The Challenges of regulation

The limits of public regulation for the insurance market

When should the state provide a regulatory framework? Under which conditions is it better to let markets do the work? The German Insurance Association has analysed this topic in a new publication. Sensible regulation is always a balancing act. This is especially true for such a complex product like insurance. By Dennis Schmidt-Bordemann

Like all key sectors, the insurance industry requires sound regulation. This is said not only by policy makers and consumer advocates, but is demanded by the insurance industry itself. “We want a reliable regulatory framework to provide a level playing field and promote effective competition “, said Klaus Wiener, member of the management board of the German Insurance Association (GDV). Only in this way can the industry satisfy customer needs and fulfil its important role in society effectively.

Klaus Wiener Dr. Klaus Wiener, Member of the Management Board of the German Insurance Association (GDV):

“Public regulation plays an important role when it comes to warranting the reliability and transparency of insurance protection and trust in the stability of the insurance sector”, Wiener said. “Especially after the experience of the Great Financial Crisis and in light of altered consumer expectations and mega-trends, such as climate change, ultra-low interest rates, demographic change and digitization, sound regulation is more necessary but also more difficult than ever”.

The question of just what constitutes good regulation has become as key issue for the European Commission and the German Federal Government. A reduction in bureaucracy and better—which often means leaner—regulation is the stated goal. GDV wants to contribute to this debate with a new study (see Download below). “Regulation is not a goal in itself “, according to Wiener, “but rather a means to create the conditions that enable the insurance industry to fulfil its societal role as best as possible.”

From this perspective, the wide-ranging effects of insurance regulation are examined in the new publication. Numerous recent regulatory projects are considered as examples. One result is that it is crucial to strike a balance between different objectives and in particular the individual interests of customers and the collective interest of the insured community. The pursuit of ever more control and security for individuals can ultimately come at the cost of reduced effectiveness of insurance markets, thus making it impossible for the insurance sector to offer certain products any more or only at a higher price.

This applies, for instance, to data protection and to surrender values in life insurance. Moreover, in the development of new insurance products – which are often called for by policy makers – excessive regulation or bureaucratic burdens can also often prove to be a stumbling block.

“This does not mean that we would not support the goals of regulation”, Wiener said. But state intervention must always have the costs and risks of regulation in view, not only the expected benefits. “There is always a danger that markets work less well in practice than in theory “, according to Wiener. A specific challenge for insurance markets in this respect is the often very long nature of the contractual agreements (e.g. for old-age provision). “Similarly, regulation in practice may not be as efficient as in theoretical models.” And this applies especially to the regulation of such a complex product like insurance. Sound regulation therefore also means recognising the limits of state intervention so that regulation does not impair the effectiveness of insurance market in the end, rather than strengthening it.

Regulation in the insurance industry

Opportunities and challenges from an economic perspective

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