o:36297 Investment activity of insurance companies en To effectively fulfil their primary function of providing economic protection against risks, insurance companies act as institutional investors that channel longterm funds into the economy. They transform a large number of small, periodic premium payments into substantial financial reserves. Due to the time lag between premium inflows and benefit outflows, the funds thus accumulated can be invested until claims fall due. Through this process, insurance companies contribute to the mobilisation of savings and the financing of public and private sector investment, supporting economic development. Their conservative investment approach, combined with the long-term nature of their liabilities, enables them to serve as stabilisers of financial markets, especially during periods of economic distress.405 Unlike most financial market participants, insurers, especially those engaged in life insurance, are less likely to engage in pro-cyclical behaviour, such as panic-selling during market downturns.406 Importantly, the funds managed by insurance companies ultimately belong to policyholders and must be invested in a way that ensures safety, liquidity, and the ability to meet future obligations as they come due. For this reason, the regulation of insurers’ investment activity is one of the most important pillars of insurance supervision. While investment regulation aims to ensure that insurers invest prudently and are able to meet their obligations to policyholders, regulatory approaches vary considerably. The Solvency II framework, implemented across the European Union, is based on the prudential principle, granting insurers greater flexibility in investment portfolio management while requiring robust internal risk assessment and capital adequacy. However, the effectiveness of this model is closely linked to the depth and liquidity of the financial market and the institutional maturity of both insurers and regulators. In contrast, countries with underdeveloped financial markets, such as Serbia, face structural limitations that constrain the practical applicability of the prudential approach. In such environments, regulators typically rely on quantitative limits as a substitute for market discipline and as a safeguard against excessive risk exposure. This raises an important question: to what extent can the regulatory philosophy behind Solvency II be realistically applied in countries with limited investment opportunities and narrow capital markets? The subject of this chapter is the investment activity of insurance companies, with a focus on the interaction between regulatory constraints and market conditions. The main objective is to analyse how different regulatory approaches — prudential and rule-based — shape the investment behaviour of insurers, and to what extent market underdevelopment, particularly in Serbia, imposes additional constraints beyond those prescribed by regulation. Key words: investment activity, insurance companies, investment risks, solvency II 91552100 170422281 1552100 978-86-403-1879-2 2025-06-11T08:49:56.137Z 44 no 46 Marija Koprivica Univerzitet u Beogradu Ekonomski fakultet 13834087 0000-0003-4239-2252 2025 46 Jelena Kočović Univerzitet u Beogradu Ekonomski fakultet 12438375 0000-0003-3219-4746 2025 46 Radmila Dragutinović Mitrović Univerzitet u Beogradu Ekonomski fakultet 12776807 0000-0003-2566-4666 2025 application/pdf 742428 https://phaidrabg.bg.ac.rs/o:36297 no yes 18 70 368 1556235 11A03 Innovations in insurance : from traditional to modern market 253 278 Belgrade University of Belgrade, Faculty of economics and business, Publishing centre 2025