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Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020 395

Trakia Journal of Sciences, Vol. 18, Suppl. 1, pp 395-400, 2020

Available online at:

http://www.uni-sz.bg

ISSN 1313-3551 (online) doi:10.15547/tjs.2020.s.01.066

FINANCIAL MANAGEMENT IN THE ACTIVITY OF

INSURANCE COMPANIES

Ts. Andreeva

Finance Department, University of National and World Economy, Sofia, Bulgaria

ABSTRACT

The article defines the essence and justifies the need for financial management in the activities of

insurance companies.

PURPOSE: The aim of the article is to bring out the specifics of financial management in insurance

and outline the advantages of controlling as a function and part of the management of the insurance

company to ensure the necessary solvency.

METHODS: The systematic and structural approach, analysis and synthesis, including, study of

literature sources and analysis of the existing situation in the practice of the insurance company are

used.

RESULTS: The results are about highlighting the role of risk management in financial management, as

well as the importance of factors - gross technical provisions and others, for risk management of the

insurance company.

CONCLUSION: Тhe complex nature of financial management requires integrated risk management,

which requires the establishment of an independent unit and / or position in financial management and

risk management.

Keywords: financial management, controlling, risk, gross technical provisions

JEL: D81

INTRODUCTION

In order to function normally, the company

must have the necessary financial resources (1)

Raising capital to start, operate, return capital

and make a profit is the first prerequisite for

financial management of the insurance

company, and in particular its finances.

The second prerequisite is a process of

providing funds for the realization of tactical

and strategic goals within a certain period.

There is a third difference, namely how

managers find the funds needed for the

financial activities of the insurance company.

The finances and financial activity of the

business organizations are leading and

determining in achieving profit. In the

insurance company, this goal is not made

explicit. It is pursued through the growth of the

volume of insurance activity, the collected

revenues from insurance premiums, increasing

market share, quality customer service and

meeting their needs.

The finance of the insurance company is a set

of financial relations arising from all cash

flows with which the insurance company is

related to other economic entities and to the

state. They express a system of financial

(monetary) relations between the insurance

company and other counterparties - insured,

banks, other insurance companies, co-insurers,

reinsurers, staff, structural units, the state, the

municipality and others. In a narrow sense of

the term, the essence of finance is associated

only with one-way monetary relations, in

which the participation of the insurance

company is not associated with the reverse

flow of money. (2)

The finances of the insurance company are

specific monetary relations, which can be

systematized in:

 Monetary relations with shareholders in connection with a subsequent increase in

share capital and the payment of dividends;

 Monetary relations with insurers on the occasion of concluding insurance contracts

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ANDREEVA TS.

396 Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020

and collecting the insurance premium, on the

one hand, and insurance payments in the event

of an insured event, in accordance with the

terms of the insurance contract, on the other

hand;

 Monetary payments with territorial divisions (branches, agencies, representative

offices) on the occasion of settling external

settlements and commission payments;

 Monetary relations with insurance intermediaries in connection with the premium

collected and paid (transferred) by them and

the payment of commissions;

 Monetary relations with the institutions in which the insurance company is

a member (the Association of Insurers in

Bulgaria, the National Bureau of Bulgarian

Motor Insurers, the Guarantee Fund, etc.);

 Monetary relations with the banking system in connection with opened current and

client accounts, receipt and repayment of

loans, etc. financial relations;

 Monetary relations with other insurance companies related to regressive

claims and co-insurance;

 Monetary relations with staff in connection with the accrual of remuneration

and deductions thereon;

 Monetary relations with subsidiaries, associates and joint ventures and investment

intermediaries in connection with investment

activities;

 Monetary relations with the financial and credit system of the state (budget, social

security) and with the state institution

performing regulation, control and supervision

- Financial Supervision Commission (FSC);

 Monetary relations with reinsurers on the occasion of relinquished premium received

insurance indemnities, commissions,

participation in the result, formation of the part

of the reinsurer in the insurance reserves, etc.

Financial management supports the global

management of the insurance company.

Financial management is a mandatory

component of the business management of the

insurance company in a market economy. It is

important and necessary for all types of

business, both for insurance companies, banks

and other financial institutions, and business

organizations for production, trade, tourism,

i.e. from the real sector.

Financial management is performed by

financial managers, assisted by controlling

managers. (Figure 1)

The most important financial decisions are

made by the top management of the company.

Figure 1. Organizational structure of the insurance company and the place of financial management and

controlling in the management (3)

ANDREEVA TS.

Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020 397

This figure represents the positioning of the

Financial Manager and Controlling units in the

organizational structure of the joint-stock

insurance company with a two-tier

management system, as well as the

relationships that arise with the other units.

The financial management in the activity of the

insurance company contains in itself the

general features of the Financial management,

but it also has its specific features

characteristic for the insurance activity and

expressed in their purpose, tasks and functions.

