"Risk", is a term used to express the probability of damage, risk constantly persons, companies, and all of as. For many persons risk concept intend different forms of insecurity in different situation. Risk management is the process of loss identifying, with which company confronts and chooses the techniques to handle those exposure. Risk management is an extended concept and one of the techniques which handle a happening which causes losses are insurance which transfer economic result of risk. In this paper we explain how insurance are instruments for risk protecting and also we are showing characteristics of insurance market in Albania.
In Albania insurance market has his historical, beginning and continuity. Insurance market in Albania is function on a framework juridical base which regulates rights and obligations between insured and insurance company.
The Albanian market of insurance is a diversified market, different companies of non-life and life sector, with domestic and foreign capital, which operate in Albania and outside of the country. You can notice a rise in interest of the foreign capital for investing in Albania's insurance market.
Like the other new markets in our country, insurance market trends by priority and many problems, such: insufficient culture for insurer, low level of income, not very developed, 10 euros /capita, compared with developed countries ( 600 $/capita), is dominated by compulsory insurance, strong competition, etc
Despite the problems that have this new market, opportunities exist for growth, development and perfection of him as a market with its features.
1. THE RISK IN SOCIETY
Modern world is filled with unpredictable events. If risks (accidents, fires, disease or death) can lead to financial losses, unpredictable events create the opportunity for the occurrence of these losses.
The need for certainty is deeply embedded in human nature and most people are afraid of threats of a loss that represents a risk. So it is not surprising that various attempts to response to risk have been taken very early in the history of humanity.
Risk can be classified into two major categories:
Pure and speculative risk.
The main risk and particular risk.
1.1 PURE AND SPECULATIVE RISK
1.1. a. Pure risk is defined as a situation where there are only two possibilities: loss or not. These risks cause a loss or an event of which indemnity leaves us in the same situation we were before its occurrence. These are: the risk of a motor accident, fire at the factory, theft of goods etc.
1.1. b. Speculative risk is defined as a situation in which there is a chance to win. For example investment of money in stocks or other investments that bring profits or losses for the investor. It is important to make the difference between pure risk and speculative risk: first private insurers provide only pure risk, second, the law of large numbers can easily be applied to pure risk than to speculative risk and finally society can gain from a speculative risk of loss if the event occurs, but this profit can be damage if the pure risk is present and when the pure risk event happens we don't have more profit.
1.2 THE MAIN AND PARTICULAR RISK
The main risk is the risk that affects the whole economy or large numbers of people or groups in the economy. For example: high inflation, cyclical unemployment, war can affect a large number of individuals. The risk of natural disasters is another important risk. Finally, the risk of a terrorist attack is classified as a major risk.
The particular risk affects only the individual and not the society as a whole. These risks are more personal about their cause and their consequences. Such examples include car theft, risks of fire, motor accidents, etc... The main difference between the main risk and specific risk is important because government support is needed in tackling major risks as: risk of unemployment is not provided by private insurers, but may be provided publicly by the state through programs of unemployment compensation.
1.3 THE TYPE OF PURE RISK
The main types of pure risk, which may create a financial uncertainties include: personal risk, risk of asset and liability risk.
Personal risk is the risk that directly affects the individual. This risk includes the possibility of partial or total loss of income and extra expenses. There are four types of personal risk: a) the risk of premature death, b) the risk of insufficient of income during retirement, c) the risk of physical disability, d) the risk of unemployment.
The risk of assets. Persons who possess a certain property are exposed to risk property as: risk of the damage of their property or its loss from multiple causes. There are two main types of loss associated with the destruction or loss of property: a) direct loss which is defined as a financial loss resulting from physical damage, destruction or theft of property, b) indirect loss is a financial loss resulting indirectly from the occurrence of a physical injury or property theft as: the missed profit while a restaurant damaged by the fire stops its activity, loss of different rent, the loss of local market etc..
The risk of liability is another type of pure risk, which many people face. Under a legal system you may be legally responsible if you do something that damages the property of someone or physically hurting someone else. The law in this case obligates the people to pay the damages caused to another person. The risk of responsibility has particular importance for several reasons: first, there is not a maximum limit regarding the amount of damages to be paid, second can be used personal income and financial asset to pay a legal penalty, finally the cost of legal defense can be very great and if we do not have a liability insurance, legal defense costs will increase.
