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The supportive role of investment funds and
insurance companies to entrepreneurship and
innovations
Jelena Ćirić 1, Vladimir Njegomir 2
1 Faculty of Technical Sciences, Novi Sad, Serbia, jciric@uns.ac.rs
2 Faculty of Law and Business Studies, Novi Sad, Serbia, njega@eunet.rs
Abstract:
Entrepreneurship and innovations are capital intensive activities and they usually
cause above average exposures to risks. Financial systems of developed economies
facilitate financial savings transfers to most profitable investments, among which
special place belongs to entrepreneurship and innovation. Previous experience in
Serbia and other countries in the region had demonstrated primarily orientation to
foreign financial sources, either through donations, foreign direct investments or
foreign banks’ loans. However, without mobilisation of domicile financial savings it is
impossible to achieve long-term and sustainable ability for realisation of
entrepreneurship and innovation ideas and thus economic development. This paper
analyses the role of institutional investors, investment funds and insurance
companies, as sources of long-term financial resources of entrepreneurship and
innovations.
Keywords:
entrepreneurship, investment funds, insurance companies
1. Introduction
Institutional investors are financial institutions that institutionally invest collected capital and at the
same time join the individual risks of small investors. This helps ensure a better balance between risk
and return than is generally available through direct investments of individual investors. Institutional
investors have a number of common characteristics, but that does not mean that they are
homogeneous. The subject of this paper is the role of institutional investors – insurance companies
and investment funds as a financial support to entrepreneurship and companies. The aim of this paper
is to explore and point out the role and importance of institutional investors as long-term financial
sources on the less developed financial markets of Serbia and other former Yugoslav republics. The
expected outcome of this paper is to present and clarify reasons and advantages of including
institutional investors in financial supporting on micro level – to the entrepreneurs and companies.
2. Тhe role of insurance companies
2.1 Insurance as a form of risk protection
The key role of insurance in the economy is the protection from risk. Insurance realize this role by the
associating risks, ie. by associating economic subjects exposed to the same type of risk.
Compensation and risk joining encourage entrepreneurial activities and increase credit supply given
that it enables compensation claims and risk management that otherwise might not be diversified.
Especially are considered non-life commercial insurers such as property insurance against fire, flood,
machinery breakdown, various types of liability or downtime. The link between economic activity and
insurance has existed since the early days of industrialization. A typical example is the United
Kingdom, a country where the insurance had a very important role in stimulating economic activity,
development of innovation and economic development. For example, in the period between the years
1790 and 1862 the rate of industrial growth and rate of growth of demand for providing insurance
cover for assets and production capacity were almost equal.
From the perspective of individual entrepreneurs, insurance implies periodic payment of a relatively
small amounts of insurance premiums in exchange for providing coverage from the uncertain but
potentially significant damages that may occur if insured cases are realized. The most important
contribution that insurance coverage has for entrepreneurs in the field of risk management, which is a
fundamental aspect of all entrepreneurial activity, is enabling entrepreneurs to take greater risk than
they would be able without insurance. Entrepreneurs often make the effort, to reduce the risks to a
minimum. It could mean giving up lucrative opportunities, or cancel the entrepreneurial and innovative
activities. For example, a local manufacturer could give up export-oriented enterprise without the
existence of transport insurance, due to concerns that its goods could be completely lost. Empirical
studies indicate that insurance has a strategic importance for the companies. For example, Seog [2]
considers the case when buying insurance affects the strategic behavior of companies and individuals
in product markets. The same author discusses the hypothesis that companies buy insurance
coverage in order to improve competitiveness [3]. It is proven that a higher level of commercial
insurance makes companies more aggressive. Therefore, insurance as a key form of risk
management, affects encouraging entrepreneurial activity.
2.2 Insurance as a financial source for financing entrepreneurship and
innovations
From a financial point insurance is a creating of cash reserves in the form of insurance funds.
Financial assets accumulated in insurance companies get the characteristics of a specific capital,
depending on the type of insurance. On the other hand, life insurance is the most advanced form of
savings, it is a long-term savings. Therefore, the insurance industry is an important source of funds for
capital investment and accumulation, and thus represent a significant opportunity, particularly in
developing countries, for financing real continuity and expansion of social reproduction. Interest of
every society is that funds raised in the reserves of insurance companies become larger.
