Bankruptcy of insurance companies, conditions and reasons

– The issue of insurance bankruptcy has always been one of the biggest concerns of insurers, especially insurers of long-term insurance policies, including life and investment insurance, and most of the marketers of the insurance industry, when dealing with insurers, were mainly faced with the challenging question that if the company If the insurance goes bankrupt, what will happen to fulfill the obligations of the insurer?

But despite the seriousness of the mentioned question, unfortunately, insurance experts do not provide a convincing answer to this challenging question. While insurance companies, like other businesses, face the risk of bankruptcy.

The discussion of bankruptcy of insurance companies is very important compared to other commercial activities because it is facing the public and social interests of a large number of insurance policyholders and the continuity of many businesses depends on the existence and activity of insurance institutions.

Despite the structural differences between insurance activities and other commercial activities, the process of insurance bankruptcy in Iran, like other businesses, is subject to the commercial law, and the insurance laws and the establishment of central insurance and insurance as supplementary legal articles of the commercial law play a role in this regard. they do, if the nature of the insurance industry is different from other economic activities.

In general, insurance companies, like other businesses, face three types of bankruptcy, including at-fault bankruptcy, normal bankruptcy, and fraud bankruptcy. Normal, which can be caused by bad economic conditions, environment and bad planning, is more.

If insurance companies do not use competent human resources, several factors can cause the bankruptcy of insurance companies, among which the following can be mentioned;

– Wrong pricing that causes the calculated insurance premiums to be disproportional to the insurance risk, and as a result, reduces the income of insurance companies.

– Lack of liquidity to fulfill the current obligations of insurance companies, which leads to pressure to sell illiquid assets or sell insurance policies at unbalanced prices by insurance companies, and causes the aggravation and acceleration of bankruptcy conditions.

– Mistakes in marketing, which causes an unrealistic estimate of the number of customers and as a result, an unrealistic calculation of insurance premiums, resulting in the disproportion of insurance premiums with accepted risks.

– Failure to recognize and separate weak and severe risks, which leads to the acceptance of undesirable risks and provides the basis for a sharp increase in the damage coefficient.

– Failure to determine and apply a fair rate in selling insurance policies to high-risk and low-risk customers, which causes high-risk customers to buy insurance policies and low-risk customers to avoid buying insurance policies due to unfair rates. This causes the accepted risks to be unbalanced and provides the basis for the downfall of the insurance company.

– Issuing unprofessional orders by superior managers and obliging technical units to order and non-technical pricing, which causes the rate to be incommensurate with the accepted risks, and the insurance company faces the challenge of heavy losses.

– Competition in cutting rates in order to attract and gain more market share, while the company is facing a liquidity problem, which worsens the financial situation of the insurance company.

Now that we have learned about the factors aggravating the possibility of bankruptcy, maybe this question will come to the minds of the readers and respected insurers, whether the risk of bankruptcy threatens the domestic insurance companies?

According to the review of the performance of some insurance companies and their lack of correct and scientific approach in facing the risks and problems that threaten the insurance companies, unfortunately, it must be said that this danger is lurking in a small number of insurance companies. Among the factors and cases that have put some insurance companies at risk are:

– A sharp decrease in income from investment, which has led to a decrease in the profits of some insurance companies.

– Lack of attention to the balanced portfolio, which has caused a sharp increase in the loss ratio of some companies, while according to the economic situation of the country, the loss ratio of over eighty percent is a potential risk that seriously threatens some companies.

– Acceptance of an order exceeding the capacity of some loss insurance policies, which unfortunately diverted the energy and performance of the companies in question and narrowed the field for their financial stability.

– Excitement in accepting some risks without paying attention to the proper insurance coverage arrangements, which will face a crisis for this category of insurance companies in the event of possible heavy damage.

– Economic crises caused by social and economic shocks, including the economic shock caused by the Corona epidemic, which both reduced the willingness of policyholders to buy insurance and caused non-payment or delay in the payment of insurance premiums for issued insurance policies, and unfortunately, complications It is still quite visible in some companies.

– The existence of debtor and unscrupulous insurers who continue to buy insurance policies from other insurance companies despite not settling their accounts with the previous insurance company, and unfortunately, some insurance companies accept them just to attract portfolios in the short term.

– Confusion in the emerging insurance markets is another challenge for insurance companies, unfortunately, we sometimes see the acceptance of the risks of this market without scientific study by some insurance institutions.

Digital transformation and new technologies are other threats that have trapped traditional insurance companies due to resistance to these developments.

