Licensing and regulation

Publish date 30 April 2018
Licensing and regulation image

Regulation (of insurance) is a process by which the behavior of insurers is monitored in order to verify their compliance with the laws, rules and directives that are officially established. Licensing is a procedure by which an organization receives (or retains) the opportunity to conduct insurance business, and hence to be subject to regulation as an insurer.

Each national presidency exercises zealous control over the licensing and regulation processes (even if certain powers are ceded to the international community, as in the EU). In some countries, such as the United States and Canada, state or provincial legislatures have great autonomy over the insurance business. In these cases, the state insurance commissions (or their equivalent bodies) are the immediate regulators.

The reason why national governments retain their powers over insurance, even when the insurance business and its corporate clients have embraced the idea of ​​globalization, is firstly that insurance absorbs a huge share of national investment potential and second, that huge political or economic potential can be applied. harm to a party if its citizens or companies take out insurance policies with a foreign insurer that is beyond the control of the regulatory body and fails to fulfill its obligations.

Therefore, each government is determined to reserve the right to have the final say on who can offer insurance products on the territory of its country, as well as to determine the intricacies of the regulatory system. Governments agree to accede to international agreements that set common standards for regulation and the conduct of regulators, both on a regional basis (eg in the EU) and globally, through the World Trade Organization, as long as they can keep to themselves. final control. The World Trade Organization works to ensure that all countries allow larger insurers from other countries to obtain an insurance license everywhere. In cases where a government feels that the vast resources and experience of American or European global insurers would compete unfairly with local insurers, it is not surprising that it resists giving all participants open access to the emerging insurance market. Tensions between insurers (and the governments they can influence) in various modern markets and in many markets that are officially recognized for future growth will be a major theme in the insurance world for at least the next two decades.

In these circumstances, regulatory arbitrage will continue to exist: insurers will decide in which state or country to locate the group's symbolic headquarters and how many subsidiaries (with which other shareholders participate) to maintain or build in areas where the parent company is not permitted to operate. direct business. The decisions that companies will make on these issues will depend on: the immediate conditions for obtaining a license; expectations about the likelihood that political systems are likely to change legislation and rules within the insurer's business planning period, as well as from forecasts for economic growth and disposable income in the countries concerned.

Due to this diversity, a narrow analysis of licensing procedures or regulatory systems of any country cannot be offered. Certain general principles are formulated here. However, it is important for any practicing insurer to study in depth the regulatory system of each country with which it plans to do business (or in which it has inherited business from a previous period).

International standards for the regulation of financial services (including insurance) are discussed both at intergovernmental level and at international meetings of regulators and insurance vendors (sometimes in separate meetings and sometimes by sharing their different views at seminars and conferences). . There is still no clear global set of regulatory standards or licensing criteria, there is a tangible move in this direction, and professional insurers need to keep up with the latest developments in this area.


In almost all legislation, licensing procedures include general conditions. These conditions apply both to new companies that start in the country or state concerned and to insurers that are already established in another state or country and that wish to obtain a license to conduct business in the territory concerned:

  • The company must have a sufficient base in terms of paid-in part of the subscribed capital. There are usually precise rules for the ratio of capital that can be raised from domestic and foreign sources and therefore what should be the share of paid-in capital as opposed to bonds or other promising documents;
  • According to most laws, companies have the right to start either only life insurance or non-life insurance business (despite the uncertainties as to whether health insurance or similar businesses - such as long-term health insurance, are life insurance or non-life insurance business). Companies existing under previous lato practices of "mixed" life and non-life insurance companies usually have to face objections to obtaining a license if they try to merge with other companies;
  • The company must show that it complies with all the requirements of the commercial law governing the activities of joint stock companies, as well as the specific legal requirements regarding the organization of an insurance company. It must show its willingness to comply with the regulatory regime if it obtains a license;
  • The company must comply with all rules of conduct relating to its activities, which can be established either on the basis of government decrees or by virtue of established business practices, which the government informally supports. This should definitely include a statement from managers that they will do their best to understand and mitigate the risks facing the business (while accepting that risk-taking is an inevitable companion to business);
  • Managers and the chief executive (or chief executive) must be the 'right and right people' to carry out these tasks. This means that they must not have a criminal record, unpaid debts, pending civil judgments and injunctions. They must demonstrate convincing evidence of honesty and integrity, general business competence and (at least in the case of the Chief Executive Officer) clear appropriate skills and / or experience for the designated post as chief operating officer of the insurance company;
  • In some legislations, life insurance companies must have a full-time actuary who has the power to approve or disapprove the adequacy of reserve arrangements and to ensure the company's financing. Less often, a similar condition applies to non-life insurance companies;
  • In almost all legislation, suitably qualified auditors must be appointed by the directors and approved by the relevant licensing authority. In this way, the means that are claimed to exist are checked.

The process of obtaining a license is usually complex and lengthy. This is done in order to allow civil servants and licensing ministers to obtain sufficiently detailed information to justify their decision and to prevent anyone wishing to set up an insurance or reinsurance business as a money laundering screen. or to defraud potential buyers of the policies it intends to offer. In some countries, there are opportunities for bribery during this process, as a result of which insurers who obtain licenses in this way are subject to special scrutiny if they apply for licenses in more effectively regulated territories.

Source: David E. Bland "Insurance: Principles and Practice"