MSG Team's other articles

8806 Understanding Communication and the Communication Process

Lisa works as a Brand Executive with a reputed multinational firm. She was asked to deliver a presentation on her assignments and achievements. Her appraisal was due that month, and she did not get her promotion. No points for guessing, her presentation played the culprit. Her thoughts were not at all clear and she could […]

11081 Role of Communication in Team

A team is formed when individuals with a common goal come together on a common platform. The team members must complement each other and avoid silly conflicts among themselves. Communication plays a very important role in team building and extracting the best out of the team members. A team member must clearly understand what his […]

12783 Combining Towers While Building a Reinsurance Portfolio

The reinsurance industry has been largely fragmented till now. This is why it is common for ceding insurers to buy different reinsurance policies for their different lines of business. For instance, ceding insurers may buy separate reinsurance policies for their marine business and their property insurance business. In insurance parlance, these lines of businesses are […]

11560 Time Management Skills

The judicious use of time by an individual to succeed in all aspects of life refers to Time Management. Time Management not only helps individuals to make the best use of time but also ensures successful accomplishment of tasks within the stipulated time frame. It is essential to do the right thing at the right […]

10121 Kotter’s 8 step Model of Change

John Kotter (1996), a Harvard Business School Professor and a renowned change expert, in his book “Leading Change”, introduced 8 Step Model of Change which he developed on the basis of research of 100 organizations which were going through a process of change. The 8 steps in the process of change include: creating a sense […]

Search with tags

  • No tags available.

The general public is not very fond of the financial services industry. Whenever any crisis breaks out, the financial services industry is one of the first ones to bear the brunt. The fact that AIG, which is one of the largest insurance companies in the world, needed a bailout during the 2008 crisis does not help. The fact of the matter is that any government help to the financial services industry is viewed by the general public as cronyism. This is the reason why it is important for insurance companies to ensure that their companies are managed properly and hence never in need of a bailout.

Insurance regulators all over the world have become increasingly strict over time. The scope of insurance regulation has drastically expanded over the years. In this article, we will have a closer look at how the insurance regulation has changed over the ages.

Price Regulation

When insurance regulation started, price regulation was their one and only objective. The regulators wanted to ensure that the insurance companies are not charging undue rates to the customers. This is the reason why in many places of the world, the insurance rates had to be first sent to the regulator for approval, before they were offered to the general public.

Even today, regulators all the world require that insurance companies notify them about changes in rates. The insurance company has to provide a detailed explanation including financial proof explaining the deterioration of the insurer’s loss that has prompted the change in rates.

However, now the rules are much more lenient. For instance, insurers only need approval, if the rates are going to increase or decrease more than a certain percentage. Also, insurers can start offering the product to the public while simultaneously sending the proposal to the regulator.

In many parts of the world, insurance regulators have started overlooking the entire process of price regulation. This means that they assume that the markets are competitive. Since no single insurance company or a group of insurance companies can control the market, they believe that there is no need for government regulation on pricing of insurance policies.

  • They believe that the rate approval mechanism needs additional resources on the government as well as the insurer’s side. All these additional expenses increase the cost of the policy which needs to be ultimately borne by the consumers
  • Price regulation creates periods when prices are artificially low and then insurers suddenly increase prices by a big margin. As a result, there is instability for both i.e. the insurance company and the consumer
  • Too much regulation prompts insurance companies to go out of business. Hence, competition is reduced and rates end up going higher. The regulator ends up achieving the exact opposite of what they had set out to achieve.

Price regulation still exists in many parts of the world. However, after the 2008 AIG financial crisis, regulators have started focusing their attention on other areas.

Consumer Protection

Unfettered competition maybe desirable as far as the reduction of prices in the insurance industry is concerned. However, it also needs to be understood that in many cases competition can be harmful to the industry.

Firstly, it needs to be understood that insurance is a product which is based on trust. To some extent contracts can determine how insurance companies will act in certain events. However, trust still plays a big role in the process. This is the reason why a strong framework for reinforcing that trust is put into place.

Insurance regulators have created special cells that look at cases of mis-selling and other unethical behaviours.

  • In many parts of the world, regulators have explicitly specified that in case of ambiguity in the contract, the insurance policy would be read in the favour of the customer and not that of the insurance company
  • Regulators levy heavy penalties if it is proven that the insurance policy was sold by providing incorrect or misleading information.
  • Regulators have also made it the insurer’s job to explain the terms and conditions of the policy to the customer. The exclusions have to be categorically laid out and highlighted. The insurer cannot mince words or bury the details in the fine print. If they do so, they might have to pay heavy penalties and may also be liable for prosecution
  • Insurers also have to ensure that they do not discriminate on the basis of colour, race, religion or nationality unless these attributes are a rating factor to the insurance policy being sold.
  • Lastly, regulators have also set up clear guidelines with regards to how consumer data ought to be used. Consumers have the right to demand complete privacy. None of their information can be shared with any third party unless their explicit consent in gained in order to do so.

The bottom line is that the regulation of insurance companies has come a long way. In the beginning, distortion of prices was the only concern. However, now, the markets have matured and because of competition, price regulation is not a priority. Hence, the focus has now shifted to consumer protection.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

The COSO Framework for Internal Control

MSG Team

The Cost Structure in the Insurance Industry

MSG Team

Credit Derivatives: An Introduction

MSG Team