*112894*
Melnichuk
A. O.
All-Russian State Tax Academy of the Ministry of
Finance
of the
Russian Federation, Russia
The Insurance Fund and its
implication for Insurance Industry
Today the RF Law “On Organization of the Insurance
Business in the Russian Federation” - in order to ensure financial stability of
insurers - deals with two key notions describing certain asset complexes owned
by the insurer, namely, own assets of the insurer and insurance reserves [3].
The former constitute an assets portfolio of a value covering authorized
capital, surplus capital, added capital and retained earnings, as indicated
directly in the Law. The insurance reserves, in turn, as based on
characteristics of the notion contained in the applicable law, are understood
as aggregate assets the amount of which is defined individually by the insurer
with account for statutory requirements to secure performance of liabilities,
both incurred and potential, to third parties in accordance with an insurance
contract. In this case the same object
of assets may be simultaneously used to provide coverage of both the own assets
and the insurance reserves.
Viewed from the above, both notions have an indicative
nature and reflect an estimated aggregated cash value of assets owned by the insurer
the amount of which, due to the estimations, is sufficient for covering
liabilities to third parties.
Obviously, such economic and law categories, firstly, fail to cover the
total assets of the insurer used in insurance operations and, secondly, make it
impossible to establish a special legal regime of individual asset objects
owned by the insurer. For instance, i.2 Art.26 of the Law stipulates directly
that “the assets of insurance reserves are used exclusively for payment of
insurance premiums”, in other words, they are not involved in other aspects of
insurance activities. In its turn, the total of the authorized capital that
defines the minimum size of the insurer’s assets warranting interests of his
creditors, the surplus capital constituting a separate fund formed by the
insurer through regular deductions for potential loss coverage, the added
capital generated by the incrementing value of fixed assets, and the insurer’s
retained earnings also fail to cover the total assets used by the insurer in
insurance operations. Moreover, it should be noted that the
application-oriented nature of the above categories makes it possible to
manipulate economic properties of a certain part of assets owned by the insurer
but not to establish a civil legal regime for every individual asset object
used for performance of insurance.
To substantiate the foregoing arguments, we should
address an issue of what the term ‘insurance’ as an aspect of insurance
activities means in the modern context. It is legally formalized that the
insurance refers to a relationship aimed at protection of interests of civil
circulation subjects on occurrence of certain insured events at the cost of
insurers. It means that the insurance
performed by the insurer is not reduced only to legal relations arising out of
insurance and re-insurance contracts but includes the total multitude of social
relations insurers enter that are directed towards protection of third party
interests on occurrence of certain insured events. Revealing the essence of the
insurance activity, M.B. Smirnova suggested a definition best suited for
understanding the nature of particularly the insurance in its contemporary
context. She indicated that the insurance may be understood as “a set of
measures targeted directly at setting up an insurance fund and making use of
its assets for payment of insurance indemnity (coverage)” [11]. Therefore,
speaking about the insurance reserves or the insurer’s own assets we do not
mean the whole complex of assets used by the insurer in running the insurance
business but rather make assessment of whether an aggregate asset value of the
insurer is sufficient for “servicing” liabilities already incurred by the
insurer. In this situation particular objects of the assets allocated by insurers
at the assessment of the insurance reserves and own assets are impersonalized.
In this connection, it becomes obvious that an
additional instrument should be introduced into the regulatory mechanism of
insurers’ activities, firstly, to identify a package of assets used at every
separate instance for performance of insurance, and, secondly, to isolate
assets having a limited circulation ability and subject to use in strictly
dedicated applications. These assets in aggregate are suggested to be referred
to as an insurance fund.
