Medium-term Forecasting Model of the Modern Insurance Market of the Russian Federation

Despite the fact that insurance companies are one of the main economic agents of the financial system, in the academic literature there is relatively little attention paid to modeling the indicators of insurance companies at an aggregated level. This paper proposes a new approach to modeling the development of the insurance market of the Russian Federation in terms of its reaction to changes in the rest of the economy. The two-stage balance-econometric model of the insurance market presented in this bachelor thesis allows to reproduce with good accuracy the dynamics of key enlarged balance accounts, as well as the premium structure of insurance companies to assess the development potential of various insurance products over the forecast interval. The model is based on quarterly data on the Russian insurance market for 2014-2019. At the first stage, models for basic variables are constructed. These basic parameters include aggregated premiums and claims, as well as premiums and claims broken down by life and non-life segments, and are modeled on the basis of econometric relationships with only exogenous macroeconomic factors. At the second stage, models are constructed for endogenous variables - enlarged balance accounts of the insurance market. These models as explaining variables include macroeconomic factors and the basic variables obtained at the first stage. In addition to the traditional econometric approaches, dynamic models are considered, which, as it is shown in the paper, make it possible to obtain more accurate forecasts for most insurance market variables. Because of the characteristics of the insurance market data, all models are built in growth rates. The selection of the best models for separate accounts of the aggregated balance sheet and P&L of the insurance market is carried out on the basis of the MAPE criterion in the out-of-sample time interval. With a scenario description of macroeconomic and banking indicators, the model allows to build an adequate forecast of the development of the insurance market for the 1 year ahead. Based on this analysis, it is shown that factors critical to the development of the insurance industry over the forecast period include GDP, household incomes, consumption, as well as bank variables - interest rates and the volume of loans to the population, confirming the assumption that the insurance market depends on the dynamics of banking system indicators. In addition, as part of a scenario analysis, the potential impact of the coronavirus COVID-19 on the Russian insurance market was examined. The model presented in this paper can be used by the Bank of Russia to predict the development of the insurance market, as well as by insurance companies to determine optimal behavior in changing macroeconomic conditions.