services, tuition fees provided by the insurer;

o costs of conducting the case; non-operating losses and damages.

The main goal of an insurance organization, in addition to making a profit, is to protect the property interests of individuals and legal entities in the event of adverse events. In this regard, the main items of income and expenses of the insurer are income and expenses from insurance activities (insurance activities). As already noted, in addition to income from insurance activities, insurers can receive investment income. Investment activity is an additional source of income for the insurer and is based on the investment and placement of temporarily available funds of the insurer [14] (Chernova, Kalayda, 2010)

.

The main elements of the insurer's investment potential or temporarily available funds are:

· funds of the insurer's insurance reserves (ISR). Insurance reserves for the insurer are the main source for insurance payments [7] (Gutova, Okorokova, 2016)

. The insurance reserve also reflects the amount of liabilities under concluded insurance contracts. If the insurance reserves were formed in insufficient quantities, then the insurance company will not be able to cover its obligations. The fact that the policyholder pays the insurance premium at the beginning of the insurance contract, and receives the service in the form of an insurance payment later, during the entire term of the insurance contract and only upon the occurrence of an insured event, allows the insurer to invest insurance reserves formed from insurance premiums;

· own funds (capital) (SS) of the insurer. The insurance company's own capital is an additional source to ensure the insurer's ability to meet its obligations if there are insufficient insurance reserves.

The profit received from investing temporarily available funds (investing own funds and funds from insurance reserves) will allow the insurer to increase the overall profit from work in the reporting period, provide an opportunity to improve solvency indicators and provide additional resources to cover not only the main insurance obligations (payment of insurance compensation) , but also to cover unforeseen expenses [10] (Kozlova, Kalacheva, Kalacheva, 2018)

.

In other words, investing own funds and funds from insurance reserves is an essential part of the functioning of the insurance company and serves as a source of profit for the insurance company, despite the fact that the investment activity of the insurer is subordinate to the insurance activity [13] (Chernova, 2009)

. This is confirmed by statistics. For example, at the end of 2019, the growth in profits of Russian insurers against the backdrop of increasing loss ratios was achieved due to an increase in income from investment activities [15]. And at the end of 2021, there is a significant change in the profit structure of insurers, where the share of investment income (especially life insurance) significantly exceeds income from insurance operations [16].

The process of investing your own funds and insurance reserves, as well as receiving income from this process, can be divided into the following main stages:

1. Calculation (formation) of investment potential. This stage consists of the formation and allocation of temporarily available funds (funds of insurance reserves and own funds), which will be invested by the insurer.

2. Selection of assets allowed for investment of insurance reserves and own funds. At this stage, the insurer selects assets in which temporarily available funds will be invested. This choice is made on the basis of the principles of diversification, liquidity, repayment and profitability [1].

3. Determination of the possible value of assets allowed for investment of insurance reserves and own funds. According to the law, when investing temporarily free funds, the conditions of structural relationships and the volume of investment potential must be observed.

4. Acquisition of assets permitted and selected for investment of temporarily available funds.

5. Receiving income from investment activities.

Investment activities within the framework of a risk-based approach

As part of the policy of introducing international methods of managing insurance companies, the Central Bank began the process of introducing a risk-based approach. At its core, this approach is the European solvency standards Solvency II adapted for the Russian market. These standards make significant changes to the way insurance companies are managed. It is worth noting that all changes are aimed at increasing the financial stability, reliability and efficiency of insurance organizations, increasing confidence in the insurance industry, including by ensuring more effective protection of the interests of policyholders, insured persons and beneficiaries by reducing the risk of insolvency of insurance organizations and increasing financial stability insurance sector, ensuring the comparability of Russian insurance legislation with internationally recognized principles and rules of regulation and supervision in relation to insurance organizations. It is worth noting that ROP is three components aimed at modifying the existing business processes of the insurer [6]:

· Component 1 “Determination of quantitative capital requirements”, or quantitative changes. This component reveals new capital requirements that will improve the financial stability of insurance companies.

· Component 2 “Corporate governance system”, or qualitative changes. This component describes the changes being introduced in the methods of managing insurers.

· Component 3, Disclosure and Reporting Requirements, or changes to external reporting. This component describes changes that insurers need to make to their financial reporting practices.