As
early as at the onset of the insurance as a social institution, the application
of such an instrument as formation by a group of people of a separate assets
fund distributed in favor of a group who suffered the consequences of an event
of a risk nature laid the foundation for the socio-economic protection of
society. In respect of the above, the domestic literature
states that “already many centuries ago a man had a wish to pool a portion of
his property with properties of other people to convert everything thereby
collected into a source of loss coverage against various accidents that might
happen to one of them” [1]. Undoubtedly, a fund like that covered the whole
insurance process including creation of the fund, its maintenance (management)
and distribution. Analyzing the whole history of the insurance it may be stated
that whatever differences might have ever been in accumulation procedures,
methods of separation and distribution of property as well as in subjects of
social relations they never questioned the necessity of the insurance fund
formation the very existence of which meets eventual demands of insurance
entities.
The development of the insurance fund concept as a
theoretical category dates back to the 19th century. One of the
prominent economic scientists of that time who studied it was Karl Marx.
According to a concept put forward by him, the insurance fund cannot be
referred a priory to either the accumulation fund or the consumption
fund, and whether it actually serves as the accumulation fund or just fills in
reproduction gaps depends on circumstances. Therefore, from the economic
standpoint K. Marx highlighted not only the eventual function of the insurance
fund but also its important role in accumulation of social wealth. It is not by chance that in his scheme of
the aggregate social product distribution in socialist society the necessity of
establishing “a backup or insurance fund to insure against accidents, natural
calamities and alike” is indicated as a mandatory thing [8].
Taking into account the personality of the cited
author it is not surprising that the insurance fund concept was not only
accepted by the Soviet science but also put forward as the fundamental
principle of insurance, which resulted in formulation of the insurance fund
theory. In a co-work of K.A. Grave and
L.A. Lunts, domestic civil law experts of the 20th century who
shared the ideas of the insurance fund theory, it is stated that “a complex of
measures aimed at creation of material and (or) cash resources with a purpose
to repair damage, recover losses incurred by the social economy as a result of
natural calamities or accidents is referred to as insurance in a broad sense of
the word [5]. It is easy to notice that the provided approach, when it comes to
the description of the insurance business, focuses on the process of creation
of independent material resources
aimed at insurance coverage of risks. The insurance fund theory was also
strongly supported by the Soviet economic science. For instance, M.K.
Shermenev, when giving a definition of the insurance, described it as “an
economic relationship arising in connection with formation (at the expense of
the assets owner) and utilization of an insurance fund created by a special
organization (the insurer) to indemnify the parties to the insurance fund (the
insurees) against losses caused by natural calamities and other contingencies”
[9].
In the domestic economic and law sciences there still
exists a school supporting the insurance fund theory. Sometimes in the
literature one can come across an assertion that “the essence of the insurance
is formation of a certain cash (insurance) fund…” [2]. Addressing this subject, A.A. Gvozdenko
writes: “An economic category of insurance protection is embodied in the
insurance fund … In the insurance fund collective and personal interests of
society members are implemented, various economic and social aspects of their
life activities are defined” [6].
The foregoing theory has, obviously, a significant
disadvantage since its supporters focus exclusively on the insurance fund as
the basic category and the very essence of the insurance, and at the same time
derate the meaning of insurance goals: compensation, social and alike. Along with that, from the above views it is
expressly understood that both the domestic and foreign science recognize the
significance of the insurance fund as an inherent component of legal relations
in the modern insurance business. However, as was mentioned above, the notion
of the insurance fund is not employed in its original meaning in the current
domestic legislation.
The current understanding of the insurance fund by the civil lawyer
community is not unanimous. According to I.T. Balabanov and A.I. Balabanov, the
insurance fund of the insurer is a reserve of cash or real assets formed by
contributions of insurees and subject to operational and organizational
management of the insurer [4]. N.G.
Kabantseva defines the insurance fund as a special form of the cash and real
assets reserve intended for coverage of contingent damage inflicted on society
by natural calamities, technogenic catastrophes and various accidents. M.B.