Premiums are collected in advance and reserves that are not required for compensation of current
losses and costs can be invested to companies. Insurance companies as institutional investors invest
these reserves in government and municipal bonds as well as in corporate stocks and bonds, which
supports the construction of shopping centers, hospitals, schools, factories, apartments, and new
machinery and equipment. Investments increased stocks of capital goods, and promote economic
development, which indirectly contribute to employment. In addition, the total supply of funds available
for loans is increasing due to insurance premiums paid in advance, so that the cost of capital in the
form of interest rate becomes less for the economy than it would be without insurance industry. Also
by mobilization of financial savings insurance and reinsurance companies improve the efficiency of the
financial system in three ways [4]: a) help to reduce transaction costs by connecting lenders and
borrowers of financial savings, b) create liquidity - the insured have immediate access to financial
sources based on compensation and savings and users of insurance funds have possibility to return
borrowed funds in the more future periods and c) provide economies of scale in investment because
they mobilized huge resources from the accumulation of small amounts of individual insurance
premiums, which provides support for large investment projects and promote economic efficiency.
According to European Association of insurance and reinsurance companies total investments of
European insurers to the economy in year 2005 amounted to EUR 6371 billion, while investments of
the insurance industry in year 2004 were on average 53% of GDP (gross domestic product) of
European countries [5]. Total investments of insurers in Europe were reduced from EUR 7,200 billion
in year 2007 to EUR 6500 billion in year 2008 due to financial crisis, but in year 2009 they increased
by 8% and amounted EUR 6800 billion [6].
2.3 Insurance sector in the former Yugoslav republics
Economic growth together with liberalisation, privatisation, and the increased presence of foreign
companies that brought substantial financial strength, new products, and advanced risk and asset
liability management practices, have had the strongest impact on the development of regional
insurance industries. Although the role of insurance activities is still relatively modest in all countries of
the region with the exception of Slovenia, there is strong growth potential especially for life insurance.
In general life insurance is less developed compared to non-life insurance, and accounts for a
relatively modest share of the countries’ insurance market in terms of gross written premiums.
Table 1: Comparative review of the key indicators of the insurance sector in Serbia, countries of the
region and the EU
Number of
insurance
companies
Total
insurance
premium
(in 000
EUR)
Life
insurance
premiums
(in % of
total
premiums)
Insurance
density
(premium/p.c.
in EUR)
Insurance
penetration
(premium
share in
GDP)
Serbia
2008 20 588994 12.16% 78.55 1.87%
Change
compared
to 2007
(in %) 110.00% 104.22% 114.88% 104.22% 100.00%
European Union
2008 4783 1001812000 61.04% 1805 8.01%
Change
compared
to 2007
(in %) 100.89% 88.88% 83.19% 79.48% 87.82%
Slovenia
2008 21 2018960 31.83% 1027.96 5.44%
Change
compared
to 2007
(in %) 110.53% 106.60% 105.48% 106.60% 99.09%
Croatia
2008 27 1388767 26.30% 312.96 2.98%
Change
compared
to 2007
(in %) 117.39% 112.22% 104.15% 112.22% 103.11%
Bosnia and
Herzegovina
2008 26 231663 14.55% 60.96 1.85%
Change
compared
to 2007
(in %) 100.00% 112.65% 120.98% 112.65% 99.46%
Macedonia
2008 12 104565 4.15% 51.70 1.61%
Change
compared
to 2007
(in %) 100.00% 104.76% 155.76% 104.76% 93.60%
Source: calcualtions by the authors, Insurance Supervision Agency, CEA Statistics, Croatian Financial
Services Supervisory Agency, National Bank of Serbia, Insurance Agency of Bosnia and Herzegovina,
National Bureau for insurance of Macedonia
On the base of these comparative data it is obvious that the insurance market of Serbia is
underdeveloped. This is indicated primarily by the fact that the share of life insurance in the total
insurance premiums is only 14.88% while the average in the European Union is over 83%. Also, the
two most developed markets in the region of former Yugoslavia, measured by the size of insurance
premiums, the share of life insurance in the total premium amounted to 31.83% in Slovenia and
26.30% in Croatia. Measured by the size of the total insurance premiums and insurance premiums per
capita, the serbian insurance market is in front of the insurance market in Bosnia and Herzegovina and
the insurance market in Macedonia. Therefore, it is evident that there is the lag of the insurance
markets in the region in comparison to the insurance market of the European Union. Although
Slovenia is the only country from the former Yugoslavia as EU member (since the year 2004), their
insurance market also marked results under the average of European Union.
