Regulation and Insurance Economics
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Regulation and Insurance Economics Anton van Rossum FORTIS, Rue royale 20, Brussels, Belgium. E-mail: [email protected]
The insurance sector is currently in the midst of a period of changing and increasing regulation. This paper focuses on the trends underlying the regulation changes and, more specifically, on the convergence between banking and insurance regulation. The final part of this paper is dedicated to the potential harm of increasing regulation. The Geneva Papers (2005) 30, 43–46. doi:10.1057/palgrave.gpp.2510005 Keywords: supervision and regulation; international accounting standards; banks and insurance
Is there a need to change current regulation? It is difficult to criticize the quality of current supervision and regulation based on past performance, since it has proven to function well even in an extremely difficult environment. The insurance sector has weathered terrorist attacks of previously unknown magnitude; it has suffered from a severe drop in equity markets; it is going through a prolonged period of historically low interest rates and has even suffered from major credit defaults. But it remains in good shape. So, are significant changes in regulation needed? As we are all aware, past performance is no reliable indicator of future performance, and I believe that there are underlying trends that justify changes in regulation. I would like to mention three such trends:
The trend towards ‘fair value’ accounting. An increasing complexity, especially in the life insurance sector. The emergence of integrated financial conglomerates.
New ‘fair value’-based International Accounting Standards The road towards new International Accounting Standards (IAS) for the insurance industry is proving to be ‘up-hill all the way’. The current roadmap indicates an interim stage to be reached in 2005, labelled Phase I, followed by a final Phase II to be reached probably much later than 2007. In Phase I, it seems we will be in the uncomfortable situation where different criteria will be applied for assets and liabilities. One of the main issues, namely, how to calculate a fair value for insurance liabilities, has been pushed back to Phase II, leaving the sector and its supervisors in a very uncomfortable transitional situation. Regulators and supervisors will have to decide which type of accounting standards they will require insurers to produce for supervision purposes. Currently, it seems that they disagree with the possible mismatch between the standards for assets and
The Geneva Papers on Risk and Insurance—Issues and Practice
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liabilities during Phase I. Hopefully, the International Association of Insurance Supervisors (IAIS) and the International Accounting Standards Board (IASB) will find common ground when reaching Phase II. If and when Phase II is implemented and accepted by supervisors, they might have to come to grips with company-specific stochastic models to calculate the fair value of liabilities and, in general, with valuations based on principles rather than rules. This will requir
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