Optimization of the risk level of net retention in the insurance market

Economic Annals-ХХI: Volume 146, Issue 11-12, Pages: 76-79

Citation information:
Kuzmenko, O., & Bozhenko, A. (2014). Optimization of the risk level of net retention in the insurance market. Economic Annals-XXI, 11-12, 76-79. https://ea21journal.world/index.php/ea-v146-19/

Olha Kuzmenko
PhD (Economics),
Associate Professor,
Ukrainian Academy of Banking of the National Bank of Ukraine
57 Petropavlivska Str., Sumy, 40030, Ukraine
o.kuzmenko@uabs.edu.ua

Andrii Bozhenko
PhD Student,
Ukrainian Academy of Banking of the National Bank of Ukraine
57 Petropavlivska Str., Sumy, 40030, Ukraine
a.s.bozhenko@gmail.com

Optimization of the risk level of net retention in the insurance market

Abstract. Introduction. In this paper, the authors discuss key optimization aspects of net retention ratio in the risk transfer process for reinsurance as a factor of financial stability and security in the insurance company. For this purpose, an algorithm was developed, which estimated a net retention ratio in the context of the insurance company responsibility for ensuring the minimum required level of the insurer’s financial security. Implementation of suggested approach has been performed based at economic and mathematical model («linear programming»), subject to the insurance market performance.

Purpose of this research is to develop an estimation algorithm of a net retention ratio which should be the responsibility of the insurance company for ensuring the minimum required level of the insurer’s financial security.

Methods. The methodological basis of the paper lies in identifying main trends of financial and insurance theory, development of domestic and foreign science in insurance and reinsurance activities and optimal financial security by determining the net retention ratio.

Results. The practical application of this model allows calculating the minimum required level of net retention risk among insurance market participants. On the bases of the insurance market analysis in Ukraine, it must be noted that only 50 companies accumulate more than 50% of all insurance premiums, which is the reason why the practical implementation of the model is conducted using these companies. Having executed settlements according with a developed technique, a ranking of insurance companies in the context of their net retention level has been made. Achieved results allow stating that all analyzed market participants for ensuring the minimum required level of financial security should cede a significant proportion of earned premiums.

Conclusion. The scientific novelty of this study is development of the model for retention risk ratio estimation by the insurance market participants, considering the minimum required level of financial security. The importance of this work is in potential for this model usage from a perspective of loss reduction by the insurance companies. Findings obtained under practical application of suggested approach allow valuing the net retention ratio of each insurance company, needed for ensuring the minimum required level of financial security.

Keywords: Insurance Market; Financial Security of the Insurance Market; Net Retention; Net Retention Risk; Reinsurance; Economic and Mathematical Model

JEL Classіfіcatіon: G22; B41; C60; C61

References

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Received 28.10.2014