The Prudent Person Principle In Insurance Law

The prudent-person principle has been introduced as mandatory for European insurance companies under Directive 2009/138/EC (Solvency II). It requires insurers' investments to be managed in accordance with the underwriting risk, emphasizing the performance of the aggregate portfolio rather than the individual risk of its components. Although modern portfolio theory accepts the principle as more reliable than quantitative regulations, there is still no indisputable evidence in this regard. Since prudent investing strongly depends on the professional qualities and morals of insurers, in an essential aspect the principle brings to the fore the high qualification and extensive experience of investment managers. In addition, it strengthens the role of supervisory authorities and the judiciary in the process of creating investment thinking for the benefit of clients. Through the sanctioning mechanisms that the government has the prudent behavior of insurers is guided, while at the same time innovative practices should not be restricted. In this context that research aims to define the prudent-person principle from a normative point of view then to place it in the conditions of market realities. Empirical studies show that it leads to an increase in risky assets in the portfolios of institutional investors, but it does not lead to an increase in aggregate risk. Obviously, the principle does not prevent good diversification of investments and does not endanger the interests of consumers.