When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation

When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation

When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation

When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation

Synopsis

In the 1990s, large insurance companies failed in virtually every major market, prompting a fierce and ongoing debate about how to better protect policyholders. Drawing lessons from the failures of four insurance companies, When Insurers Go Bust dramatically advances this debate by arguing that the current approach to insurance regulation should be replaced with mechanisms that replicate the governance of non-financial firms.


Rather than immediately addressing the minutiae of supervision, Guillaume Plantin and Jean-Charles Rochet first identify a fundamental economic rationale for supervising the solvency of insurance companies: policyholders are the "bankers" of insurance companies. But because policyholders are too dispersed to effectively monitor insurers, it might be efficient to delegate monitoring to an institution--a prudential authority. Applying recent developments in corporate finance theory and the economic theory of organizations, the authors describe in practical terms how such authorities could be created and given the incentives to behave exactly like bankers behave toward borrowers, as "tough" claimholders.

Excerpt

This timely book is a rare, cogent analysis of the regulation of insurance companies from the point of view of economics. The topic of insurance regulation has come right to the fore in the policy debates in financial regulation, and rightly so given the pivotal role of insurance companies in the financial system as direct and indirect claimholders of banks and other leveraged institutions, as well as their long-term role in channeling savings for an aging population. And yet, the current framework for insurance regulation across the advanced economies is a patchwork of rules that have built up over years, based loosely on actuarial considerations, and which differ substantially from one jurisdiction to another without much rationale. This book sets the standard for debate in this important area. The book surveys the recent episodes of failures of insurance companies, reviews the actuarial basis for insurance regulation and its weaknesses, and proposes an economic rationale for insurance regulation based on capital as a way of mitigating moral hazard. The scholarship backing the book is impeccable, as would be expected from authors of such caliber, but the book has added authority arising from the fact that one of the authors (Plantin) also has first-hand experience as an insurance regulator. The book will be of wide interest to financial economists, and will be essential reading for policy makers in central banks and financial regulatory bodies. In time, this book will gain the status of (and be seen as a natural accompaniment to) Dewatripont and Tirole’s classic on the prudential regulation of banks, and will be widely read and cited.

HYUN SONG SHIN Professor of Economics, Princeton University . . .

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.