1.4 THE RISK MANAGEMENT PROCESS
Risk management is the process that identifies different exposures to the loss, wich a society faces and select appropriate techniques to handle these exposures. Risk management should not be confused with the management of insurance. Risk management is an extended concept and includes all techniques to affront an event that causes losses, where insurance is one of these techniques. The objectives of the risk management are classified as objectives before and after the exposure that causes loss. The objectives before the loss include the economy; reduce of anxiety and pursuit of legal obligations. Important objectives after the occurrence of event that causes loss include: survival, continuity of operations, stability obtained, the continuation of growth and social responsibility, which means to minimize the effects that loss can have on other people or society.
1.5 THE STEPS OF THE RISK MANAGEMENT PROCESS
The risk management process involves four steps presented in the table below:
The identification of potential losses
The evaluation of potential losses
The selection of the risk treatment techniques:
the control of risk
loss avoidance
loss prevention
loss reduction
the financing of risk
holding
Non-insurance transfers
insurance
Implementation and administration of the program
Identification of potential losses. The first step in the process of risk management is the identification of exposures (events) large or small, which cause risk for the company. This step involves an analysis of all possible losses. The most important possible losses are: a) personal risks, b) risks of property c) risk of liability.
A risk manager has different sources of information which he can use to identify loss exposures as: the questionnaire of risk analisys, physical inspection, financial analysis, data from previous losses etc…
The evaluation in the risk management process has to do with evaluating and measuring the cost of loss for the firm. This step is concerned with assessing the frequency of event that causes loss and its severity. The frequency of loss is related to the number of events that may occur during a period of time and severity of an event that causes the loss relates to the possible size (the cost of loss) loss that may occur. Once the risk manager determines the frequency and the severity of loss it can determine the degree of their importance. Events which have a lower frequency but greater severity should be insured because of their catastrophic consequences.
Choosing the best technique to treat exposure to losses is the third step in the process of risk management. These techniques can be classified as techniques to control risk and financing risk. Controlling risk is related to techniques that reduce the frequencies and the severity of accindental losses as: risk avoidance, loss prevention, and loss reduction. Which refers to the measures to reduce the severity of a loss after it occurred for example: installing an automatic system to extinguish a fire in the immediate way.
Financing the risk refers to financing techniques for the loss such as: holding meaning that firms facing a part or all of its loss resulting from a particular event, non-insurance transfers, which transfers the risk to an other element that is not the insurance, insurance is a good method of risk transfer in those cases where loss exposures have a low probability of occurrence, but the severity of loss is high. With insurance, individuals or different companies transfer the risk of loss uncertain, but possible. The biggest benefits of the society from the insurance are: the compensation of losses, the reduction of fear and anxiety, the source of funds financing, the prevention of losses.
Insurance also can have some social costs for the society as: the cost of doing business, fraudulent application for compensation and excessive demand for compensation.
To determine the appropriate method for dealing with events that cause losses may use a matrix, which classified exposure of these events based on their frequency ande severity. The matrix can be used to determine which of the risk management methods can be used.
The matrix of risk management .
Type of loss
The frequency of loss
The severity of loss
The appropriate technique of risk management
First type
Low
Low
Holding
Second type
High
Low
Loss prevention and holding
Third type
Low
High
Insurance
Fourth type
Low
High
Avoidance
The implementation and administration of programs. As in all areas in the field of insurance the risk management requires regular monitoring of decisions taken, to prove that past decisions are always optimal. So risk management programs should be reviewed and evaluated periodically. In particular, should monitor the cost of risk management, the programs of insurance and loss prevention programs. Risk Manager is not acting alone. He should have a close cooperation with other departments to identify exposures that cause loss events as: finance, accounting, marketing, production and human resources.
2. THE ALBANIAN INSURANCE MARKET
Insurance in Albania have long existed, although they started very late compared with other developed countries, they have their own characteristics and history. History of Albanian insurance market has its origins before World War II, in which the period of insurance activity conducted by English society, France and later Italian. The period after World War II until 1991: in terms of an internal isolation of the insurance market prevailing forms of compulsory insurance. After 1999, in this market is observed the entry of some private insurance companies, which brought an increase in competition in this market. During these years has created a legal basis regulating the rights and obligations between the insured and the insurance society, have expanded the kinds and types of insurance coverage and are creating conditions and the possibility of reinsurance with foreign societies, as a necessary means of protect the interests of policyholders.
The Albanian market insurance is divided between non-life insurance companies: Sigal- 27%, Sigma- 15.5%, Insig- 15.2%, Atlantik- 11.6%, Interalbanian - 10.6%, Albsig-8%, INTERSIG - 7.6% and Eurosig - 4.5%. Sigal led the market with about 27% of premiums.
Figure 1. Market share, non-life insurance . Figure 2. Market share, life insurance .
