Financial risks of "green economy"

Table of contents: The Kazakh-American Free University Academic Journal №7 - 2015

Authors:
Sudakov Valeriy, D. Serikbayev East-Kazakhstan State Technical University, Kazakhstan
Madiyarova Elvira, D. Serikbayev East-Kazakhstan State Technical University, Kazakhstan

Discussions of the concept of «Green Economy» (or «Green Growth») have recently taken an important place in economic literature. This problem has been much discussed in lots of big international forums. However, the issue on perspectives, profits and risks of «Green Economy» has raised much to debates.

A great interest to the concept of «Green Economy» is mainly caused by numerous crises that the world has been facing the last few years. They are climatic, ecological, food, financial and economic crises. This has predetermined the necessity of searching for alternative ways of the development. The concept of «Green Economy» is being considered due to a longer-time and wider concept of sustainable development including economic, social and ecological aspects.

This concept generally comprises those sectors of business which production basis is renewable types of natural capital as well as management areas which produce goods (products and services) for ecological purpose. They provide the reducing of eco destructive influence of a human’s life-sustaining activities.

It includes:

- scientific products (know-how, data bases, plant varieties, animal breeds, construction and technology documentation, etc.);

- industrial products (cleaning equipment, monitoring systems, waste utilization equipment, effectiveness improving technologies, resource saving, etc.);

- information services (ecological consulting, data collection services, eco auditing, etc.); etc.

There have appeared a number of risks which reduce implementation rates of the «Green Economy» concept. The first risk refers to the fact that it can be applied as a purely ecological concept. The second risk is that similar approaches will be applied to different countries without regard to their specific characteristics. There are also a number of risks regarding a trading regime.

To transit towards the «Green Economy» it is necessary to make drastic technological changes. At the same time, an overwhelming majority of technological products are produced in developed countries, whereas other countries are in bad need of technologies for solving economic, ecological and social problems. The acquisition of these technologies is concerned with financial risks.

In our country, is being carried out a lot of searching for some new approaches to attract new direct foreign investments. First, it will be necessary to attract advanced technologies and getting the world’s experience in innovation development. It is ultimately important for diversification of production and diminishing resource dependence of the country. However, it might increase financial risks.

Transition towards the «Green Economy» will probably cause some changes in the trade structure, which can bring potential economic profits for developing market economies to open new possibilities for exporting. However, it might require production modernization, which bears, in its turn, financial risks including investment and commercial risks in regard to money purchasing power.

A great number of free trade agreements lead to additional financial risks. First, these agreements do not help business much to differentiate between «desirable» and «undesirable» forms of investments in terms of transiting towards the «Green Economy». In this regard, in an investment area there should be such international agreements that would determine investment regulation rules in terms of «Green Economy».

The main topic of the scientific researches in the «Green Economy» area in the country as well as on a regional level includes material recycling technologies, new construction materials and technologies in construction, food production, energy saving, advanced methods in public health service and “green” nanotechnologies.

Let us indicate some basic premises to the country’s transition towards sustainable development and formation of the «Green Economy». The crucial ways of this formation are stimulated by specific development of three key factor groups: human, technological and natural.

Highly-qualified personnel are one of the decisive factors of solving the problem of «dematerialization» of production cycles and product consumption, i.e. diminishing their resource intensity, which makes it less possible to effectively transit toward sustainable development.

Scientific, construction and technological potential can be converted to successful solving of the problem of sustainable development and particularly for ecologization of economy, increasing production effectiveness and reducing resource intensity of life-sustaining systems.

There could be one of the factors in forming premises to the country’s transition toward sustainable development. It could occur when in perspective the basis of its natural and resource potential contains renewable resource varieties with active usage of ecological and social functions along with natural resources. The leading sectors of that are organic farming, forest management, recreational complex, tourist sector, and creative economy, i.e. everything that forms the basis of «Green Economy».

