In recent years, many countries are rapidly moving towards a new type of economy based on modern technologies and information and communication technology (ICT) knowledge. The transition to a new economy is characterized by a change in the nature of traditional areas of production, a shift of information into the main production resource, while the economic system is the main factor in development [1]. The rapid spread of digital technologies poses new challenges for insurance companies, which must adequately respond to the changing needs of insurers. Digitalization has made information more accessible and personalized, and processes and mechanisms more simplified. In this regard, artificial intelligence (AI) technologies are actively used in the insurance industry, including various chat bots, cloud databases and other automation elements. Now the use of modern developments and discoveries in business is not a unique competitive advantage, but a necessity.
Such activities contributed to the formation of a new direction in the field of financial technologies - InsurTech. Today, the technological modernization of insurance is seen as an effective mechanism for strengthening market positions. Its popularity opens up new opportunities for traditional businesses and generates new competitive start-up projects. The modern insurance sector is in the midst of a fundamental change that only companies that can embrace and innovate can withstand. The emergence of new products, online business models and restructuring of internal mechanisms make the insurance sector more mobile and flexible in accordance with consumer requirements.
Along with these processes, information risks are increasing, negatively affecting the stability of the company. Given the specifics of the insurance business, a well-formed portfolio should be the key to achieving long-term financial stability. It plays a central role in the insurance process, serving as a balance of risks and their coverage [2]. Compulsory insurance, which for a long time was the safety cushion of the insurance market, brings a total profit of no more than 5-10% of the turnover of insurance companies. This amount is primarily spent on unprofitable types of insurance, which indicates an imbalance in the portfolio of many organizations [3].
Digitalization has become quite popular among researchers in recent years [4]. Therefore, there are many studies on the relationship between high technology and insurance, both at the global level [5] and at the local level [6], [7]. Considerable attention is also paid to the insurance portfolio as the basis of insurance activities [2], [8]. However, the features of its formation with the active use of digital technologies by the company require more thorough research. Thus, the results of this study will be of practical importance and will form the basis for further developments.
2. Literature review
Insurance is one of the first industries to take advantage of AI. However, the biggest changes are yet to come. AI is a digital simulation of human thinking, which is most often used to analyze data and solve complex problems [9]. Researchers from the German insurance company Allianz Global Corporate & Specialty (AGCS) [10] note that such technologies can significantly improve the value chains in the insurance industry. Computerization of insurance processes (for example, portfolio diversification or risk profiling) provides the best customer experience, policy issuance and financial regulation. In Azerbaijan, the conclusion of contracts online and the execution of calculations for types of compulsory insurance has a positive effect on the frequency of fraud cases involving insurance companies and intermediaries. E-contracting also reduces costs for companies, thereby making it possible to offer products at a lower price. All this contributes to the overall competitiveness of the business and the development of the insurance market [11]. The analytical functions of intelligent agents are actively used in risk assessment and data analysis. The introduction of special software in the auto insurance market of Azerbaijan makes it possible to apply a more unified approach to assessing damage from road accidents and significantly reduces the number of customer complaints in this area [11]. thereby making it possible to offer products at a lower price. All this contributes to the overall competitiveness of the business and the development of the insurance market [11]. The analytical functions of intelligent agents are actively used in risk assessment and data analysis. The introduction of special software in the auto insurance market of Azerbaijan makes it possible to apply a more unified approach to assessing damage from road accidents and significantly reduces the number of customer complaints in this area [11]. thereby making it possible to offer products at a lower price. All this contributes to the overall competitiveness of the business and the development of the insurance market [11]. The analytical functions of intelligent agents are actively used in risk assessment and data analysis. The introduction of special software in the auto insurance market of Azerbaijan makes it possible to apply a more unified approach to assessing damage from road accidents and significantly reduces the number of customer complaints in this area [11].
On the other hand, the use of AI in the insurance sector has led to many threats associated with this type of activity. First of all, these are cyber attacks and technical failures that can lead to significant data loss. As a result, the following paradox arises: insecure technologies are the most effective tool for dealing with insurance risks, although they contribute to a better understanding of risks. Leading players in the insurance business understand this fact and are actively investing in the development of InsurTech projects. For example, the IT budget of the previously mentioned insurance company Allianz in 2018 amounted to $4.3 billion [12]. A similar interest of insurers in technological innovation was noted back in 2017, when investment support for AI increased eightfold [13].
Blockchain technology is considered a good "partner" for AI. Its uniqueness lies in the fact that already entered data cannot be changed or deleted. The user can only add new ones. This fact equally presents both a significant opportunity and a threat to this area. Insurance companies mainly implement blockchain technology in the form of smart contracts - self-executing contracts, the terms of which are directly written in lines of code. They are seen as a way to simplify business relationships between clients and investors [14].
The effectiveness of such tools directly depends on proper management. For example, many large insurers are refusing to use them due to the difficulty of integrating into the traditional insurance model. One way out of this situation may be to change the way business processes are conducted. For the qualitative use of information technologies in insurance, a specialized data collection and processing center is needed in the sales management department and the risk control center of the insurer. The latter includes such functions as reinsurance and underwriting, which are necessary to create a balanced insurance portfolio [15].
