Edited by Daniel Schwarcz and Peter Siegelman
Insurance solvency regulation seeks to reduce the risk that an insurer will be unable to meet its financial obligations due to financial distress or bankruptcy and to promote confidence in the financial stability of the insurance sector. It is based on a societal judgment of the optimal risk-return trade-off involved with insurance transactions, in which solvency regulations that allow for greater flexibility for insurers lead to a wider range of possible product/price options but expose consumers to greater risk in return for these benefits. Solvency standards for insurance companies vary around the globe in accordance with different assessments of the optimal risk-return trade-off as well as different regulatory philosophies. This chapter assesses the ongoing efforts to reform the insurance regulatory systems in the major insurance markets, primarily the United States (US) and the European Union (EU), in the wake of the recent financial crisis and other economic developments. It examines the economic theories underpinning these systems and why different countries have come to different conclusions regarding the best way to regulate the solvency of insurance companies. In addition, we discuss how the globalization of the insurance industry has led to efforts for greater coordination and harmonization of solvency standards nationally through the Solvency Modernization Initiative (SMI) of the National Association of Insurance Commissioners (NAIC), regionally through efforts like the EU’s Solvency II, and internationally through projects, like the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) of the International Association of Insurance Supervisors (IAIS).
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