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Introduction to 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]

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Author Info

  • Guillaume Plantin

    (London Business School)

  • Jean-Charles Rochet

    (University of Toulouse, London School of Economics and Political Science.)

Abstract

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.

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Bibliographic Info

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This chapter was published in: Guillaume Plantin & Jean-Charles Rochet , , pages , 2007.

This item is provided by Princeton University Press in its series Introductory Chapters with number 8440-1.

Handle: RePEc:pup:chapts:8440-1

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Web page: http://press.princeton.edu

Related research

Keywords: insurance; regulation; supervision; solvency; claimholders; finance theory; theory of organizations; authorities; incentives;

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Cited by:
  1. Bank for International Settlements, 2011. "Fixed income strategies of insurance companies and pension funds," CGFS Papers, Bank for International Settlements, number 44, July.
  2. Thorsten V. Koeppl & James MacGee, 2007. "Branching Out: The Urgent Need to Transform Canada’s Financial Landscape and How to Do It," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 251, June.
  3. Alessandro Fiori Maccioni, 2011. "A Stochastic Model for the Analysis of Demographic Risk in Pay-As-You-Go Pension Funds," Papers 1106.5081, arXiv.org.

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