3. Тhe role of investment funds
3.1. Investment funds on the European and world financial market
Investment funds, usually in a form of mutual funds, are financial intermediates that collect the savings
of individual investors and raised funds invest on the financial market. According to the Gitman and
Joehnk [7] when investors buy shares in a mutual fund, they become part owners of a widely
diversified portfolio of securities. Mutual funds are the most appropriate form of capital mobilization.
They appeared much later than the banks, but as financial institutions they contribute significantly to
the deepening of capital market and its development. Investment funds are also useful in terms of a
whole society because they represent an attractive mechanism to attract capital of small individual
investors, putting it at the disposal of businesses. Otherwise, individual owners of capital would be
rather chose consumption than savings, or would deposit funds in bank accounts, with much lower
returns. Investment funds offer a rational way for small investors to involve and increase the rate of
savings in a national economy.
Data of the European Funds Assets Management Association – EFAMA [8] for year 2009 show that
the European investment funds industry comes to recovery. There has been marked positive growth in
net assets value (NAV) and net sales of funds, in accordance with the equity market recovery,
recovery of capital markets and restore of investor confidence. Across Europe net assets of
investment funds increased by 15.6% and from EUR 6 to 7 billion in year 2009. When we look at
investment funds worldwide, at the end of the third quarter of year 2009 has marked an increase in
their net assets value for 10% to the amount of US$ 22.38 trillion, or US$ 23.0 trillion at year-end 2009
[9].
Table 2: Worldwide mutual funds net assets in EUR billions, June 2010
Region June 2010
(in bn EUR)
USA (mutual funds) 9.150
Europe (UCITS and non UCITS) 7.492
Asia and Pacific 2.242
America (excl. USA) 1.640
World 20.623
Source: Investment Company Institute www.ici.org
According to the newest published data from june 2010, data on worldwide fund assets in EUR billions
can be noted that the sector's investment funds in the European financial market by net assets value
of the funds coming close to the U.S. financial markets as the most developed in terms of fund
numbers, net asset value, net inflows and others indicators of funds performances. Net assets value of
investment funds in the financial markets of USA represents approximately 45%, while assets in
European funds (UCITS and non-UCITS) represents about 36% of total worldwide fund’s net assets
value. Regarding that total net assets value of investment funds represents half of gross domestic
product (GDP) of the European Union, it is clear that investment funds have an important role in the
European economy and European financial market. Investment companies manage by long-term
savings, invest in the European financial market, buy shares and provide short-term financial sources
for European companies and employ many workers.
Statistical data collected from 45 countries around the world shows that the total number of investment
funds is about 66,000, while approximately 26,000 funds (or 38% of fund net assets) is invested in
shares [9]. These data support the fact that it is very important to the company to raise needed capital
for finance its business and encourage innovation through issuing securities, especially shares. More
than 1/3 of all investment funds in the world invest in shares. Therefore, companies need to attract the
attention of potential investors, by issuing shares that will be publicly traded on the stock exchange.
Transparent and successful business is the best way to attract capital owners, who are interested to
invest in a company, idea or project. By issuing securities and initial public offer (IPO) companies are
becoming visible to the capital owners who could financially support companies’ development. It is
important to notice that emerging markets experienced significantly larger gains in stock prices than
occurred in the United States and other developed countries.
3.2 Investment funds in Serbia and former Yugoslav republics
Investment funds sector is the most developed in Croatia and Slovenia, where funds first appeared 15
years ago, after the realisation of mass voucher privatization process (MVP). In Croatia are dominated
money market funds and in Slovenia equity funds that primarily invest in shares of foreign issuers.
Investment funds in Montenegro, Macedonia and the Republic of Srpska appeared later and their
numbers in the financial market was drastically lower, with the lower transparency and weaker
performances. It can be seen in the table below.
Table 3: Investment funds in former Yugoslav
Country Number of investment
funds
Net Assets Value
(in €)
Croatia 128 open-end
4 close-end
4 real estate
2 billions
Slovenia 130 open-end 1,98 billions
Montenegro 7 mutual n.a
Macedonia 9 open-end
13 private
n.a
Serbia 15 open-end
3 private
2 close-end
8,7 millions
Republic of Srpska 3 open-end
14 close-end
67 millions
Source: Securities Commission Republic of Serbia, Securities Commission of FYR of Macedonia,
Croatian Financial Services Supervisory Agency , Securities Commission of Republic of Srpska ,
Securities Market Agency of Slovenia, Securities Commission of Republic of Montenegro
n.a – not available
The first investment funds have emerged in Serbia in early 2007 and after the initial successful
performances, they were affected drastically by the global financial crisis. The effects of the crisis had
extremely negative impact on the shallow and volatile financial markets not only in Serbia, but in all
countries of our region. It happened a decline in demand and prices of securities on the stock
exchange, which is consequently reflected in the decline in value of investment units of all funds and
negative returns over a long period of time. Today is the same situation where the value of investment
units is lower than their value at the fund establishment. The total net assets value of the funds in
Serbia in February 2011 is RSD 920 million or about EUR 9 million[10].
