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]
AbstractIn 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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This chapter was published in: Guillaume Plantin & Jean-Charles Rochet , , pages , 2007.
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insurance; regulation; supervision; solvency; claimholders; finance theory; theory of organizations; authorities; incentives;
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- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
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- 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.
- Bank for International Settlements, 2011. "Fixed income strategies of insurance companies and pension funds," CGFS Papers, Bank for International Settlements, number 44, October.
- Plantin, Guillaume & Sapra, Haresh & Shin, Huyn, 2008. "Marking to Market: Panacea or Pandora's Box," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- 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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