The main issues that the implementation of EPR will solve are increasing the financial stability and solvency of insurance companies. The financial stability of insurance companies is the company’s ability to fulfill its obligations in a certain time frame and in full, primarily under insurance contracts. Therefore, it should be expected that the implementation of the ROP will make adjustments to all processes of the insurer, which are aimed at ensuring financial stability and solvency [8] (Kalayda, 2017)

.
These are processes related to the formation of the insurer’s investment potential, ensuring the insurer’s profitable operation, as well as processes related to the insurer’s risk management. A brief analysis of the impact of the requirements of the key provisions of the new standard on the insurer’s business processes is presented in Table 1
.

Table 1

Assessment of the impact of the requirements of the components of the risk-based approach on the insurer’s business processes

Source: compiled by the author based on [11] (Trutneva, 2021)
.

When considering the process of investing own funds and insurance reserves, it is worth paying special attention to Component 2 “Corporate Governance System”, because the requirements it contains change approaches to this process and contain new investment principles for insurers.

In order to implement the ROP and apply new standards for the reliability of insurers, the Central Bank developed and adopted Bank of Russia Regulation No. 710-P dated January 10, 2020 “On certain requirements for the financial stability and solvency of insurers,” which will come into force on July 1, 2021 [1] . Within the framework of this Regulation, an entire chapter is devoted to the rules for investing own funds and insurance reserves. It is worth noting that after this Regulation came into force, Bank of Russia Directive No. 4298-U dated February 22, 2017 “On the procedure for investing the insurer’s own funds (capital) and the list of assets permitted for investment” and Bank of Russia Directive No. 4297-U dated February 22, 2017 “On the procedure for investing funds from insurance reserves and the list of assets permitted for investment,” which are currently being used for investment activities, will no longer be in force. This confirms the change in the regulatory framework regarding the implementation of investment activities of insurers and the need to review the organization and management of this process at the level of the insurance company.

Having analyzed the regulatory changes, we can conclude that the main elements of investment processes that have undergone changes after the implementation of the EPR are:

· assets allowed for investment of own funds and insurance reserves. As part of the insurer’s investment process, the changes made affected stage 2 “Selection of assets allowed for investing own funds and insurance reserves”;

· the value of assets allowed for investment of own funds and insurance reserves. As part of the insurer’s investment process, the changes made affected stage 3 “Determining the possible value of assets allowed for investing own funds and insurance reserves.”

Assets allowed for investment of own funds and insurance reserves

According to the law “On the organization of insurance business in the Russian Federation,” insurers must invest their own funds and insurance reserves on the terms of diversification, liquidity, repayment and profitability [1]. This means that, according to the law, the insurer’s investment portfolio must contain not only “risky” and highly liquid assets as a way to obtain the greatest profit, but also “reliable” and low-liquidity assets that will not bring a lot of income, but will allow the formation of a permanent income without associated with great risk. In addition to the investment principles, the Central Bank's instructions strictly limit the assets in which own funds and insurance reserves can be invested by providing a closed list of assets allowed for investment (Table 2).

table 2

List of permitted assets for investing insurance reserves and own funds

Source:
compiled by the author based on regulatory documents [2–4, 6].

At the moment, a closed list of permitted assets allows the regulator to almost completely control the investment activities of the insurer. With the introduction of the ROP, the insurer is given greater independence. In addition to the principles of diversification, liquidity, recovery and profitability, the insurer will build its investment portfolio based on the principle of prudence. This principle requires a certain degree of caution in estimating insurance reserves and equity assets so that, in the event of uncertainty (i.e., the worst case scenario), assets or income are not overstated and liabilities or expenses are not understated. The introduction of this principle is associated with the independence of the insurer when making investment decisions. It is worth noting that other components also imply a certain independence of the insurer from the regulator when making decisions on the management of the company. After implementing the EPR, the insurer needs to increase the level of responsibility of employees. As part of the prudence principle, one solution may be to create an investment committee, including key employees and representatives of corporate governance, to make investment decisions. In addition, it is planned to introduce the principle of freedom of investment. According to this principle, the insurer has some freedom in choosing assets for investment due to the absence of a closed list of assets allowed for investment. The introduced principles mean following the international practice of investment activities of insurers. It is worth noting that the introduction of international investment principles corresponds to another goal of introducing RBA - ensuring the comparability of Russian legislation and international standards for regulating insurance activities.

The value of assets allowed for investment of own funds and insurance reserves

At the moment, all assets allowed for the investment activities of the insurer are valued according to accounting data (Table 3)

. This means that the recalculation of the value of assets occurs on the calculation date (once a year when preparing financial statements).