There appears a multidirectional tendency of changing social and economic premises for building up the “Green Economy”. Amongst the main changes of the kind one can single out the following:

- an increase of the role of people’s social needs, which provides a demand for relevant groups of goods (education, science, recreation, spots, art, tourism, creative economy, etc.) and the necessity to expand the production of social and ecological ecosystem services;

- an increase of food shortages (and consequently a price increase of agricultural products) in the world markets, which stimulates the rise of profitability in domestic agriculture production and the necessity of its transforming  into the regime of sustainable farm usage on the grounds of the “soft” use of natural resources based on the processes of self-reproduction ecosystems;

- an increase of demand for ecologically clean food products and for products with ecological purpose, which considerably enhance economic stipulation of organic farming and «Green Economy»;

- a price increase of traditional energy sources, which adds to the potential of profitability in alternative energetics (in production of biogas, biodiesel engine, coalmine methane, wind and solar energetics).

Insurance business based on proper accounting and processing of the information coming from the segments of «Green Economy» market enables to a certain extent to decrease the level of influence of a financial component of all the listed risks.

Let us consider financial risks and the possibility of managing them due to a dynamic econometric model taken as a risk-management component in terms of insurance business in the segment of «Green Economy».

There are five forces managing business competition that can be singled out in insurance business. A variety of interactions of competitive forces on different levels of economy enables to apply a stochastic approach in calculations. Compression of various initial data more fully considers details of risk types of insurance as well as likelihood of insurance cases, which is above all necessary for a successful competition, e.g. price competition [1, 2, 3].

In a general case, the calculation of insurance rates is related to the activity sphere of actuary mathematicians that are specialists in the area of insurance and financial mathematics and is also considered an independent scientific trend.

For mass risk types of insurance, average estimates give good results. Un profitableness of the insurance sum is often applied as a sufficient value in calculating tariff net-stakes. In practice, when calculating insurance rates it is also possible to apply complex mathematical models in terms of distribution laws in describing characteristics of stochastic variables. Thus, amounts of insurance payment of certain risks and portfolio on the whole, their occurrence frequency and others can be the values. For instance, to characterize distribution of the number of portfolio payments binominal distribution and the Poisson distribution are frequently applied. When estimating the amount of insurance payment such varieties of distribution as exponential, G-distribution and Pareto distribution are applied [4].

The analysis of practical techniques and theoretical investigations of the issues on optical business planning of insurance companies operating in the «Green Economy» segment has shown that it is possible to single out three the most important interrelated problems requiring simultaneous solutions. Firstly, it is imbalance in the level of planning and estimation values of insurance companies’ activities. Secondly, it is imbalance in the level of calculated rates of insurance statistics on which basis planning and estimation indicators are formed. Thirdly, it is a non-optimal value of investment and innovation activities performed in insurance companies in terms of «Green Economy» providing for the levels of calculated, planning and estimation rates.

In accordance with the determined problem, which solution substantially lessens a negative influence of the listed moments, it is suggested to make business planning in the following way. In insurance companies having a significant segment of «Green Economy» in their portfolios it is necessary, on the basis of really identified reserves, to provide measures of planning and estimation rates in terms of optimal calculated rates of insurance statistics at the necessary costing minimum to implement investment and innovation activities of «Green Economy».

For the determined goal to achieve, a positive result can be gained in terms of the real data processing in insurance companies due to the method of series connection of principal components, component regression, linear component programming and optimization models of investment costs on the initial factors-arguments of insurance statistics.

In order to solve the problem of cost minimization of investment and innovation activities it is necessary to know how primary calculated rates of insurance statistics influence final planning and estimation rates applied for characterizing the value of an insurance company. In the mentioned case we suggest applying a method of principal components which along with all listed methods enables to considerably increase the reliability of estimates as it has a number of advantages [5, 6].

The feasibility and expediency of using the suggested calculation apparatus are due to the characteristics of the principal components. These include absence of correlated connection among them; compactness of the information given; correctness and relative simplicity of economic interpretation of principal components; their subordination to the law of normal distribution. These properties enable to apply an apparatus of regression modeling. The application purpose of the given apparatus is gaining analytical dependencies of the insurance rate system forming gross premium not from initial factors-arguments but from the gained principal components, which provides the following advantages of principal component regression:

– an orthogonality component enables to gain independent regression coefficients with “correct” marks;

– compact information submission in principal components enables to considerably reduce the number of regression coefficients in contrast to the regression on initial factors-arguments of insurance statistics and to provide more in formativeness of the regression coefficients.