Reinsurance is especially useful when dealing with significant single risks. This allows you to counteract possible losses in case of unforeseen events [16] and enables the insurer to conclude more contracts, expanding and improving the portfolio. Underwriting functions are somewhat broader and consist of risk selection, ranking of the main insurance conditions and insurance coverage options [17].
At the same time, analytics, including forecasting, has always been part of the traditional insurance business model. Over the entire existence of the industry, insurers have improved the risk assessment mechanism
3. Methods and materials
The analysis of the insurance portfolio included consideration of the following criteria:
- degree of risk of offered services;
- The level of profitability;
- The structure of the insurance portfolio.
Thus, the insurance portfolio can be divided into conservative, diversified and aggressive [2] (Table 1).
Table 1.Insurance portfolio diversification under the formation principles
The Markowitz portfolio optimization model [20] was taken as the basis for developing an optimal insurance portfolio due to the similarity of the studied indicators (the return on securities is equivalent to the level of insurance return). All necessary calculations were made using the MS Excel add-ins "Data Analysis" and "Search for a Solution".
The first step was to determine the profitability of certain types of insurance. The corresponding calculations were made according to formula (1).
P u003d (Insurance payments, thousand rubles) / (Insurance premiums, thousand rubles) (1)
The specific metrics needed to apply the model were then determined, such as the mean return, variance, and standard deviation (the standard risk for each type of insurance). The developed model can be formalized by formula (2).
where - the share of insurance of the i-th type in the insurance portfolio;wi
ri- profitability of the i-th type of insurance;
N - the total number of types of insurance;
covab- coefficient of covariance between pairs of specific types of insurance;
σreq- the maximum allowable risk of the portfolio of insurance services.
The insurance portfolio payout ratio was calculated as follows:
Cp = (Insurance premiums received during the year, thousand rubles) / (Insurance payments, thousand rubles) (3)
Under normal conditions, this figure should be in the range of 40-60%.
Reference:
[1] Aliyev, AG, Shahverdiyeva, RO, & Abbasova, V. A, “Comparative analysis of strategies and trends shaping the information economy of Azerbaijan with leading countries”, 2016 IEEE 10th International Conference on Application of Information and Communication Technologies (AICT), IEEE , pp. 1-4, 2016.
[2] Yashina, N. M, “Insurance portfolio as a basis for ensuring the financial stability of the Stroh organization”, Finance and credit, Vol 20, pp. 84-87, 2007.
[3] Rakhmanov, A, “Compulsory insurance – safety cushion of the insurance market Republic of Azerbaijan”, 2018
[4] Semenycheva, I, F., Latysheva, VV, Sakulyeva, TN, Semenova, L., & Tikhonova, Y, “New assessment technologies to evaluate current and intermediate knowledge of learners”, Opción, Vol 36, No. 27, pp. 240-260, 2020.
[5] Perepelitsa, D. G, “The impact of the digital economy and financial technology on the development of the global insurance industry”, Economics and Entrepreneurship, Vol 10, pp. 131-136, 2018.
[6] Wiesböck, F., Li, L., Matt, C., Hess, T., & Richter, A, “How management in the German insurance industry can handle digital transformation”, LMU München, 2017.
[7] Muylle, S., Standaert, W., Basu, A., Everaert, E., & Decraene, W, Digital innovation in the Belgian insurance market, Vlerick University, 2018.
[8] Chaldaeva, LA, & Shibalkin, A. A, “Qualitative and quantitative characteristics of insurance portfolio”, Digest Finance, Vol 5, pp. 24-28, 2011.
[9] Frankenfield, J., Artificial Intelligence (AI), https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp, Last accessed 06/5/2020.
[10] The rise of artificial intelligence: future prospects and emerging risks, АGC&S,https://forinsurer.com/news/18/05/16/3596, Last access 5.06.2020.
[11] Ibragimov, K. M, “Insurance market of Azerbaijan: adaptation to new conditions”, 2018.
[12] Quarterly InsurTech Briefing Q4 2019,https://www.willistowerswatson.com/en-US/Insights/2020/01/quarterly-insurtech-briefing-q4-2019, Last accessed 5.06.2020.
[13] From grudge to nudge: tech firms help insurers shift gear,https://www.reuters.com/article/us-insurance-technology/from-grudge-to-nudge-tech-firms-help-insurers-shift-gear-idUSKCN1BT0VC, Last access 7.06.2020.
[14] Sayegh, K, “Blockchain Application in Insurance and Reinsurance”, France, Skema Business School, 2019.
[15] Kaigorodova, GN, Mustafina, AA, & Alyakina, D. P, “Directions of improving information system of insurance company”, Journal of Physics: Conference Series. IOP Publishing. Vol. 1015, no. 4, p. 042016, 2018.
[16] Ivanova, S, “Problems and prospects of development of the legislation of the Russian Federation on reinsurance”, State and Law, Vol 12, pp. 85-92, 2019.
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