Designing an insurance mutual investment fund in order to increase the capacity of reinsurance

Master's Thesis of MBA, Finance Orientation

Abstract:

The progress of insurance is parallel with the economic development of the country. The development of insurance helps to improve the living conditions of the people of the country and preserve the national wealth and create large savings. When the economy of a country does not rely on insurance and the provision resulting from it, the economy is under the threat of countless risks. Every year, many accidents occur in all corners of the world, and these accidents cause severe material and life losses to people. The amount of insured losses caused by these accidents indicates the amount of damages caused to insurance companies and the upward trend of increasing damages caused to insurance companies; So that sometimes insurance companies face the risk of bankruptcy. Insurance companies traditionally take the approach of using reinsurance in order to save themselves from these crises and reduce the concentration of losses of these risks on themselves. However, it should be noted that reinsurance companies also have a limited risk concentration and storage capacity. Among them, one of the efficient and effective tools to solve this problem is the direct connection between the insurance industry and the capital market under the concept of "risk securitization". These bonds are known as insurance bonds. Securitization of insurance risks is a process close to reinsurance.

On the other hand, in our country, there is a double problem; Because the country is facing financial and international sanctions and the use of foreign reinsurance capacity is also limited. Also, in such cases, the cost of using reinsurance increases. Therefore, according to the reviews and studies conducted and the collection of experts' opinions using the Delphi method and the analysis of those opinions with the technique of the theme "Insurance investment fund in order to increase the capacity of reinsurance" was proposed.

Key words: reinsurance, investment fund, insurance penetration rate, increasing the capacity of reinsurance

Foreword:

Insurance progress is comparable with the economic development of the country. is The restoration of the economic situation of a country and the increase of exchanges and improvement of the standard of living and the development of investment will lead to the development of insurance in that country, and the development and spread of insurance will also help to improve the living conditions of the people of the country and preserve the national wealth and create large savings. If the economy of a country does not rely on insurance and the provision resulting from it, the economy is under the threat of countless risks. Every year, many accidents occur in all corners of the world, and these accidents cause severe material and life losses to people. So that the statistics show their growth in recent years and our country is not exempt from this category. With the increase in the amount of losses, the insurance companies that have entered into various insurance contracts in these areas face severe losses. The amount of insured losses caused by these accidents indicates the amount of damages caused to insurance companies and the upward trend of increasing damages caused to insurance companies. So that sometimes insurance companies face the risk of bankruptcy. Insurance companies traditionally take the approach of using reinsurance in order to survive these crises and to reduce the concentration of losses of these risks on themselves and to be able to compensate their limited capital reserves with this coverage. But it should be noted that reinsurance companies also have limited risk concentration and storage capacity. In the meantime, one of the efficient and effective tools to solve this problem is the direct connection between the insurance industry and the capital market under the concept of "risk securitization". These bonds are known as insurance bonds. Securitization of process insurance risks is close to reinsurance. The main difference does not come from the structure; Rather, it comes from the creation of a tradable asset. Also, the existence of the secondary market allows the investor to decide whether to stay in the market or leave it. On the other hand, there is a double problem in our country; Because the country is facing financial and international sanctions. As a result, even in using the capacity of foreign reinsurance companies, it faces limitations. In addition, in such cases, the cost of using reinsurance increases. Therefore, according to the surveys and studies conducted and the collection of experts' opinions using the Delphi method and the analysis of those opinions using the theme technique, an insurance investment fund was proposed in order to increase the capacity of reinsurance and its structure was explained in full detail.

Financial development includes instruments, institutions and markets. Meanwhile, financial institutions form the basic part of the financial market. In fact, these institutions are the basis for the growth of financial instruments and markets. Based on numerous researches, financial institutions and instruments have positive relationships with economic development and growth, and most economists consider financial growth as a prerequisite for making a leap in the economic development process. Financial institutions operate with the goals of providing service to society, providing growth and market share, and creating maximum efficiency. The types of financial services that can be provided by financial institutions cover a wide range of needs of economic operators. Financial institutions are classified into two groups: financial intermediaries and specialized institutions. In the group of financial intermediaries, we can mention commercial banks, monetary unions, banks and savings institutions, life and property insurance companies, and pension funds. In the second group are specialized financial institutions; Securities brokers, capital supply companies and mortgage banks are among them. Therefore, financial institutions play an important and essential role in the transformation of economic facilities such as land, manpower, management and so on. are responsible for different types of financial assets. Playing this role, in addition to giving more liquidity and flow to the assets in the economy, also enables economic transformation and development. Financial market is a market where financial assets are created, exchanged and traded. The first function of the financial market is to transfer the surplus funds of people interested in investing to people who need capital. Its second function is risk distribution between fund providers and receivers, which is called risk hedging.  Based on the third function of transactions between buyers and sellers in the financial market, it determines the price of the traded asset, and as a result, the yield rate of the financial asset is determined. The fourth function of the financial market is to create an easy trading mechanism, which is called liquidity. (Dixon Rob & Phil Holmes, 1995)

In the financial market, financial institutions operate in three groups: money market, capital market and risk hedging market. In this wide collection, the activities of various financial institutions in financing, financial services and investment, risk reduction and distribution are summarized. Money market institutions are commercial banks, specialized banks and non-bank financial and credit institutions. In the capital market, brokerage companies, investment companies and capital supply companies are the main market participants. The risk coverage market includes debt buying institutions, insurers and reinsurers. It can be concluded that the financial market in a society, under favorable conditions, consists of three markets: money, capital and risk coverage. The evolved dimensions of this structure, which according to the theory of contemporary economists, especially Rybzensky (1985), is formed in three gradual situations, is associated with inadequacies in most developing societies. According to the theory of phases of financial development, which was first proposed in 1985 by Rybzensky, an English economist, it has placed the countries of the world in one of the three phases. He believes that the more developed the economy is, the more developed its financial market will be.

The first phase is called "Bank Center". In this situation in which most of the developing countries are, banks operate as exclusive sources of financing alongside some limited investment organizations, and financial development is not seen in comprehensive dimensions. In this situation, the financial market is mainly exclusive to the banking network that forms the money market, and the capital market in this situation operates in a limited horizon, with a weak radius of action and in the territory of the banking system. The second phase is described as "core market". It is usually visible in countries that are associated with financial development from an economic point of view, and for this reason, the provision of facilities and financing by banks is not exclusive and limited in them. In this case, the wide network of financing and investment consists of the money market and the capital market.