Table 3

Changes in the valuation of assets allowed for investment of insurance reserves and own funds

Source: compiled by the author based on regulatory documents [2–4, 6].
Despite the fact that within the framework of the ROP, the list of assets permitted for investment is not strictly regulated, there is a classification of types of assets to take into account the valuation of these assets. After the introduction of solvency standards, all assets allowed for investment activities are divided into three groups:

· attracted loans and borrowings;

· securities (including cash) received by the insurer under the first part of the repurchase agreement;

· lots of derivative financial instruments, underlying assets of derivative financial instruments.

The first type of assets (raised loans and borrowings) continues to be assessed according to accounting data. This means that the calculation and valuation of these assets occurs when preparing financial statements.

Valuation of other types of assets is calculated at fair value. According to IFRS 13, fair value is the price that would be received to sell an asset or paid to transfer a liability under current market conditions in an orderly market between market participants at the measurement date [5]. In other words, fair value is the actual price of an asset at the time of sale. Accounting for assets at fair value will allow the insurer to provide insurance reserves and own funds with assets of real value.

The introduced principle of assessing assets at fair value also corresponds to the goal of introducing international standards into the national system of accounting and management of insurance companies through the principles of a risk-based approach.

Conclusion

To achieve the set goals of increasing the economic stability of society, increasing the financial stability of the financial sector and increasing the transparency and reliability of reporting data in the insurance sector, the financial market mega-regulator represented by the Central Bank began an active policy to introduce a risk-based approach to the management of insurance companies. At its core, this approach is the European solvency standards Solvency II adapted for the Russian market. EPR standards introduce significant changes to the way insurers manage their business processes.

Despite the fact that investment activities are not of primary importance for the insurance company, they are still an integral part of the functioning of the insurer. Income from investing temporarily free funds is the second largest income for the insurer.

With the introduction of a risk-based approach, the investment activities of insurance companies in the Russian Federation have undergone changes. The main one is the abandonment of the limited list of own funds and insurance reserves allowed for investment, as well as the transition to accounting for the value of these assets in accordance with IFRS. In addition, the level of responsibility for investment decisions is “descended” to the level of the insurer in connection with the introduction of the principle of prudence when carrying out investment activities.

All changes introduced by the ROP are aimed at increasing the transparency and investment attractiveness of Russian insurers for both national and foreign investors, to ensure the comparability of Russian insurance legislation with international standards and, of course, to increase the reliability of subjects of the Russian insurance market.

[1] Please note that consultations are currently underway between the Supreme Council of the Russian Federation and the Central Bank of the Russian Federation on postponing the entry into force of certain paragraphs of this Regulation.

Structure of placement of insurance reserves

On July 1, 2006, new Rules for the placement of insurance reserve funds by insurers, approved by Order of the Ministry of Finance of the Russian Federation dated August 8, 2005 No. 100n, come into force (the structural relationships of assets and reserves are given in Appendix 1).

The new rules for placing insurance reserves promise to become a serious test of strength for many, especially small, insurers. However, the results of a study conducted by the Expert RA rating agency showed that almost all major players in the insurance market (at least those with an agency reliability rating) are ready for the introduction of new rules.

An analysis of the structure and composition of assets submitted for placement of insurance reserves by leading insurers showed a fairly high degree of compliance of assets accepted for coverage with new regulatory requirements as early as July 1, 2005. Certain inconsistencies with the requirements of Order No. 100n can be easily eliminated by the main players in the insurance market by the time it comes into force.

Figures 18 and 19 show the average structure of assets presented to cover insurance reserves as of January 1, 2005 and July 1, 2005 for companies with an Expert RA reliability rating (including unpublished rating estimates).

Source: Expert RA

Source: Expert RA

Detailed information about the object-by-object composition of assets presented to cover insurance reserves cannot be disclosed by the Rating Agency in accordance with the terms of the rating agreement. However, we note that the assessment of the quality of the investment policy of the insurance company, the reliability and diversification of investments in investment objects, as well as the degree of readiness of the company for the regulatory requirements being introduced, carried out by Expert RA specialists, is one of the key components of the integral rating assessment of the level of solvency and financial stability of the insurer.

Application of credit ratings to regulate the placement of insurance reserves

One of the most important innovations of Order No. 100n was the use of credit ratings to regulate the placement of insurance reserves.

