Financial risks of "green economy"
Table of contents: The Kazakh-American Free University Academic Journal №7 - 2015
Sudakov Valeriy, D. Serikbayev East-Kazakhstan State Technical University, Kazakhstan
Madiyarova Elvira, D. Serikbayev East-Kazakhstan State Technical University, Kazakhstan
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.
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.
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.
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.
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.
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.
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
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.
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».
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”
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.
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
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
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».
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:
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;
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;
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).
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
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».
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].
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
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 .
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.
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».
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].
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:
orthogonality component enables to gain independent regression coefficients
with “correct” marks;
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.
general case, for i-index forming gross premium along with the others, a
regression component equation takes the following standard form:
where Ai – an insurance statistics rate forming gross premium along with
boi –an absolute term of a regression equation of i-insurance statistics
bij – a regression coefficient at j-principal component;
Zj – j-principal component characterizing a conceptual whole of
structure can be given in the following way:
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.
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.
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.
approach to forming investment and innovation activities provides for achieving
the given values of specific insurance statistics rates but not their increase
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:
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
δj –a mean-square deviation of j-principal
Due to the
developed competitive environment for an insurance company operating in the
«Green Economy» segment a criterion index choice can variety.
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
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.
mathematical setting of such problem is formulated in the following way.
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
qje – an input coefficient of e-factor-argument into
ΔXe – increment of e-factor-argument
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.
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.
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
information is necessary for a final formation of the implement content and
amount of each of the investment and innovation activities.
stages of the procedure of planning investment and innovation implement in
insurance business of the «Green Economy» segment.
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;
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:
determine the content of planning and estimation rates of an insurance company;
justify the content of insurance statistics calculated rates determining
the level of planning and estimation rates and putting them into sense-groups;
determine a criterion planning and estimation rate based on the analysis of an
insurance company’s competitive state;
determine priority directions in a competition strategy of an insurance company
operating in the segment of «Green Economy».
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.
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.
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.
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
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.
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Table of contents: The Kazakh-American Free University Academic Journal №7 - 2015