4. Importance of institutional investors as financial sources on
micro level
The need for more intensive presence and successful performances of institutional investors in the
Serbian financial market, can be observed in the context of the economic environment and business
conditions for enterprises and entrepreneurs. In the last decade after democratic reforms in Serbia,
total external debt is constantly growing, and the end of 2010 the amount reached as high as EUR
23.1 billion [11] and has a share in the gross domestic product (GDP) of 77.1%. It is slightly below the
high indebtedness according to the standards of International Monetary Fund (IMF) and the country is
highly indebted when external debt exceeds 80% of GDP).
Sector September 2006
(EUR billions)
September 2008
(EUR billions)
September 2010
(EUR billions)
Public sector borrowing 7 6,3 8,36
Private sector borrowing
7,6 14,3 15,2
3,5 banks
10,7 enterprises
4,8 banks
10,4 enterprises
Total external debt 14,6 20,5 23,5
Source: National Bank of Serbia http://www.nbs.rs/export/internet/cirilica/80/index.html
From the table it can be seen that in all observed years more than half of total external debt is private
sector borrowing, particulary medium- and long-term borrowing of enterprises. Often it is the purchase
of plant and equipment from foreign producers or sellers financed through the credit lines of foreign
banks. Based on the amount of short-term private sector borrowing, it can be concluded that the
enterprises usually borrow short-term from domestic banks in order to maintain liquidity. The total
amount of loans granted by banks to entrepreneurs is about EUR 1.5 million.
Privatization in Serbia began over a decade, but has not yet been fully completed. The problem
becomes more pronounced as the privatization process is nearing completion and inflows are
reduced, while simultaneously the level of foreign direct investment per year decline.
Table 5: Foreign Direct Investment (nett) in Serbia, in US$ millions, 2000 – 2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
50,0 165,0 475,0
1.365,
0 966,0
1.550,
0
4.264,
0
2.523,
2
2.716,
9
1.864,
8
1364,1
Source: European Bank for Research and Development (EBRD) - Transition Report
From the above table can be seen that the level of FDI since the beginning of democratic change in
Serbia in year 2001 were continuously increasing until the year 2006 (with the exception of year 2004)
but then begins to decline.
After the reform of the banking sector, most banks in Serbia are become members of foreign banking
groups, but were established as domestic legal entities and the large financial sources that place to
businesses and citizens of Serbia banks supply on the international financial market. It speaks of the
great dependence of domestic banks and their placement on internatinal financial sources. Higher
country risk in Serbia in comparison to economically developed countries increase interest rates as
the price of borrowed capital. One of the reasons for the higer price of borrowed capital is tight
monetary policy of central bank that is trying to keep inflation and credit expansion under control, by
increasing the effective interest rate, required reserves and other financial instruments. It should also
be added a high bank margins that all causes high price of borrowed capital and a great burden for
enterprises and entrepreneurs. With the strengthening of competition among banks and the more
significant role of institutional investors (investment, pension and insurance funds) on Serbia's
financial market can be expected a reduction in price of borrowing. Average weighted interest rate on
bank loans (September, 2010) amounted to 12% [11]. The global financial crisis has contributed to
increasing the number of problematic loans in the banks’ portfolio, which together with the constant
depreciation of the domestic currency makes difficult paying out the loans by enterprises and citizens.
It forced all market players to take a very conservative credit policies, making it difficult for enterprises
to access to financial sources needed for financing their business and development.
Global financial market is gradually recovering, but the Serbian financial market is still shallow and
underdeveloped, and reflects the problems in the real sector of the economy. Companies in Serbia are
hesitant and do not have sufficient information regarding the implementation of the Initial Public Offer –
IPO, although this may be the cheapest and very effective method of financing enterprises’
development. IPO represents issuing and the first public trade of shares on the primary market. In this
way, the company offers its shares to a wide range of potential investors and acquired capital
necessary for financing its development. If the Serbian companies more often decided for an IPO, the
number of investors would be increased and large institutional investors such as investment funds and
insurance companies would be more interested to invest capital to the enterprises whose securities
are on the stock exchange. As a consequence of the lack of qualitative securities on the stock
exchange and the underdevelopment of financial market in Serbia, there is only one stock exchange -
Belgrade Stock Exchange (BSE), whith the only five share issuers on the prime market [12] and 3
share issuers on the standard market. Most of the other about 1600 companies are on the unregulated
market and its shares are not publicly traded.
