Regulatory Uncertainty and Insurance

Jared Wade


November 1, 2010

Trepidation about the future has permeated the business world. Of all the matters affecting the private sector, uncertainty arguably looms the largest. And while much of this is natural due to the ongoing fallout of the financial crisis, neither the overarching message nor the regulatory fervor coming from Washington seems to be putting executive minds at ease.

One anecdotal example comes from Meet the Press host David Gregory. In late September, he recounted a story from a recent gathering of CEOs that he attended during which one of the high-power executives told him "the White House has lost everybody in the room."

Visa CEO Joseph Saunders echoed a similar sentiment about regulation to Forbes in response to new consumer protections enacted by Congress. "Whenever somebody tries to correct something that they feel has gone too far in one direction, there is a tendency to over-correct," he said.

The insurance industry is starting to feel the same way, and many are beginning to fear that carriers, brokers and agents will be paying for the sins of banks. A recent Swiss Re SIGMA paper highlights the concerns, the most pressing of which is that regulations that include overly stringent capital requirements could force insurers into conservative investment decisions, thereby lowering policyholder returns. "The business model of insurers is fundamentally different from that of banks because their liabilities are not payable on demand, since they generally require an insured event," said Kurt Karl, Swiss Re's chief U.S. economist and author of the report. "Also, insurers can fail without threatening the stability of the financial system since they are not as interconnected as banks and because their liabilities can be run off over an extended period of time."

Additionally, some of the regulatory mandates in existence, particularly some solvency frameworks, may exacerbate the cyclical nature of the insurance market. Especially in times of severe market stress, when asset prices fall, a downward spiral can trigger some companies to sell their riskier assets to meet capitalization requirements. Such regulation leading to this "undesired outcome" should be tempered, according to the report.

Not all regulation is bad regulation for insurance, however. The report notes that "modern" regimes like Solvency II and the Swiss Solvency test, with their risk-based principles, can be very positive forces of industry supervision. "If implemented properly, such regulations will create an environment in which the insurance industry can operate efficiently and promote financial stability and growth."

As always, the answer here seems to be that good regulation is more important than more regulation.

Jared Wade is a freelance writer and a former editor of Risk Management.