Instruments for regulating insurance activities...

Insurance regulation instruments

The most common tools used by regulatory structures, depending on the goals set, are summarized in Table. 3.1.

Table 3.1

Insurance regulation instruments

Goal

Tools

Maintaining the solvency of insurance companies

• requirement for a minimum level of equity;

• rules for profit distribution and creation of reserve funds;

• requirement for the competence of the company's management;

• requirement for the reputation of the owner;

• separation of life insurance and other insurance than life insurance (general);

• rules for the formation of technical and mathematical reserves;

• Definition of allowable assets of insurance companies and rules for their assessment;

• rules for investing insurance reserves;

• rules for matching assets to liabilities;

• requirement for financial reporting;

• audits of the financial condition of the company;

• regulation of relations with reinsurers;

• Limiting the maximum amount of self-deduction;

• Early warning systems;

• setting solvency margin;

• Tariff limitation from below

Ensuring fairness and availability of the product

• Tariff limitation from above;

• the requirement to publish information;

• regulation of the content and form of insurance contracts;

• restriction of types of insurance;

• Cost limitation;

• restriction of advertising activity;

• government subsidies;

• compulsory maintenance requirement;

• introduction of compulsory types of insurance;

• regulation of market behavior

Market Stability

• collection, processing and publication of information on the development of the insurance market;

• encourage the creation of professional associations of insurers;

• Development of self-regulatory mechanisms;

• creation of national guarantee funds

Support for national insurance companies

• the process and rules for licensing insurance companies;

• rules for the participation of foreign capital;

• rules for the operation of companies with foreign capital participation;

• regulation of competition policy;

• regulation of distribution channels (including the activities of insurance intermediaries)

Promoting the development of the economy

• principles of taxation;

• rules for investing insurance reserves;

• forms of organization of insurance companies;

• participation of insurance companies in providing social protection

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The fundamental goal of state regulation is to control and maintain solvency. Methods and instruments for regulating solvency in a combination are used in virtually all insurance markets in the world.

Some solvency requirements are made at the stage of creating an insurance company. Since the main guarantee of the reliability of the insurer in the event of an unfavorable trend of unprofitableness is the availability of equity, it is usually established its minimum size necessary to obtain a license. The amount of the minimum authorized capital varies by country, depending on the class of insurance. In addition, at the licensing stage there may be requirements to the reputation and competence of management and the reputation of the owner of the company being created. Usually, in conditions of developed insurance markets, a company can not simultaneously carry out life and insurance operations other than life insurance.

Thus, at the stage of creating an insurance organization, the supervisory authorities establish requirements for the following characteristics:

• the minimum amount of equity;

• the reputation and competence of management;

• Reputation of the owner;

• Simultaneous conduct of life insurance operations, or for insurance other than life insurance.

As a measure of operative maintenance of solvency and financial stability of the insurance organization (see Table 3.1), in many cases rules for the formation of insurance reserves are established, which ensure compliance with actuarial principles; investment rules ensuring reliability, profitability, liquidity and diversification of investments; rules for matching assets to the company's obligations. Measures that limit the size of the accepted risk are used, the limit of own deduction is established, and relations with reinsurers are regulated. The insurer may be obliged to send part of the profits received in favorable periods for the creation of reserve funds, which can be used if actual losses exceed expected, although often the maximum amount of such allocations is limited to the regulator.

In order for regulators to have an actual opportunity to control and take action at the first signs of reducing the reliability of the insurer, the supervisory authorities introduce requirements for the composition and procedure for the presentation of financial statements. The financial report may be accompanied by the conclusion of an independent auditor; additional verification of the reliability of the information provided can be carried out selectively by the employees of the supervisory authorities.

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As the main indicator of the solvency of insurance companies, the rules of the ratio of assets and liabilities are used, which includes the calculation of the solvency margin and the minimum amount of the own funds of the insurance organization. In addition to the solvency margin, other financial indicators can be calculated. In the calculation of indicators, types of assets suitable for ensuring solvency may be limited and rules for their assessment shall be established.

On the basis of the information received from the company, possible weaknesses of the insurer are identified, which can be timely eliminated. This is how the early warning system works.

Thus, operative maintenance of solvency and financial stability, as a rule, is provided:

• rules for the formation of insurance reserves;

• investment rules;

• rules for the compliance of assets with obligations;

• Limiting the size of the accepted risk;

• setting a limit for own deduction;

• regulation of relations with reinsurers;

• the creation of reserve funds;

• requirements for the composition and procedure for the presentation of financial statements;

• the conclusion of an independent auditor on the financial report;

• additional selective inspections by the supervisory authorities of the reliability of the information provided;

• restriction of tariffs from below.

