Profit maximization of the top 3 non-life insurance companies in the Philippines for the years 2005-2009

Added Title

Profit maximization of the top three non-life insurance companies in the Philippines for the years 2005-2009

Date of Publication

2011

Document Type

Bachelor's Thesis

Degree Name

Bachelor of Science in Commerce Major in Management of Financial Institutions

Subject Categories

Finance and Financial Management

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management

Thesis Adviser

Angelito A. Bala

Defense Panel Chair

Robert Dan J. Roces

Defense Panel Member

Junnette A. Perez
ALfredo M. Santoyo

Abstract/Summary

The researchers are very much interested on portfolio management moreover, on how to get the optimal portfolio choice. Many dissertatiopns and thesis have been made on this specifically in the life insurance companies in the Philippines. The researchers however, want to offer a new perspective by giving the spotlight to the non life insurance companies in the Philippines which the researchers think will be a breath of fresh air since today non life insurance companies have been increasing in terms of the growth in their industry and competition among the companies is present.

As of 2010, there are a total of 85 non-life insurance companies in the Philippines. Out of these 85 companies, Malayan Insurance Company, Inc., Pioneer Insurance & Surety Corporation, Prudential Guarantee and Assurance Inc. belong to the top three highest total assets for the years 2005 to 2009.

The constraints are a big factor in the study as the researchers focused on legal and regulatory factors, moreover integrating the Insurance Code of 1978. Since the thesis that has been done in the past are not up to date, the researchers would also provide in this study the contemporary issues that the Insurance Code of 1978 offers moreover recommending relevant modification of the Insurance Code of 1978 to provide a better and optimal portfolio choice for both the life and non life insurance companies.

The researchers would like to answer the problem: What would be the optimal investment mix for the chosen three non life insurance companies in the Philippines?

In answering this problem, the researchers made a model. The profit maximizing model for the top three non-life insurance companies is:

Y=aX1(rl) + bX2(r2) + cX3(r3) + dX4(r4) + eX5(r5) + fX6

With these following constraints:

X1 >= +50% of minimum paid up capital

X1

X2

X3

X1 + X2 + X3 +X4 + X5 + X6 = forecasted total admitted assets

X1 >= 0

X2 >= 0

X3 >= 0

X4 >= 0

X5 >= 0

X6 >= geometric mean of cash/total admitted assets (per company)

Note: Forecasted TAA

TAAt+1-TAA

TAAt

The constraint that was considered in the amount to be invested in each type of investment is dependent on the percentages given by the Insurance Code of the Commission and the treatment of each company to yield and risk for the investment. The researchers will also be using the optimization programming method to which the researchers will be able to analyze statistically the effects of each factors in computing the optimal investments and consequently obtain the profit maximizing model.

This method is the most ideal for this study since it consists of determining the model that would give the three chosen companies their maximum profit given constraints on the amount that can only be invested in each security imposed by the Insurance Commission. The researchers will also use the current yield rates of each security in determining the maximum profit of each company.

Current market rates are defined as the up to date or most recent rate used in the market in investing. In the study, the current markets rates' role is to define the rate of return of a certain investment that will enable the researchers identify which among the securities are the most profitable investment. Moreover, these rates are important in weighing the decision on how much to invest in each security to be able to get the optimal model for the companies in terms of being able to maximize profits. The current market rates are important in computing the rates that will be used by the top three companies for their investments.

The researchers used optimization programming which is the best fit program that can be used to answer the problem because optimization programming is a mathematical method that determines the best outcome of a study given some specific constraints.

The values were encoded and results were generated using Lindo What's best program. It is an add-in to Excel that allows you to build large scale optimization models in a free form layout within a spreadsheet.

Based on the generated results, one can see that the program suggests that all three companies and the non-life insurance industry can primarily invest their funds in loans, bonds and stocks respectively. This is because the three financial products yield the highest return among others.

As long as they do not exceed the given regulatory constraints, companies and the industry will be able to maximize the returns on their investment portfolio if they invest in bonds, stocks and loans. The optimization program suggests that to get an optimal or to maximize profit, the companies should not invest in real estate and short term investments.

And this is only for the reason that the result must satisfy the given constraints which states that investment in short-term investments and real estate must be greater than zero.

Even with the result of the three companies combined, that may serve as a benchmark for whole non-life insurance industry showed that each and every non-life insurance company must invest in the assets with the highest return as long as it does not exceed the given constraints in order for them to maximize their profit.

The amount to be invested suggests that there is a direct relationship between the total admitted assets and revenue. If the company's total admitted assets increase, revenue can also increase providing that the investments are patterned to what is provided in the optimal mix above. A company with a higher amount of total admitted assets means that they have more to invest in the securities consequently can result to a higher investment, moreover, higher revenue.

In conclusion, the researchers believe that the profit maximization model provided can be achieved by any insurance company. The limitations however, become the reason why insurance companies are discouraged to follow or implement the optimal model. The limitation that the researchers believe that is the biggest factor is the risk.

The risk is due to internal and external factors as discussed. The risks involved may be accepted or rejected by the companies which are then known as their risk profile which varies from companies. Whether they are risk-averse, risk indifferent or risk takers, in the end the choice will always be in the hands of the companies.

Abstract Format

html

Language

English

Format

Print

Accession Number

TU21805

Shelf Location

Archives, The Learning Commons, 12F, Henry Sy Sr. Hall

Physical Description

87, [45] leaves : illustrations (some color)

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