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Introduction to When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation

In: When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation

Author

Listed:
  • 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.

Suggested Citation

  • Guillaume Plantin & Jean-Charles Rochet, 2007. "Introduction to When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation," Introductory Chapters,in: When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation Princeton University Press.
  • Handle: RePEc:pup:chapts:8440-1
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    Citations

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    Cited by:

    1. René Doff, 2016. "The Final Solvency II Framework: Will It Be Effective?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(4), pages 587-607, October.
    2. Thimann, Christian, 2014. "How insurers differ from banks: a primer on systemic regulation," LSE Research Online Documents on Economics 61218, London School of Economics and Political Science, LSE Library.
    3. John Marshall, 2009. "Review of Guillaume Plantin and Jean-Charles Rochet, When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 16(1), pages 139-146.
    4. Antonio Zanella, 2011. "Solvency II and the European Sovereign Debt Crisis: The Case of Misplaced Prudence," Chapters,in: Institutions in Crisis, chapter 6 Edward Elgar Publishing.
    5. Bank for International Settlements, 2011. "Fixed income strategies of insurance companies and pension funds," CGFS Papers, Bank for International Settlements, number 44.
    6. Christian Thimann, 2014. "How Insurers Differ from Banks: A Primer on Systemic Regulation," Working Papers halshs-01074933, HAL.
    7. 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.
    8. 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.
    9. Kirti, Divya, 2018. "When gambling for resurrection is too risky," ESRB Working Paper Series 69, European Systemic Risk Board.

    More about this item

    Keywords

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

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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