Of particular importance in the system of instruments of state regulation of solvency, as well as the fairness and accessibility of insurance of a number of countries is attached to the tariff policy. In the event of increased competition, companies seek to attract customers through a low price, which does not allow the formation of adequate reserves, which can lead to insolvency and bankruptcy. To prevent such situations, tariffs applied by insurance companies may be limited to below.

However, insurers can set prices above the competitive level, using the ignorance of the consumer. In this case, there is a need to limit tariffs from the top.

We can distinguish three types of regulation of insurance rates.

The first type provides for mandatory approval of insurance rates by the supervisory authority before their use, in extreme cases it may be mandatory setting of tariffs or some corridor of their fluctuations. The second type assumes that the company can establish and apply tariffs at its discretion in accordance with existing rules, but it must also report on the changes made to the regulatory structures. Finally, with the use of the third type of regulation, the issue of determining the level of the tariff is completely under the responsibility of the insurer.

Regulation of insurance rates is carried out in the throes of the following ways:

• preliminary approval of insurance tariffs developed by the insurer;

• a posteriori approval by insurance supervision of tariffs developed by the insurer;

• an independent determination of tariffs by the insurer.

Another way to limit prices is to set the maximum share of costs and commissions in the premium paid by policyholders. Instruments that control the share of commissions and costs serve the second objective of regulating insurance activities - ensuring fairness and availability of the product.

Price regulation can be carried out:

• control over the establishment of tariffs;

• setting the upper limit of prices;

• the establishment of a maximum share of costs in premiums paid by policyholders;

• setting the maximum share of commissions in the premium paid by policyholders.

In order to overcome the existing asymmetry of information in favor of insurance services producers, and therefore, the achievement of social justice at the level of the insurance organization, the regulators control the following:

• mandatory provision of insurers with certain information, including financial information,

• Protection of consumers from inaccurate information on the basis of limitation and regulation of advertising activities of insurers;

• the introduction of uniform forms of contracts and a limited number of types of insurance.

To ensure equal access to insurance for various social groups, the following regulatory tasks are performed:

• Direct subsidization by the state of the least well-off strata of the population in need of insurance coverage;

• the introduction of mandatory types of insurance as a basis for more stringent regulation leading to lower prices and to expand the range of policyholders;

• in a number of cases, a mandatory requirement to extend or renew the health insurance agreement;

• the establishment of various tariffs for residents of urban and suburban areas.

Often, the oversight bodies act as a committee for the protection of consumers' rights, accepting and resolving complaints and claims of clients to insurance companies and thus regulating the market behavior of insurers.

The objectives of regulating the achievement of the goal of social justice are:

• In subsidizing the poorest layers of the population;

• introduction of compulsory types of insurance;

• Mandatory preferential treatment of unsecured social groups;

• the analysis of claims of policyholders.

Maintaining market stability is facilitated by the possibility of timely detection and forecasting of fluctuations in various indicators of market functioning. This is achieved through statistical studies based on the database of individual insurance companies and the insurance market as a whole collected by the supervisory authorities.

Practice questions

In some countries, the professional associations of insurers and the self-regulatory mechanisms used by them play a significant role in creating a reputation and maintaining the stability of the insurance market. Since confidence in the entire market can be undermined by the bankruptcy of one company, it is envisaged to create guarantee funds used to ensure the obligations of insolvent insurers, as well as transfer of the bankrupt portfolio to other market participants.

Maintaining market stability is achieved through: identifying and forecasting the development of the insurance market, state support for the professional association of insurers and market self-regulation mechanisms, creating guarantee funds used to secure insolvent insurer's liabilities, transferring the bankrupt portfolio to other market participants.

Support to national insurance companies and limiting the work of foreign insurers is typical for countries with unsettled insurance markets. Such a policy can be expressed either directly: through restrictions in the process of licensing and selling existing companies to foreign investors or defining specific working conditions, and indirectly: through restricting access to distribution and marketing channels. State policy can also determine the number and volume of operations of insurance companies and the possibility of granting a monopoly on the conduct of certain (most compulsory) types of insurance to authorized national insurance companies.

The possibilities for regulating insurance activities for the purpose of economic development are practically unlimited. Among the most obvious are the principles of taxation, investment rules and the participation of insurers in providing social protection to the population. The use of tax benefits is characteristic of pension insurance: the economic result is an increase in the saving rate and the expansion of sources of long-term investment. Investment rules allow financing priority sectors, from the point of view of the government, for the economy. Finally, the participation of insurance companies in the provision of social protection reduces the burden on the state budget and stimulates the personal interest of citizens.

The combination of mechanisms used by regulating structures in different countries is determined by the objectives of regulation, which, in turn, are formed on the basis of general political beliefs of the most active participants in the regulatory process and the chosen model of state impact on the financial, including insurance, market.

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