The main goal of the Financial Management in

insurance is to integrate the functions of

management - planning (insurance - technical

planning), budgeting, forecasting, spending,

accounting, analysis and control in a single

system for managing financial resources. In the

process of fulfilling this main goal, two tasks

are solved - current (regular) and

extraordinary.

The current (regular) tasks of the Financial

Management in the insurance activity are:

 Related mainly to tracking and controlling the incoming cash inflows and

outgoing cash payments in order to optimize

the financial condition of the insurance

company and ensure the security for correct

payment of the claims by the clients;

 Aimed at controlling current cash flows, the conducted tariff policy, the

distribution of income and investments;

 Related to estimating and reducing the risk of the insurance company.

Constant tasks - are aimed at providing the

necessary capital for development and

expansion of the insurance business by

acquiring new insurance products and services

and expanding the insurance market.

The fulcrums of insurance management related

to the management of financial resources are

objects, subjects and functions. (2)

The main objects of the Financial Management

in the insurance business are the capitals and

the insurance-technical reserves of the

insurance company, their formation,

organization, management and distribution of

all insurance payments for normal

implementation of the insurance activity.

Specific objects of the Financial Management

of the insurance company are the Financial

Risk Management, the investment, the credit,

the dividend policy and others.

Subjects of Financial Management in

Insurance are executive directors and their

deputies, owners, responsible actuaries,

experts, auditors, controlling specialists and

supervision of the insurance activity.

The main functions of the Financial

Management are:

 Financing;

 Investing;

 Forecasting and planning;

 Controlling.

The main functions performed by the Financial

Management in the insurance company have

their specifics:

 Insurance function - is related to the use of the financial resources of the insurance

company for its normal and effective

functioning and implementation of their cycle

during the course of the insurance activity;

 Distribution function - distribution of the income from the insurance activity in

accordance with the insurance-technical plan

and / or normative regulation;

 Reporting - observations for correct documentation of data on conditions and

changes in carrying out insurance activities. In

this regard is the role of controlling as an

information-analytical activity that supports

management decisions and the successful

development of the insurance company;

 Control - covers the control of the circulation of financial resources from the

insurance and economic activity, including the

formation, distribution and rational use of

financial resources;

 Investment - how much money and in what specific assets to invest? (1, 4) Where

and in what way to provide the necessary

financial resources for investments? (1, 4)

The distribution of functions and tasks between

the individual insurance specialists is one of

the main tasks of the management of the

insurance company.

The coordination of the work between the

separate units in the structure of the insurance

company is carried out by the Controlling unit.

Controlling as an element of the organizational

structure of the insurance company (Figure 1)

assists the top management in making adequate

management decisions.

The management function "Controlling"

monitors compliance with obligations and

coordinates the implementation of tasks by

ANDREEVA TS.

398 Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020

jobs in the various units of the insurance

company.

Assists in making management decisions by the

members of the Supervisory Board and the Board

of Directors and participates in the work of the

General Meeting.

The controlling manager works in direct

connection with the financial manager and is

directly subordinated to the Executive Director of

the insurance company.

The specialists from the "Controlling" unit,

managed by the controlling manager, enter into

relations with the specialists from all units of the

senior and middle management.

The application of controlling in the activity of

business units places emphasis on controlling

costs and controlling results. In this aspect,

insurance companies are no exception.

Through controlling, the deviations of the actual

from the planned results at the moment of their

occurrence are ascertained and analyzed. In this

way the real reasons for the appearance of the

deviations are discovered, factors for the positive

(purposeful) acceleration of the process of their

elimination and the realization of the set goals of

the company are identified.

Taking into account the specifics of the insurance

activity in the analysis of cost deviations as a

method of control in insurance theory and

practice and distinguishes between the concepts

of "costs" and " expenses".

Costs are a broader concept and include

operating costs and risk-related payments.

Financial managers are aware that good

financial results from the activities of the insurance company are achieved by managing

the risk that accompanies the insurance business.

(2) The content side of risk management and its

complex nature require its consideration as a

process and management through methods: risk

avoidance, risk reduction, damage control and

risk financing. (5, 6)

Risk financing is the financing of the

consequences of the occurrence of a risk.

Emphasis is placed on the technical risk due to

its importance for the overall risk exposure of the

insurance company.

The technical risk is reduced to a negative

deviation between the expected (calculated) and

the actual need of the insurance company to

cover the damages caused by the occurrence of

the risk.

In order to establish the existence of a possible

loss from the development of the risk for the

company, the actually incurred expenses in

connection with the development of the risk are

compared with the provided funds for covering

these expenses for a given period and for a given

insurance set. Includes on the one hand,

insurance payments and costs for assessing and

limiting claims, on the other hand, net premiums

collected and reserves set aside.

An important factor for the technical risk is the

technical reserves.

The largest share in the gross technical reserves

on the Bulgarian non-life insurance market are

the reserve for forthcoming payments (pending

payments) and the unearned premium reserve,

respectively with an average annual share for the

period from 2004-2008 of 51.38% and 48.08 %.