Source: Albanian Financial Supervisory Authority (AFSA), Statistical Report 2008
And life insurance companies: SigalLife- 40.6%, Insig- 31.3% and Sicred-28.1% Sicred. Sigal-Life led the market with about 40% of premiums.
The Herfindahl index (HI), also known as Herfindahl-Hirschman Index or HHI, is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. It is defined as the sum of the squares of the market shares of the 50 largest firms (or summed over all the firms if there are fewer than 50) within the industry, where the market shares are expressed as fractions. The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to a single monopolistic producer. Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite.
Where si is the market share of firm i in the market and N is the number of firms.
A HI index below 0.01 indicates a highly competitive index.
A HI index below 0.1 indicates an unconcentrated index.
A HI index between 0.1 to 0.18 indicates moderate concentration.
A HI index above 0.18 indicates high concentration
From the statistics of market share of non-life insurance in Albania this index is:
HI = 1*0.272 + 2*0.152 + 2*0.112 + 1*0.082 + 1*0.052 = 0.1574
Where one firm produces 27%, 2 firms-15%, 2 firms -11%, one firm-8% and one firm 5%.
The HIndex is between 0.1 to 0.18 which indicates moderate concentration in Albanian non-life insurance market.
For life market this index is:
HI= 1*0.282 + 1*0.412 + 1*0.312 = 0.3426
The HIndex is above 0.18 and indicates high concentration in life insurance market in Albania. As the market concentration increases, competition and efficiency decrease and the chances of collusion and monopoly increase.
The statistics noted that the market insurance is shared: 93% of non-life insurance companies and 7% of life insurance companies. By looked gross written premium by geographical distribution, there is a concentration of insurance market in large districts where in : Tirana 55.15%, Durres 9.56%, Korca 6.55%, Fier 5.87%, Elbasan 4,13%, Shkodra 3.86%. (see figure 3).
In the insurance market is dominated by private companies, where only INSIG company is state-owned companies. The presence of foreign capital in the Albanian insurance market since 2007, testified that this market is huge development potential and attractive to foreign investors. In the Albanian insurance market participate: "Aspis Group" based in Cyprus, with 51% of the shares of the insurance society" Interalbanian " , " Vienna Insurance Group" based in Amsterdam, Netherlands with 75% + 1 of shares of the insurance society "Sigma" and society "Uniqa Group, Austria" with 45.62% of Sigal Holding. The Albanian insurance market note that the capital is 79% domestic, 18% Austrian and 3% Greek. (See figure 4).
On the other hand the insurance companies operating in the Albanian market have increased their presence outside the territory of the Republic of Albania. Thus, the insurance company as "Insig", "Sigal Uniqa Austria Group", " Sigma" and " Albsig " have spread to Kosovo and Macedonia.
Figure 3. Market share, by district Figure 4. Market share, by capital
Source: AFSA, Statistical Report 2008
Table 1. Some characteristics and financial indicators on insurance market. ( in million leks-national currency)
Years
2006
2007
2008
Total assets
11453
13360
15523
Gross written premiums
4542
5948
7076
Non-life
4239
5538
6561
Life
302
410
515
Gross Claims Paid
1287
1294
1571
Non-life
1275
1250
1526
Life
12
44
45
Premium growth rate
13.22%
30.97%
19.31%
Report claims / net premiums
36.65%
24.19%
25.78%
Report expenditures
56.06%
55.62%
64.87%
Report of payment ability
447.40%
539.19%
424.48%
Source : AFSA, statistical report
-Total assets of the insurance market value reached 15.5 MLD lek by that was 13.3 MLD in 2007, marking a 16% increase in size. Voices main assets are: deposits, real estate ect. Deposits in banks constitute the main voice of assets reaching 1.5 MLD leks in 2008, or 49% of total assets. Treasury bonds make up about 4% of total market assets.
-The income from gross written premiums have been increased from one year to another and in 2008 reached 7.08 mld lek or 19% more than in 2007. Growth rate of premiums in 2008 is lower than in 2007 (30.97%) but again is within the boundary of the permitted norms. (-40% to 40%). Increasing the level of premiums written is a measure of success sales companies. However, it is worth mentioning that the development of the sector remains far from the potential levels offering the country and the development of insurance market in other countries of the region.
-In life insurance premiums in 2008 totaled around 515 million leks, or about 26% higher than in 2007. Growth in life insurance is closely linked with increasing levels of lending and life insurance for effect credit. Other products of life insurance remain undeveloped in Albania. Despite the marked growth of life insurance, again 93% of premiums come from non-life insurance in 2008.
