Regulation and control

Publish date 02 May 2018
Regulation and control image

Regulation and control of insurers (once licensed) can be done directly by the licensing ministry or by a government-designated agency (such as the UK Financial Services Authority, which currently regulates life insurers and Lloyd's, without other insurers general insurance), or by a selected special agent (as in most US states). Although the regulatory body is appointed or elected, this board or individual can only act within the laws established by the legislature for the territory concerned. In some cases, the laws themselves set out all the details related to the regulation of insurance, while most laws set out general principles and guidelines, according to which the regulatory body (Board, Council or Special Representative) develops detailed rules and issues directives for their lawful application.

The powers and defined functions of the regulatory bodies vary from country to country, but in general the obligations are as follows:

• To maintain the confidence of investors and clients in the regulated sector of the economy;

• To protect consumers from bad practice (whether due to incompetence or malice) by the insurance seller or by any agent working for them;

• To fight crime in the insurance business (fraud, theft, money laundering, etc.)

In some cases, they also have the power to regulate the advertising and sales promotion activities of insurers and their agents. Some regulators also refuse to help create favorable conditions for public awareness of the advantages and disadvantages of purchasing regulated products. To this end, regulatory authorities shall perform the following tasks:

They check the periodic (monthly or quarterly) reports of insurers and require them to provide more detailed information about their business analysis, reserves and assets in a format provided by the regulator in order to ensure their continued solvency. This usually involves reviewing the type of assets (government and corporate bonds, stocks, derivatives, etc.) held to ensure that the company is truly solvent, in the sense that it is able to convert the assets into real cash in number whenever you have to pay benefits.

Establish and ensure compliance with the solvency standard that all insurance companies must comply with. The security of an insurance company is measured by the ratio of the financial assets that the company owns (in a broad sense, its capital plus the totality of premiums set aside to cover potential claims) to the claims that are expected to be filed. Some regulators insist on risk-based capital for which different formulas exist. The key to this concept is that the insurer does not accept premium income in any category of business, more than that which is covered by the specified amount of assets of the company to maintain this business. This means that in the case of a low-risk business, the company must set aside a capital equivalent of, say, up to 10% of the premium income as a contingent fund to maintain business flow, while in a high-risk business category the capital to be may be more than 100% of the premium income. If the premium that can be charged in a business segment is high enough to justify a large-scale blockade of capital, which results in 100% plus risk-based capital, the insurer is free to accept the business (and the risk associated with it), the regulatory body, for its part, can assure investors and the public that the necessary measures have been taken. In most legislations, the strict accountability contained in meticulously accurate risk-based capital allocation is replaced by the general requirement that the company's reserves must at all times be sufficient to meet the claims that will be made with claims arising from from the diverse business insured by the company.

They conduct on-site inspections of companies and their agents to ensure that they keep records and conduct business in accordance with the law and the rules of the regulatory body.

They determine standards of competence and requirements for the personal characteristics of the employees of the insurance organizations and their agents and ensure the observance of these requirements.

Define the categories of business that are allowed and describe those that are not; identify precisely the requirements and conditions of the policy that may not be acceptable and offer guidelines for good practice in this area; lay down rules on sales procedures (for example, that customers can terminate contracts without penalty within a certain number of days of signing if in doubt).

They carry out direct supervision of insurers whose claims ratios are unusually high or whose solvency is in question; provide proper control over insurance companies that are so close to the point of insolvency that they cannot be allowed (according to the criteria set by the regulator) to take on a new business or renew expiring insurances.

Many more points can be added to this list, which are common to most insurance regulation schemes. As there are still significant differences between countries (for example, in the definitions of solvency margins and in the ways in which the ratios are derived), it is best for practitioners to be guided by the rules existing in the country or countries where they operate ( or intend to do business), instead of presenting in this text too long a list of general rules.


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