(Table 1) For the period 2013-2018, respectively

- 62, 2% and 36, 45%. (Table 2)

Тable 1. Gross technical provisions in non-life insurance for the period 2004 – 2008 (7)

№ Year Transfer- premium

reserve

(thousand

BGN)

Reserve

for

unexpired

risks

(thousand

BGN)

Reserve for

forthcoming

payments

(thousand

BGN)

Reserve

fund

(thousand

BGN)

Reserve for

bonuses and

discounts

(thousand

BGN)

Other reserves

approved by the FSC

(thousand

BGN)

Total

(thousand

BGN)

Indices

basic chain

1 2004 196567 - 196384 2410 - - 395361 100 100

2 2005 257898 - 264751 1286 - 3509 527444 133,41 133,41

3 2006 340624 33 341163 1176 - 7724 690720 174,71 130,96

4 2007 445885 44 455336 1649 217 - 903131 228,43 130,75

5 2008 535732 19 640852 1811 263 - 117867

298,13 130,51

Total

Average

annual

1776706

(48,08%)

1898486

(51,38%)

8332

(0,23%)

480

(0,01%)

11233

(0,30%)

3695333

(100%)

ANDREEVA TS.

Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020 399

Table 2. Gross technical provisions in non-life insurance for the period 2013 – 2018 (8)

№ Year Transfer- premium

reserve

(thousand

BGN)

Reserve for

unexpired

risks

(thousand

BGN)

Reserve for

forthcoming

payments

(thousand

BGN)

Reserve

fund

(thousand

BGN)

Reserve for

bonuses and

discounts

(thousand

BGN)

Total

(thousand

BGN)

Indices

basic chain

1 2013 472861 16627 664524 5205 6069 1165286 100 100

2 2014 486158 17230 726241 5636 6615 1241880 106,57 106,57

3 2015 494119 13783 722044 7209 7207 1244362 106,79 100,20

4 2016 458068 12036 741734 4987 7032 1223857 105,03 98,35

5 2017 715367 20618 1424409 4340 7361 2172095 186,40 177,48

6 2018 864452 18232 1679432 3353 6206 2571675 220,69 118,40

Total

Average

annual

3491025

(36,45%)

58526

5958384

(62,2%)

30730

(0,32%)

40490

(0,42%)

9579155

(100%)

Three groups of factors can be distinguished

by importance, as elements of the technical

risk:

 Factors, due to accidental risk diversion. In this case, the actual value of the

aggregate loss deviates from its expected value

because more in number and / or very large

damages occur by chance. The reasons are the

risk situation of the insured sites, the

possibility of an insurance event to affect many

of the insurance sites or the possibility of

occurrence of an event at one site to cause the

occurrence of the same event and many other

sites;

 Factors related to the negative change of the risk situation, respectively of the risk

circumstances, after the risk assessment has

already been made. Here, the deviation of the

actual value of the aggregate loss from its

expected value is due to a change in the risk

situation;

 Factors due to errors. In this case, the deviation is the result of an incorrect

assessment of the development of risk. The

reasons for the erroneous assessment are

reduced to deficiencies related to the quantity

and quality of information, incorrect statistical

methods for processing the information,

incorrect interpretation of the available data

and calculation errors.

In addition to the listed groups of factors, other

factors that affect the technical risk are

derived. These are the type and size of the set

aside reserves and the number and

homogeneity of the objects in the separate

aggregates. Significantly less is the impact of

the amount of damage assessment costs. Last

but not least, attention is paid to the selection

of sites and risks for which the insurance

company offers insurance protection.

CONCLUSION

In the conditions of scale, complexity and

dynamics in the functioning of the economy,

the issue of the financial management of the

insurance company remains relevant.

Insurers manage huge funds and reserves and

their management requires a careful approach

from experienced and competent professionals.

This process must be continuous and

constantly evolving, an integral part of the

company's strategy.

The complex nature of the Financial

Management requires integrated risk

management. This requires the establishment

of an independent unit and / or position in

financial management and risk management in

the organizational structure of insurance

companies to participate and fully monitor the

management process.

REFERENCES

1. Nenkov, D., Financial Management, University Publishing House "Economy",

UNWE, Sofia, 2008.

2. Neykov, M., Financial Management in Insurance, Business Directions Magazine,

Burgas Free University, 1-2: 44-45, 50,

2010.

ANDREEVA TS.

400 Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020

3. Misheva, Ir., Controlling in the management of the Insurance Company,

Research papers, UNWE, 2:67, 2014.

4. Brealey, R., St. Myers, Fr. Allen, Corporate Finance, McGraw-Hill/Irwin, New York,

2006, p. 7

5. Andreeva, Ts., Risk Management of an Insurance Company, University Publishing

House "Economy", UNWE, Sofia, 2009.

6. Doff, R., Risk Management for Insurers – Risk Control, Economic Capital and

Solvency II, Risk Books, London, 2007.

7. Financial Supervision Commission, annual reports 2004-2008.

8. Financial Supervision Commission, annual reports 2013-2018.

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