Influence of Financial Risks on Financial Position Indicators of an Insurance Company

<p>The paper presents a study of the risks&#39; impact on the financial indicators which are most commonly used in order to assess the financial position of a company. The information letter that has recently been issued by the Ministry for Finance clearly states that the companies are obliged to disclose the information on all sorts of risks they are exposed to, which makes the topic under study undoubtedly acute. The work focuses on the influence of financial risks in the insurance companies as this industry seems more vulnerable to risks compared to other companies. One of the main features of the paper is that within the framework of the inquiry financial risks are regarded in terms of legislation, i.e. financial risks consist of credit risks, market risks and liquidity risks. The scientific significance of the research is the fact that it attempts to measure the influence of financial risks on the financial position indicators of an insurance company. The methodology developed in the course of the study can be used by the insurance companies in their activity.</p><p>The research aims to reveal the interrelations between the financial risks and the financial position indicators of an insurance company. The objectives of the paper are:</p><p style="margin-left:35.7pt;">&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; to define the term &quot;financial risks&quot;;</p><p style="margin-left:35.7pt;">&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; to study the classifications of different risks;</p><p style="margin-left:35.7pt;">&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; to analyse the existing approaches to estimating financial risks;</p><p style="margin-left:35.7pt;">&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; to consider the peculiarities of evaluation of an insurance company&#39;s financial position;</p><p style="margin-left:35.7pt;">&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; to look upon the legislation concerning the insurance activities;</p><p style="margin-left:35.7pt;">&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; to assess the risks and financial position of the particular insurance company;</p><p style="margin-left:35.7pt;">&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; to develop the model for estimating the influence of financial risks on the insurance company&#39;s financial position,</p><p>For the purposes of the study risk is interpreted as the combination of the event&#39;s probability and consequences. In the course of work a new classification has been developed. This classification is an extended version of the one suggested in the legislation.</p><p>The study includes the review of approaches to estimating risks have been studied. The most feasible methods are the composition of a financial risks indicators system, interval approach, econometric model.</p><p>The absence of a unified methodology poses certain difficulties for the economic analysis of an insurance company. Thus several methods are employed in this research, including those described in the works by L.G. Makarova, E.G. Moskaleva, G.V. Chernova and others. Multicriterion methods such as matrix method and method of level assessment are used as well.</p><p>In the empirical part of the study the insurance company ERGO Russ has been analysed. Financial position of the company is satisfactory, although some negative tendencies have been revealed. Despite the fact that financial position of the company has deteriorated&nbsp; compared to the previous year, comparison with the major competitors has shown that its position on the market is favourable.</p><p>Financial risks of the company are interconnected. Therefore, their combined influence on the financial indicators is assessed, too.</p><p style="text-align: justify;">Factor analysis has uncovered that the financial risks&#39; impact on the financial position indicators is quite controversial. For the purposes of estimating the influence of the market risk an econometric model is developed. Scenario analysis, i.e. drawing up the alternative financial reports, has revealed that if the company does not create the reserves and does not reinsure, exposing itself to the financial risks, only its financial stability is impaired while all other indicators improve tremendously. Provided the company creates minimal reserves, balance sheet liquidity, business activity and solvency improve insignificantly whereas financial stability and profitability are impaired dramatically.</p>