Bankruptcy in insurance. What is there to do? What is not good to do?

Conf. univ. dr. Băluță Aurelian Virgil

A new bankruptcy in the Romanian insurance sector was announced and discussed for a long time. It was again the bankruptcy of the largest insurer in the market at the time. Several questions are asked to which I will propose answers.

Question: How can a large insurance company go bankrupt?

Answer: In the insurance field, a company goes bankrupt either through fraud or because the level of the premium does NOT cover the costs. With regular companies, there is also the option of not collecting the money owed to you from customers. In insurance, bankruptcy is not possible in conditions of profit but without receipts from customers: the company first collects the money (insurance policy) and later, if necessary, pays any damages. Returning to insurance in Romania, we can say that fraud is or should be more difficult to achieve. The banking system in our country has reached certain standards where not everything is possible. On the other hand fraud in a financial market will only occur if the business is not profitable. No employer bankrupts their profitable business in a market as difficult to enter as insurance. Eliminating fraud from the possible causes of bankruptcy leads us to the alternative: too high costs or too little income, in short loss instead of profit. In a private company with capital from abroad, it is hard to believe that there can be too high expenses. The private employer always aims to employ only justified expenses. For example, no one in a foreign private company is willing to pay higher wages than similar companies or to pay unjustified rents. Only one conclusion remains: the premiums collected did not cover the necessary payments for accepted claims. It is not by chance that most customers went to Euroins: because they paid the lowest insurance premium. If the insurance premium had been the same as that of competing insurance companies that remained in the market and did not go bankrupt, Euroins probably would not go bankrupt either.

Question: Is it possible to maintain the level of insurance premiums in the future?

Answer. NOT. Normally, if normal market rules are followed, insurance premiums should reach at least the level charged by firms that have survived and not gone bankrupt.

Question:  How is it possible to cap insurance policies though?

Answer. Policies can only be capped if SOMEONE pays the difference.

Question: Can we take into account for the future the level capped by the Government of insurance policies?

Answer. NOT. Let’s not make our company or family budget for the next year based on state-controlled policies. After the return to market prices the policies will increase again.

Question: Would it be possible to always have insurance policies capped?

Answer. NOT. According to the Constitution, Romania has a market economy. In addition, free market prices and state-controlled prices can NOT coexist.

Question: Would it be good, however, to make legislative changes that would allow capping of insurance policies to help the budget of citizens and companies?

Answer. NOT. If capping were a solution, we would apply it to all products and services. We would start capping with staples like bread, milk, cheese, fruit and vegetables. However, we know that any ceiling means a reduction in production. We will pay more because we will be taking from outside the legal market. Or maybe we will buy at the same prices but standing in lines and wasting a lot of time.

Question: What should we do to reduce insurance policies?

Answer. The costs that generate them should be reduced. For example, car repair prices should be reduced. These in turn depend on other costs: labor, spare parts, etc. It is a whole chain that leads us to the price of energy and other resources, to inflation, to the system of taxes and fees. State authorities must also carry out their duties with a minimum of red tape. All of this depends to some extent on the government act. We need to start judging the rulers according to their performance in these areas which indicate our standard of living, not based on promises or smiles on TV. When there is performance in lowering the price of energy, inflation and taxes, then the prices of all goods and services necessary for living, including insurance policies, will be lower.



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