Olga Chernigevych, KNEU

Financial controlling as the important tool of quality management in life insurance companies

Management, controlling and improvement of quality are essential activities for modern enterprises. Quality directly influences performance, competitiveness, customer satisfaction, business growth and success of every company. Defects and mistakes arise not only in the manufacturing, they also exist in financial service companies: banks, insurance companies, investment funds etc, that can be caused by uncontrolled and excessive deviations from the product characteristics.

Life insurance companies provide financial service market with product, that has such unique specifications as:

·protection from income losses in the event of breadwinner death;

·ability to bild up additional source for the retirement period or for specific future event.

The probability of such risks are very high and in most cases life insurance companies reimburse huge sums of money. Thus understanding of the necessity of financial controlling as a tool of quality management in the life insurance companies is of vital importance.

Nowadays the major quality management system is presented by ISO standards, based on the process approach, that describe the enterprise activity as the set of interrelated actions. Company can improve its performance by means of management and control.

According to the ISO concept, the cornerstones of this quality management mechanism are:

Figure 1. The ISO 9000 process approach [5]

1.Management responsibility

2.Resource management

3.Product realization

4.Measurement, analysis and improvement

As we can see one of the initial parts comprising the above system is measurement, analysis and improvement. These activities can be implemented by the use of different tools and methods of controlling.

Main methods of controlling:

1.Benchmarking ― to compare performance of different business units, insurance products of different insurers.

2.Cost analysis ― to characterize own insurance products in "price‑quality” area

3.Portfolio theory ― to analyze the diversification of the investments, their rate of return and risk

4. ABC-analysis ―is inevitable in the process of partners selection, especially in crunch conditions.

Main tools that supplement these methods of controlling are:

1.  System of ratios based on the principle of early prevention and reaction, which consists of such components [6]:

·     Macro measurers ― enable to forecast the tendencies in the economy of both certain country and of whole word (GDP, inflation etc)

·     Market measurers ― characterize the current situation and opportunities within the life insurance market.

·     Technical measurers ― collect information about innovations, new services.

·     Social measurers ― provide data about current income and expenditures of households, their ability to spend extra money on the life insurance.

·     Political measurers ― enable to assess the political environment.

·     Internal measurers ― include different types of ratios, based on the managerial accounting data (for example total amount of insurance premiums per employee, size of insurance reserves)

2.  Financial planning. Problem No1 for every business is lack of necessary resources. To achieve insurance company’s goals it’s very important to plan and control incoming flows of insurance premiums, total sums of reimbursement. In order to fulfill these aims, at the beginning of accounting period key indicators are set and during certain period of time insurer should check and compare current company position with initial one, defining reasons of deviations and working out recommendations for their improvement.

3.  Reporting system ― it is reasonable to notify senior managers about all contracts with significant risks and indemnities. In some cases it is necessary to make risk audit.

4.  BSC and strategic maps. For Ukrainian enterprises BSC is new management tool. The one that compares all above mentioned controlling methods and instruments, maintaining achievement of company’s strategic objectives and operational goals [1]. In our economic environment its implementation is very important. By means of linking four components (Finance, Internal business‑processes, Consumers, Learning and Growth), it not only describes company’s strategy and ways to achieve it, but characterizes integrated mechanism of internal relations between main components of insurance company performance.

The "Finance” perspective for life insurance company should include most important financial goals, such as an increase in received premiums, changes in reimbursed amounts, due for payment under the contracts, changes in overhead costs etc.

The "Internal business‑processes” perspective should include measures that characterize internal operations and environment of the company, such as performance of life insurance departments, insurance agents, level of reinsurance, investment ratios.

The "Customers” perspective should describe current clients’ satisfaction, their expectations about services, offered by life insurance company. Measures that can characterize this component of BSC are an increase in quantity of contracts in certain customer segment, expectations about new product characteristics.

The "Learning and Growth” perspective provides an overview about most important intangible assets in the life insurance company ― its employees, who maintain the growth of the company. This component is difficult to measure, because improvement of human resources has indirect effect on the company’s performance. Nevertheless, while implementing BSC those involved in developing should take influence of the human resources into consideration.

All these four perspectives provide close integration of all parts of the life insurance company, improve quality of the offered products and strengthen insurer’s position within the market.

Insurance product of good quality ― is one that provides coverage against the selected risks, that is reasonably assessed in the monetary equivalent, offers excellent customer service.

Nowadays the use of controlling in the improvement of quality management system of the life insurance products is urgent. This segment of insurance market faces many problems, such as low interest of the corporate insured, inefficient sales channels, increase of the contracts with additional risks, that boost life insurance companies’ liabilities. Only the use of controlling, its specific methods and tools give insurance company a chance to optimize the structure of insurance premium, to offer insurance products meeting consumer expectations, to increase company’s market share.

1.     R.S.Kaplan Conceptual Foundations of the Balanced Scorecard ― Handbook  of  Management Accounting Research: Volume 3 (Elsevier, 2009).

2.     http://en.ce.cn/Insight/200704/05/t20070405_10942887.shtml

3.     http://neumann.hec.ca/gestiondesrisques/98-15.pdf

4.     http://www.fsu.gov.ua/article/index/id/621

5.     http://www.iso.org/iso/iso_9000_selection_and_use-2009.pdf

6.     http://www.nbuv.gov.ua/portal/soc_gum/Uproz/2011_5/u1105erm.pdf