- Fulfillment of obligations arising from insurance contracts is the main goal of providers in the market, which binds directly with the payment of damages. During 2008, Gross Claims Paid by insurance companies came in around 1,57 billion lek, or about 21% more than in 2007. Most gross claims were paid the compulsory and voluntary insurance non-life with 97% of the total gross claims paid and 3% for the life sector. Report low claims / premius shows that there is still much to be done to improve customer service to the public in general.
- Report claims / premius remains at low levels, while 25.78% when the allowed rate is from 50% to 80%. Low rates of damage can be justified in a moment but rates lower than 50% are also signs that a market is not functioning properly
- Report expenditure continues to be high (64,87%) for an insurance company, when rates are allowed from 25% to 50%, but this is a phenomenon for all the insurance market. This report is the extent of 65% to market non-life insurance and 52% for the life insurance market. The operating costs have greater weight in the cost structure of an insurance companie, captured the extent of 72% for non-life market and 81% for the life insurance market.
- Report of the payment ability level is at 424.48% allowed, which vary from 150% to 300%. An insurance company is solvent, if it is able to fulfill all obligations of all contracts under all possible circumstances in the foreseeable future. Margin of actual payment ability for an non-life insurer to run better is usually at least 200% of the required minimum. When the percentage falls below this, the supervisor will usually start with closely monitor provider in an environment of an industrial country.
From the table below noticed that the insurance market is shared: 44% voluntary insurance and 56% compulsory insurance, where in comparison with the two previous years, gross written premiums of compulsory insurance accounted 65% to 70% of market.
Table 2. Compulsory and voluntary insurance for the period 2001-2008 (in million leks)
Years
2004
2005
2006
2007
2008
Compulsory insurance
2968
2576
2973
3868
3995
Voluntary insurance
1069
1196
1267
1670
2567
Source: AFSA, statistical report
Compulsory insurance. Compulsory insurance has increased from year to year and during 2008, the compulsory motor insurance (the liability of holders of motor vehicles against third parties) continued to dominate the market structure, bringing about 56% of the revenue from gross premiums written insurance market. Law 'for compulsory insurance in the transport sector' expands the range of products compulsory passenger insurance from accidents in public transport and insurance of liability for damage caused to third party by use of air transport assets and speedboats.
Voluntary insurance. In 2008, income from voluntary insurance reached about 3 billion lek, or 48% more income than a year ago. Growth of voluntary insurance premiums continues to be linked closely with the level of lending by banks and entry of big investors primarily in infrastructure.
The voluntary insurance non-life, with revenues about 2.6 billion lek, took first place insurance for civil general responsibilities 31%, followed by assurances from fire and natural hazards with about 28% of the income of this group, CASCO insurance with about 20% and lower weight had accident and health insurance and warranty insurance. Greater weight on income from accident and health insurance held travel health insurance by about 70% income of this group. Foreign investment in insurance are accompanied with interest to the introduction of new products, mainly in the field of health.
The insurance market in Albania minimum capital for each company is 370 million lek, about 3 million euros, the level required by EU directives, wholly invested in deposits in the banking sector in Albania and the Albanian government treasury bills. Activity of insurance companies is overwhelmingly concentrated in the Albanian territory and focused on traditional and short-term products of insurance in non-life and life sector. Albanian insurance market does not offer long-term or complicated products related to financial investment schemes or risk transfer. The global crisis has not affected the insurance market in Albania, but certainly not the profits of companies will escape its effects.
Albanian insurance market faces difficulties as:
-Albanian companies and businesses, as well as individuals currently are not very inclined to spend more for insurance. This is due to lack of information, lack of education to be provided, financial inability due to level of low income population, etc.
Information which is designed to increase awareness about the risks and the importance of protecting against major risks, including through insurance, is usually a matter for governments, for at least for catastrophic risks and long-term risks (eg life insurance for retired, long-term care and disability) that people generally fail to understand and manage in a reasonable and stable manner. Developed countries used different information and aducation forms as : a preventive program, traditional media publications (eg leaflets, brochures, guides and other publications), which complemented by poster campaigns, prevention campaigns in the media and so upward, via the Internet, mobile phone, telephone center, information point and direct counseling center. Activities such as lectures, conferences and speeches, they also aim to include more and more customers. The Internet has become other channel information to make comparisons, find specialist advice and is used by Internet users as individuals and private organizations in most countries.
Research on the impact of programs to increase risk awareness and education on securities, considered by most countries as essential to avoid unnecessary costs and to provide an adaptation of better regulation of new policy measures take.
-In Albania, the insurance market remains not very developed, 10 euros /capita or 0.6% e GDP, while in developed countries reaches 600USD/capita. Claims are paid only to the extent 26% of revenues while this ratio should be at 50% to 80%.