The new regulations propose, as in the case of corporate securities and bills, to use credit ratings to regulate investments in bank deposits. The restrictions are twofold. The first, the main limitation, is floating and depends on the level of Russia’s sovereign rating. The bank's rating should not differ by more than 2 levels down compared to the rating of the Russian Federation. Currently, the sovereign rating is at BBB on the S&P scale, Baa2 on the Moody's scale and BBB on the Fitch scale. Therefore, the floating cut-off line is now at the level: BB on the S&P scale, BB on the Fitch scale and Ba2 on the Moody's scale. Only those banks rated above this level qualify. The lower fixed cut-off level was created in case of a downgrade of Russia's sovereign rating. In this case, even if the bank’s rating differs from the sovereign rating by less than 2 levels, it should not be lower than BB-, Ba3 and BB- according to the Standard & Poors, Moody's, Fitch scales, respectively. If the level of Russia's rating increases, the lower limit no longer forms a cutoff: it is counted from the sovereign rating.

The maximum total amount of investments in bank deposits is limited to 40%. Thus, the insurance company can vary the ratio of banks with a high credit rating and those without one within 40%, but not exceeding 20% ​​of the latter’s share (clause 6 of the Rules). The requirement to diversify investments does not allow one bank to invest more than 20% of its total reserves in deposits, including those certified by certificates of deposit (clause 7 of the Rules).

The new Rules combine bills of banks and non-banking organizations. Whether this is correct is a moot point, but from July 1, the value of bills of any organizations, including banks, is limited to 10% (clause 10), and the organizations that issued bills are required to have a high rating.

Insurers may also invest in stocks, bank bonds and other assets on a general basis, subject to other structural requirements and rating restrictions. Investments in banking instruments can be expanded by transferring funds into trust management with subsequent investment in banking assets. However, funds from insurance reserves transferred to trust management should not exceed 20% of the total amount of insurance reserves (clause 30), and, as a rule, are used to operate on the stock market. It is hardly advisable to use these funds for low-profit investments in banks.

As of the beginning of May 2006, more than fifty resident banks of the Russian Federation had ratings in 3 international agencies. At the same time, only 12 Russian banks meet the credit rating requirements (only residents of the Russian Federation, licensed by the Central Bank of the Russian Federation and attracting deposits from insurers): Sberbank of the Russian Federation, Vneshtorgbank, Gazprombank, Bank of Moscow, Rosselkhozbank, KMB-Bank, Moscow Narodny Bank, PromStroyBank , International Moscow Bank, Russian Development Bank, Raiffeisenbank, Impexbank. This does not take into account specialized banks, in particular those involved in investment banking (for example, the investment bank Renaissance Capital and the international bank for assistance to transformational economies of the EBRD), as well as VEB.

Several more banks could theoretically raise their rating to the required level within a year. These are Alfa Bank, MDM Bank, Russian Standard, RRDB, Financebank.

It is easy to notice that the above requirements for the rating level are currently met by about 1%, another 5% of banks have ratings from international rating agencies (Big Three agencies), but these ratings are more than 2 levels lower than the sovereign Russian one. The remaining almost 94% of Russian banks do not have ratings from these agencies. Obviously, the share of fairly reliable banks is much higher than what is noted by the Big Three agencies. The second echelon of reliability will not be able to receive a rating less than 2 levels away from the sovereign (according to our forecasts, the number of banks with such ratings will reach 15-18 by the beginning of next year). On the other hand, at least another 30-40 federal and regional banks can be considered quite reliable and satisfy the requirements of the Ministry of Finance of the Russian Federation. In order to formalize this, the bank needs to obtain a rating from a Russian rating agency, for example, Expert RA.

Structure of the investment portfolio at the end of 2021

Objectives of investment operations

LLC IC Renaissance Life manages the insurance funds of its clients, guided by two principles - safety and profitability.
Based on these principles, the company builds a balanced investment strategy. A significant part of the asset structure is made up of fixed income instruments. The priority is quality assets. Following strict criteria for selecting areas for placing funds and focusing on the effective use of existing investment opportunities allow the company to steadily increase the funds of its clients. The key task of an insurance company is to fulfill its obligations to clients in a timely manner and in full. To effectively solve this problem, the company pays special attention to the following areas of work:

• development of an investment strategy - the investment portfolio is distributed among individual classes of assets (stocks, bonds, deposits), requirements are imposed on the quality and risk-return ratio acceptable to the company;
• investment activities are aimed at ensuring the ability of the insurance company to meet its obligations to clients under any conditions;
• the company invests funds corresponding to insurance obligations to clients, as well as its own funds;
• a necessary condition for making investments is unconditional compliance with the legislation of the Russian Federation regarding insurance and investment activities. The high level of reliability of the company is confirmed by the rating agency "Expert RA" ruA+ "Moderately high level of creditworthiness/financial reliability/financial stability."