We should also bear in mind the fact that savings in foreign currency as deposits in commercial banks
in late 2010 amounted to around EUR 7 billion [11] and it is estimated that there is aditional EUR 1
billion savings that it is not mobilized by banks or institutional investors. In such circumstances it is
very important that mutual funds and insurance companies mobilize small amounts of individual
owners’ capital and form capital funds that will be invested in stocks and corporate bonds, municipal
bonds and other securities of different issuers. This increases the efficiency of using capital as a
limited resource and promote its rational allocation in the national economy, but also provides
significant financial support at the micro level. Without strengthening the capital market and the greater
presence of institutional investors can not be immobilized capital of domestic and foreign owners
required for financing the real sector of economy and providing financial support to the development
of entrepreneurship and innovations. We should also bear in mind that because of above-mentioned
country risk and high dependence of international financial market, there is a high price of capital
borrowing capital needed by companies and entrepreneurs for financing business. By including
institutional investors as long-term financial sources, it is encouraged development of capital markets
and increases the supply of capital, facilitates the access to the capital in the real economy and
consequently reduces the price of capital borrowing. It is therefore important that companies through
their transparent and successfully business attract institutional investors to invest capital in home
issuers securities.
In the markets of Serbia, Macedonia and Montenegro for several years has operated an investment
fund SEAF South Balkan Fund BV Fund [13] , as a part of the global investment company SEAF -
Small Enterprise Assistance Fund. This fund invests in companies that have excellent growth and
development potential, to them can be added value in different ways and they needed additional
capital to achieve faster growth rate. SEAF Fund provides capital and operational support to
companies that can not access traditional sources of capital, and operate in markets that are still
developing. SEAF provides access to alternative sources of capital, linking the selected companies
with reputable strategic partners and investors on a global level, the active management support in
improving finance, strategic and operational management. Although by investing in selected
companies SEAF becomes co-owner, the advantage for the enterprise is that there is not high
borrowing costs (as by the traditional bank loans). Financial resources for financing development of
private companies could be in the amount of EUR 300,000 to EUR 2,000,000. SEAF invests primarily
in medium-sized private companies, but also start-up company if the owner has relevant experience
and is willing to share financial risk with SEAF. It is important that private companies are majority
owned by domestic owners (min. 51%), that the management team is experienced and has a clear
vision of the future development of the company and a strong ambition to achieve rapid growth of the
company. Regarding that after several years fund sells its shares in the company and withdraw from
the ownership structure, achieving higher rates of return, in accordance with the taken risk, it’s needed
to exist a clear vision of exiting the investment through the sale of shares in the capital to the existing
owner , management, financial or strategically partner, or through IPO. More of these funds on the
underdeveloped financial markets could be very useful for many small or newly established
enterprises with solid development potential, a unique product or service, and the deficit of capital,
management experience and contacts for easier emerging on foreign markets.
5. Conclusions
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REFERENCES
[1] Final Report, produced for review by the United States Agency for International Development,
prepared by Chemonics International Inc.and the International Insurance Foundation.
[2] Seog, S.H.: “The Strategic Role of Insurance: The Warranty Case“, Journal of Insurance Issues,
Vol.29, No.1, 2006, p. 33-50.
[3] Seog, S.H.: “Strategic Demand for Insurance“, The Journal of Risk and Insurance, Vol. 73, No. 2,
2006, p. 279-295
[4] Policy Issues in Insurance No. 3: Insurance Regulation, Liberalisation and Financial Convergence,
OECD, Paris, 2001, p. 80
[5] European Insurance in Figures, Comité Européen des Assurances, Brussels, 2006, p. 18-20
[6] European Insurance in Figures, Comité Européen des Assurances, Brussels, 2010, p. 25
[7] Gitman, L.J., Joehnk, M.D., Fundamentals of investing, Pearson Education, Boston, 2003, p.541.
8] European Fund Assets Management Association – EFAMA www.efama.org
[9] [Investment Company Insitute www.ici.org
[10] http://www.kamatica.com/investicioni-fondovi
[11] National Bank of Serbia www.nbs.rs
[12] Belgrade Stock Exchange www.belex.rs
[13] SEAF South Balkan Fund B.V. fund www.seaf.co.rs
