Chapter 8: Regulation. Why Regulate Businesses? zMarket failure zPublic choice zCapture theory.

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Presentation transcript:

Chapter 8: Regulation

Why Regulate Businesses? zMarket failure zPublic choice zCapture theory

Why Regulate Insurance? zDestructive competition yRisk of underpricing yLax underwriting zPublic interest (information asymmetries) yFirms are not allowed to take “excessive” risks and go bankrupt yProduct, sales methods (Compare with securities industry/banking)

Insurance regulation - goals zFair prices and fair contracts zSolvency zMake insurance available at affordable prices

Some features of insurance regulation zState regulation yLegislative yJudicial yExecutive (Insurance Commissioners) zNAIC

Areas regulated zFormation and Licensing zAnnual and quarterly reports zInsolvency funds and early detection z Rate regulation z Financial regulation (Investments, Reserves) z Policy forms z Sales practices

Life Insurance Rate Regulation zRate regulation is indirect zLaws may specify mortality tables and interest rate assumptions for reserving zDisclosure requirement regarding standardized cost indexes and dividends

Property-Liability Rate Regulation zPrior approval zFile and use zUse and file zFlex rating (price range established) zOpen competition

Sales Practices Regulation zLicensing of agents zRebating zTwisting

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