Smirnova points out that the insurance fund is a term to define its two
meanings: for the first thing, it is a complex of natural resources and
financial reserves of society intended for prevention, localization and
indemnification of damage inflicted by acts of elements or other contingencies;
in the second thing, it means aggregated financial reserves created by way of
insurance, formed by fixed premium collections and used only for payment of
indemnities and insured sums, it also
includes a system of backup and reserve funds [11]. All the foregoing
definitions as well as a number of other insurance fund descriptions studied by
the author, undoubtedly, - to this or that extent - reflect the meaning of this
concept, but, in the author’s opinion, they do not seem complete. Viewed from
this point, after having identified the basic features of the insurance fund,
we are going to discuss its sources and applications in more detail so as to
gain a better insight into this phenomenon.
The main source of the insurance fund establishment is
contributions in cash made by third parties in pursuance of obligations under
insurance contracts. But along with this, the insurance fund may be replenished
through the authorized capital of the insurance company comprised of
contributions of its members (shareholders), profits derived from the
investment activity of the insurer, other profits from the insurer’s operations
permitted by the law [7].
In the economic, scientific literature investigations
on such issues as the economic nature of the insurance fund, the extent of its
participation in the financial mechanism and the structure of financial
relations determining the internal content of this category do not have a
single point of view. In the author’s
opinion, to clarify the purposes of the insurance fund spending, it would be
correct to view it as a complex of assets employed in the insurance company
finances. The latter, according to
M.G. Zhigas, are a combination of economic monetary relations arising in the
process of: first, overtaking risks from economic agents (risk transfer), which
results in a cash inflow in the form of insurance premiums filling thereby the
insurance fund; second, risk retention including accumulation of reserves
adequate to the risk to ensure timely and complete performance of liabilities
incurred; third, indemnification of losses (damage compensation); and fourth,
operations of the insurer.
The insurance reserves of the insurer are actually the basic element in
the finance system of an insurance company that determines the essence of
insurance [10]. The insurer’s own assets determine an amount of property of an
insurance company that was contributed by the company members or earned by the
company but not distributed among it members. Meanwhile, the insurance fund
serves as a filling for the insurance reserves and the insurer’s own assets and
at the same time makes possible the whole complex of operations performed by
the insurer in the insurance framework.
Therefore, the author understands the insurance fund as a complex of
assets having a special legal regime and owned by the insurer; the fund is
formed by insurance premiums (contributions) paid to the insurer, contributions
made by members (shareholders) of the insurer, the insurer’s investment
activities, other insurer’s earnings, and used for insurance operations.
References:
1. S.N. Afanasyev, V.V. Timofeyev. On the Insurance Essence Issue // Civil
Law. – 2009, No.2, p.39
2. Sh.R. Ageev, N.M. Vasilyev, S.N. Katyrin. The
Insurance: Theory, Practice and Foreign Experience. M., 1998, p.5.
3.
Arts.25, 26 of RF Law “On Organization of the Insurance Business in the
Russian Federation” //
“Rossiiskaya Gazeta”, No.6, 12.01.1993.
4. I.T. Balabanov, A.I. Balabanov. The Insurance –
S.Petersburg, Peter Publishers, 2001, p. 46
5. K.A. Grave, L.A. Lunts. The Insurance – M.: Gosyurizdat, 1960, p.5
6.
A.A.
Gvozdenko. The Fundamentals of Insurance. M., 1998, p. 137.
7. N.G. Kabantseva. Insurance Operations: a
Teaching Aid / N.G. Kabantseva – M., FORUM, 2001, p.18
8. K.Marx, F. Engels, Op. cit.,v.19, p.17
9. M.K. Shermenev. The Financial Reserves as a
Factor of Planned Development of Socialist Economy. Author’s summary of Dr. of
Econ. Sci. thesis. M.: 1971
10. G.A. Shitikov. Management of Insurance Reserves
Placement: PHD (Econ.) Thesis. – Irkutsk, 2004, p.22
11. M.B. Smirnova. Insurance Law: a Teaching Aid. M. Yustitsinform
Publishers, 2007, p. 27-31