– The increase in the economic inflation rate is another problem that, on the one hand, due to the increase in insurance costs, leads the insurance companies to increase insurance premiums, which provides the basis for the decrease of customers, and on the other hand, the increase in the inflation rate, the increase It leads to the prices and this issue reduces the purchasing power of people and as a result, the unwillingness of customers to buy insurance.

– Cyber ​​attacks by hackers are a potential threat that has put some insurance companies that have weak software infrastructures at risk, and studies show that some companies are very fragile in the face of this risk, and in case of cyber attacks, their performance is severely impaired. will be .

– Oppressive sanctions are among other problems that have overshadowed the performance of many insurance companies, including new insurance institutions, on the one hand, they have prevented financial transactions between domestic insurance companies and international insurance companies, and this Akhd has challenged international reinsurance coverage and as a result has forced insurance companies to keep large risks inside the country and on the other hand has limited technical and scientific communication with global progressive insurance companies and as a result caused technical backwardness. and scientific and creating a meaningful distance with the globalized insurance industry.

However, despite the existence of all the aforementioned cases and the need for insurers to be vigilant in choosing their insurance company, there is not much to worry about for insurers because:

Fortunately, the Central Insurance of the Islamic Republic of Iran carefully examines the situation of insurance companies every year and is under its supervision with various monitoring methods, and by determining the levels of insurance companies’ solvency and issuing the necessary warnings to insurance companies that do not have adequate financial performance and are unable to repay their debts. are not, provides the necessary warnings to the insurance policy community, and when purchasing an insurance policy, by checking the status of the insurance company, while choosing a reliable insurance company, they should be aware that insurance companies that are not able to repay their current debts face the possibility of bankruptcy. In the short term, insurance companies that do not have adequate capital face the possibility of bankruptcy in the long term.

But the probability of bankruptcy of insurance companies is very low compared to other businesses, because the existing laws such as the Insurance Law and the Law on the Establishment of Central Insurance and Insurers together with the approvals of the Supreme Council of Insurance as well as the strict financial and technical supervision of the Central Insurance of the Islamic Republic of Iran As an institution that oversees the performance of insurance companies, it has taken the necessary measures both when issuing licenses for insurance companies and appointing their top managers, as well as in order to prevent insurance companies from going bankrupt and also to fulfill their obligations to policyholders in case of possible bankruptcy. .

Article 32 of the Insurance Law and Article 44 of the Central Insurance and Insurer Establishment Law are among the legal articles that exist to protect the rights of policyholders in case of possible bankruptcy.

According to Article 32 of the Insurance Law, in case of bankruptcy of insurance companies, the insurers have priority over other creditors, and among the various insurance transactions, life insurance transactions have the first priority, and according to Article 44 of the Central Insurance and Insurer Establishment Law The portfolio of dissolved insurance companies was transferred to Iran Insurance Company and this company will be committed to fulfill the obligations of the dissolved insurance company for the issued insurance policies.

In addition to the articles mentioned in Article 60 of the Law on the Establishment of Central Insurance and Insurers, it is clearly emphasized that the deposits and assets of insurance companies are a guarantee of the rights and claims of the policyholders, and in the event of the liquidation and bankruptcy of an insurance company, the policyholders, the insured and the rights holders They have priority over other creditors, and insurance companies cannot settle or mortgage their property without the prior approval of the Central Insurance Company, or make it the subject of any type of transaction with the right of restitution.

Also, articles 71 and 73 of the aforementioned law, by predicting and requiring to obtain the insurance coverage of the issued insurance policies, obliges the institutions to insure a part of their obligations with the Central Insurance of the Islamic Republic of Iran in order to monitor and control the insurance policy issued in case of In the event of a possible loss, take action to compensate a part of the insurance policy’s obligations in the amount of the share that has been relied upon.

Needless to say, in order to increase the reliability factor, according to the approvals of the Supreme Council of Insurance, insurance companies are not allowed to hold more risk than the holding party determined by the Central Insurance and to issue insurance policies for risks whose amount exceeds the holding limit of the insurance institution only if are allowed to acquire reinsurance coverage for the excess part of it, according to this, insurance companies must cover more risks than the authorized party through domestic or international reinsurance companies under reinsurance coverage, thus insurance companies in addition to financial support Central insurance can benefit from the financial support of domestic and international reinsurers, which significantly reduces the risk of large losses to insurance companies and their bankruptcy.

Producer: Reza Esadi, Deputy Official Brokerage of Third Millennium Insurance
Financial News Quarterly, No. 32, pp. 28 and 29