The assessment of the effectiveness of credit risk insurance in ensuring the stability of the banking sector

Abstract

The research focuses on the critical role of insurance mechanisms as a fundamental tool for strengthening the financial stability of banking institutions, particularly within the volatile segment of consumer lending. In the context of modern macroeconomic instability and the unprecedented challenges posed by the military conflict in Ukraine, the efficiency of credit risk management has become a decisive factor for the survival and growth of the financial sector. The main topic of the article encompasses a comprehensive evaluation of how insurance can redistribute risks among financial market participants, thereby minimizing potential losses for banks and ensuring a more resilient capital structure. The core problem addressed in the study is the high level of credit risk inherent in consumer lending, which is heavily influenced by social, behavioral, and external economic factors such as inflation and fluctuating employment rates. Despite its importance, the Ukrainian credit risk insurance market remains underdeveloped and characterized by extreme volatility. The authors highlight that most existing insurance products are indirect, covering the life or health of the borrower rather than the credit default risk itself. Furthermore, significant barriers such as high insurance tariffs, a lack of transparency in reporting, and low public trust in insurance companies continue to hinder the integration of effective risk-mitigation strategies. The primary purpose of the article is to substantiate the necessity of insurance in minimizing financial risks, analyze the current state of the Ukrainian insurance market, and explore the transformative potential of innovative technologies. The authors aim to identify ways to optimize bank reserves and enhance risk management through the adoption of digital solutions. The generalized results of the study reveal a significant instability in the domestic insurance market, exemplified by an anomalous loss ratio of 632.2% in 2023 due to war-related defaults. A key contribution of the research is the conceptualization of the «AI-policy» – an adaptive insurance model based on machine learning. Unlike traditional static assessment, this model allows for real-time monitoring of a borrower’s financial health. Through quantitative analysis using PrivatBank as a case study, the authors demonstrate that implementing AI-driven risk assessment could potentially release over 1.18 billion UAH in bank reserves by improving the quality of the loan portfolio. The findings conclude that the future of banking stability lies in the synergy of comprehensive insurance products and advanced digital technologies, aligned with European regulatory standards such as the EU Artificial Intelligence Act.