Thus, SK Renaissance Life LLC is a conservative investor, focused primarily on the reliability of investments. All decisions are made collectively through a monthly or extraordinary meeting of the investment committee based on a detailed analysis of any type of investment.

Investment objects

The selection of investment objects is carried out in accordance with the requirements of current legislation. Regulation in this area is very strict - the use of any other tools not provided for by law is impossible.

The insurance company has the right to make the following types of investments:

• place funds in deposit accounts;
• purchase shares and bonds of Russian issuers;
• transfer assets to trust management.

Investment results for 12 months of 2021

Currently, the investment policy of Renaissance Life Insurance Company LLC, as before, is based on maximizing profitability while observing the conditions of maximum reliability and liquidity of assets.

This approach to making investment decisions allows the insurance company to receive a stable income from the placement of insurance reserves and own funds, although the Russian financial market has been quite unstable in the last few years, especially against the backdrop of the COVID-19 pandemic that broke out in 2021, affecting almost all areas.

The share of deposits and bonds in the investment portfolios of the insurance company (50-80%) made it possible to obtain a stable guaranteed income both on insurance reserves and on own funds.

Deposits

Part of the insurance company's funds are placed in bank deposits in the largest banks in the Russian Federation; their reliability is beyond doubt.

All banks have high credit ratings from leading Russian rating agencies.

Deposits are open for both long-term and medium-term periods. This measure allows you to reduce the risk of sudden changes in interest rates and use funds as efficiently as possible.

Currently, deposits are placed in Russian rubles, but agreements concluded with banks make it possible to quickly place funds in foreign currency. If necessary, this measure will reduce the risk of fluctuations in the ruble exchange rate against the US dollar or euro.

Partner banks: VTB Bank (PJSC), Raiffeisenbank JSC, GPB Bank (JSC), CREDIT BANK OF MOSCOW PJSC, etc.

Stock

The share of funds placed in assets, the value of which significantly depends on the market situation and may fluctuate significantly, does not exceed 20% of the total amount of funds. These assets consist of securities of issuers, the growth potential of which is quite high both in the medium and long term, and the solvency of the issuers can be supported by the state.

Currently, these assets were acquired with a medium to long-term investment horizon, and short-term fluctuations in their market value do not significantly affect the expected return of the portfolio in the future.

Shares in the portfolio: PJSC MMC Norilsk Nickel, PJSC LUKOIL, PJSC MTS, PJSC GAZPROM, etc.

Bonds

The bond portfolio of IC Renaissance Life LLC consists of issuers that have both the highest credit ratings of rating agencies (Expert RA, ACRA) and those included in the top-level quotation list of the Moscow Exchange (issuing companies with high capitalization, liquidity and reliability). The company's bond portfolio includes both corporate and government bonds.

Bonds in the portfolio: VEB.RF, JSC Russian Railways, VTB Bank (PJSC), PJSC Uralkali, etc.

Management companies and brokers

SK Renaissance Life LLC cooperates only with reliable management companies and brokers with significant experience in financial markets and a high credit rating.

Management companies and broker-partners: Management Company "SPUTNIK CAPITAL MANAGEMENT"

,
Bank GPB (JSC)
,
LLC Management System "Sistema Capital"
,
TKB Investment Partners (JSC)
.

• Structure of the investment portfolio for the first half of 2021
• Structure of the investment portfolio at the end of 2021
• Structure of the investment portfolio for the first half of 2021
• Structure of the investment portfolio at the end of 2021
• Structure of the investment portfolio for the first half of 2021
• Structure of the investment portfolio at the end of 2021
• Structure of the investment portfolio for the first half of 2021
• Structure of the investment portfolio based on the results of 2015
• Structure of the investment portfolio for the first half of 2015
• Structure of the investment portfolio at the end of 2014
• Structure of the investment portfolio for the first half of 2014
• Structure of the investment portfolio at the end of 2013
• Structure of the investment portfolio for the first half of 2013
• Structure of the investment portfolio based on the results of 2012
• Structure of the investment portfolio based on the results of 2011

Date of last change of information: 03/23/2021 at 10:09:11

Annex 1

Structural relationships between assets and reserves (as amended by Order of the Ministry of Finance of the Russian Federation dated 08.08.2005 No. 100n)