In a general case, for i-index forming gross premium along with the others, a regression component equation takes the following standard form:

    (1)

where Ai – an insurance statistics rate forming gross premium along with the others;

boi –an absolute term of a regression equation of i-insurance statistics rate;

bij – a regression coefficient at j-principal component;

Zj – j-principal component characterizing a conceptual whole of insurance statistics.

A component structure can be given in the following way:

  (2)

where Zjk – an index of j-component in k-observation point;

λj – an eigen-value of j-component;

Хек – a value of e-factor-argument in k-observation point;

Хе – a mean value of e-factor-argument;

δе – mean-square deviation of e-factor-argument;

еj – intensity used by the factor-argument to enter j-component.

Methods of expert analysis are applied to determine the structure of the indices. To determine indices which do not belong to one of the alternatives an apparatus of variance analysis is applied.

Upon processing initial information it is possible to obtain regression equation systems for indices forming gross premium. In this case, a gross premium calculation model chosen as a criterion index acts as an objective function of the optimization problem. In this respect, the levels of insurance statistics calculated rates obtained from the equations of principal components being parts of a criterion component equation become quantitative characteristics of the main investment areas in an insurance company and determine their priority.

Such approach to forming investment and innovation activities provides for achieving the given values of specific insurance statistics rates but not their increase in general.

Further, a criterion index optimization problem is solved. Level correlation and balance of other insurance statistics rates are provided by including them as constraints into the model of this problem having the following form:

       (3)

where ΔАо – increment of an optimal criterion index;

bj – a regression coefficient of j-principal component in the model of a criterion index;

di – a level of i-insurance statistics index; 

μj – a variation coefficient of j-principal component;

δj –a mean-square deviation of j-principal component.

Due to the developed competitive environment for an insurance company operating in the «Green Economy» segment a criterion index choice can variety.

A joint resolution of the given optimization problem enables to obtain optimal, in terms of the given constraints, values of principal components ׀Zj׀. It makes it possible to move to the next step of the calculation procedure. On this stage, correlation of insurance statistics calculated rates is made. The task lies in a joint solution of principal component linear connection equation systems and insurance statistics calculated rates. As an objective function in an optimization problem of calculated rate levels there perform additional investments which are necessary for increasing competitiveness of an insurance company operating in the «Green Economy» segment.

Such approach provides an insurance company’s orientation, in other equal terms, to implement investment and innovation activities performed in a resource-saving regime. A risk-manager of an insurance company assumes a key role to make management decisions based on the obtained marginal values.

A mathematical setting of such problem is formulated in the following way.

          (4)

where μе – a variation coefficient of e-factor-argument;

D – a value of additional investments for investment and innovation activity implementation in an insurance company operating in the «Green Economy» segment;

qje – an input coefficient of e-factor-argument into j-principal component;

ΔXe – increment of e-factor-argument value;

Се – cost coefficients per a unit of a corresponding factor-argument.

If ΔХе equals to zero, insurance business in the segment of «Green Economy» is set up on the initially achieved level and is not expanded. However, a set of investment and innovation activities must be directed for providing expanded reproduction in terms of competition, i.e. for supporting the growth of all insurance statistics rates by means of using a certain amount of financial, material, labor, informational and intellectual resources. In terms of the price-based competition it is necessary to make such amount of means providing, however, the rate of growth given in an insurance company’s business plan as little as possible.

On the final stage of the procedure of developing an insurance company’s innovation politics in the segment of «Green Economy» a purposeful selection of activities for reaching the calculated levels of insurance statistics rates is made. Though, it should be noted that an activity selection area tapers as far as considered stages are implemented. Thus, on the first stage an activity selection area was confined by the information which was in the criterion index equation forming gross premium with due regard for a possibility to implement innovation politics in the segment of «Green Economy». Insurance statistics calculated rates being components of a criterion index equation perform an activity selection function on this stage.

