The magnitude of the financial crisis was such that a reciprocal response from regulators around the world is hardly a surprise. The most recent sigma study from Zurich-based Swiss Re, “Regulatory Issues in Insurance,” takes a look at this response around the globe.
Paradoxically, much of regulations bandied in response to the crisis, began gaining acceptance well before it. Most prominent among these is the move toward principles-based reserving for life insurance products enshrined in the Solvency II regulations, which are set for implementation in the European Union in 2012. The move to principles-based regulations also is afoot in the United States, Australia, Japan and China, Swiss Re notes.
Elsewhere, the need for other regulatory shifts only became apparent in light of the crisis. A good example of this is liquidity risk.
“While the bulk of traditional insurance business does not give rise to liquidity risk, some non-core activities during recent periods of severe market stress suddenly required additional liquidity,” the report states. “Both insurers and supervisors should improve their monitoring and understanding of liquidity risks.”
Yet, the report cautions that insurers also need to be mindful of overreaction by regulators to the crisis, pointing out that efforts prevent insolvencies altogether would prove too costly.
“The purpose of insurance regulation is not to prevent insurance insolvencies altogether as this would be highly distortive and inefficient, i.e. the costs of achieving such a result would outweigh the benefits,” the report says. “Rather the goal of insurance regulation should be to reduce solvencies to an acceptable minimum and to minimize their negative impact on policyholders.”
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