- Insurance market is dominated by compulsory insurance. The market is shared 56 % compulsory insurance and 44% voluntary insurance, but even these figures do not represent the real situation of voluntary insurance because most of them are indirectly compulsory as required by banks but also as provided by the government in public investment.
-Fierce and unfair competition, insurance companies offer insurance with lower prices than those provided by law to increase the market share that they possess.
Despite the problems that have this potential market, opportunities exist for growth, development and perfection of him as a market with its features.
Conclusions and recommendations
There is no unique definition for risk. Traditionally, risk is defined as an uncertainty of a possible loss. Insurance is one of the means of risk transfer
The type of risk that can be provided privately are: personal risk, the risk of asset and the risk of liability but the market risk, financial risk and political risks can not be provided from private companies.
A risk manager should be aware of every step of risk management process in order to be succesfull. The essence of risk management process is about maximizing those areas on the results of which one has control and minimize those, whose results are beyond control.
He must use several techniques in order to avoid the foreseen losses. The risk management field has undergone a lot of changes. Risk managers should understand the importance of the effective use of financial and statistical models in the decision making process.
Insurance market in Albania is a diversified market, which operate several companies that have a wide geographical spread within the country. In the insurance market there is a growing interest of foreign capital to invest in the domestic market and the extent of outside country of Albanian companies.
Insurance market in Albania is a modest market focused on compulsory insurance. The volume of voluntary insurance represents the development of an insurance market, which in Albania is still at low levels. Growth of voluntary insurance premiums continues to be linked closely with the level of lending by banks and entry of big investors primarily in infrastructure. Current legislation is old and supervisory authorities should better monitor the respect of certain fees for premiums because otherwise such a situation, not only reduces the confidence of client insurance companies, but also obliges them to consider insurance as an obligation to the state and not as a tool, which will serve as protection, leaving more space for voluntary insurance, as necessary and important.
Insurance market is not a market fully liberalized. For non-life insurance market the HIndex is 0.1574, that means a moderate concentration of the firms and for life insurance market this index is 0.3426 that means a high concentration. As the market concentration increases, competition and efficiency decrease and the chances of collusion and monopoly increase.
Premium tariff liberalization, especially in compulsory insurance market will help further development of insurance market in Albania. An electronic platform reporting of insurance companies will enable the existence of a historical data basis on damages, which will mitigate the possible liberalization of tariffs or passage in the approach genuine "risk-based", which is based on the risk of each insured to determine his premium. In 90% of EU countries this market is fully liberalized.
Different actors in the field of insurance as the state, insurance companies, consumer associations should use more different forms of education about the importance of insurance. Implementation of various programs in the field of insurance education should be analyzed for effectiveness of the information that they transmit to consumers.
Regulatory authority should better monitor the insurance market for a better functioning of this market. Regulatory authority, exercising regulatory and supervisory function, should exert pressure for the creation of an efficient market, safe and sustainable and to protect consumers, to monitor effectively the activities of insurance companies, through strengthening the regulatory framework and review legal basis for the insurance market.
And finally the insurance companies should play by the rules of the game, with honesty and responsibility, by the customer aware of the importance of voluntary and compulsory insurance, offering a variety of products and package products, as individuals, as well as for businesses, not assume insurance that exceed their limits of liability, paying claims in the appropriate time and value.
One king have said one day :
"The man does not know what the future can bring for them. Just as the fish are engaged in a cruel net, and birds caught in the trap, the people can be engaged in a long loop, dangerous when it falls suddenly upon to them"
For this reason :
"The contract of insurance is one of the most important inventions of the human mind in modern times"
Edwin W. Patterson
Literature
-George Rejda, Principles of Risk management and Insurance, Wigth Edition
-Hart, Buchanan, Howe, "Actuarial Practice of General Insurance"
-Marc R Greene, Jmes S. Trieschmann, Risc and Insurance
-Godet Michel, Risques et prospective, entrepritien de l'assurance
-AFNOR. 2002. Management du risqué globale.
-Godet Michel, Risques et prospective, entrepritien de l'assurance.
-Andree Charles, Farid Baddache. Editions AFNOR.2002. Prevenir les risques. Agir en organisation responsable.
-Catherine Veret, Richard Mekouar, Dunand, 2005. Fonction Risk Manager .
-The World Bank in Albania. November 2006. Rodney Lester, Serap Gonulal, Analysis and monitoring report for insurance companie.
-AFSA, Statistical report 2008 in Albania.
-AFSA, Statistical report 2007 in Albania.