On the second stage more tapering in the selection area of investment and innovation activities of the «Green Economy» segment is achieved, however, not mainly in terms of detailing their qualitative content but by way of determining the possibility to develop a real volume of investments for an insurance company in order to provide reaching the levels of insurance statistics rates according to the model.

The given information is necessary for a final formation of the implement content and amount of each of the investment and innovation activities.

The main stages of the procedure of planning investment and innovation implement in insurance business of the «Green Economy» segment.

A suggested procedure is carried out in accordance with the scheme of transition from the correlated and balanced levels of insurance statistics planning, estimating and calculated rates to the purposeful development of investment and innovation activities. The procedure includes the following stages of its implementation:

– a choice and grounds of priority directions in a competition strategy of an insurance company in the «Green Economy» segment;

– correlation of a company’s insurance statistics planning, estimation and calculated rates in terms of constraints of financial, material, labor, informational and intellectual sources;

To develop the first stage of the procedure in regard to the determination of priority directions of innovation and investment activity implementation in an insurance company operating in the segment of «Green Economy» it is necessary to solve the following interrelated problems:

– to determine the content of planning and estimation rates of an insurance company;

– to justify the content  of insurance statistics calculated rates determining the level of planning and estimation rates and putting them into sense-groups;

– to determine a criterion planning and estimation rate based on the analysis of an insurance company’s competitive state;

– to determine priority directions in a competition strategy of an insurance company operating in the segment of «Green Economy».

Methods of an expert analysis including direct estimation of values according to the two-step measurement scale are applied to solve problems of the first stage. To determine a group of rates which do not belong to any of the alternatives an analysis of variety is applied. As a result, a group of planning and estimation rates characterizing principal activities of an insurance company operating in the «Green Economy» segment is determined. The total number of insurance statistics calculated rates makes a great deal more. They are divided into sense-groups according to the features of economic community, exogenous and endogenous regarding specific terms of an insurance company’s activity and further characterize principal components.

A choice as one of the criterion of planning and estimation rates is made on the basis of an economic analysis of an insurance company’s activity taking into account compulsory satisfying of the terms of its consistency with the system of other planning and estimation rates, which is fulfilled in the process of the further solution of the optimization problem. The solution of the last problem of the first stage being considered is made due to the apparatus of a component analysis and a correlation-regression analysis of principal components.

On the second stage of fulfilling a planning procedure in insurance business serving the segment of «Green Economy», the problem of one of the planning and estimation rates (criterion) is solved. Correlation and balance of the levels of other planning and estimation rates are achieved by means of including them as constraints of the model.

The solution results of this problem enable to obtain required and optimal, in terms of the given constraints, rates of the principal components ׀Zj׀ which makes it possible to turn to the next step of the second stage of the procedure – to the agreement of the calculated rates of insurance economy.

The problem is in a joint solution of linear connection equation systems of principal components and calculated rates of insurance statistics. Additional investments perform an objective function of optimization of the levels of calculated rates.

The problem of the third stage lies in a purposeful selection of investment and innovation activities for an insurance company operating in the segment of «Green Economy» in order to reach calculated levels of its activity rates.

REFERENCES

1. Porter M. Competitive Strategy: The method of analysis of sectors and competitors. – M.: АББ, 2001.

2. Porter M. E. Location, Competition, and Economic Development: Local Clusters in a Global Economy // Economic Development Quarterly 14.1. –  2000. – Р.15 – 34.

3. Porter M. E., Ketels C. H. M., Miller K. and Bryden R.T. Competitiveness in Rural U.S. Regions: Learning and Research Agenda. Institute for Strategy and Competitiveness, Harvard Business School, 2004 // http:// www.eda.gov/

4. The Theory and Practice of Insurance/ edited by K.E. Turbina. – M., 2001

5. Dubrov A.M. Processing of statistical data by the method of the main components. – M.: Statistics, 2003

6. Sudakov V. A technology of using techniques of a road-map development by growing points of a perspective economic development of the Republic of Kazakhstan based on a dynamic econometric model // The First National Scientific and Technological Foresight in the Republic of Kazakhstan: an international conference. - «National Innovation Fund» Ltd. Almaty, 2011.



Table of contents: The Kazakh-American Free University Academic Journal №7 - 2015

  
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