Financial Regulation of Insurance Companies - Essay Example

Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Awareness on insurance has made people to save in pensioners’ funds and policyholders’ in financial markets, thus not only are they protected but also lead to the development of a country. In the retirement schemes, employees are continuing to accumulate their assets in order to spend their accumulated wealth in an orderly fashion. This certainly means that most people, globally, are investing part of their salary in the pension schemes in the insurance industry in order to have an adequate retirement income. The employers are therefore, expected to contribution part of their employees’ salaries to the pension and retirement schemes. This has been implemented in all areas of employments (Bank of France 2005). In the past, the employers used the defined benefit (DB) plan whereby the employer promises to give a life retirement payments to the employee through a pre-defined formula. However, in recent times, the employers have been eliminating and freezing defined benefit and shifting towards to defined contribution (DC). In this arrangement the employee does the contribution to the pension plan but has no guarantee on the future benefits payouts. The risk is then shifted from the employer to the employees. This means that the employees will rely on their assets and increasingly become fund their own retirement funds (Barr & Diamond 2006). It is therefore, important for the insurer to train the retirees on how to effectively use their accumulated assets wisely. Participation in this scheme is usually mandatory in most countries. Though, the contract varies from country to country. It is also important to note that pension funds do play a major role in the financial markets as long-term investors. However, the insurance industry is no longer at present capable of giving pension products that give the consumer a reasonable retirement income. They are various reasons for this, and include; the current global financial crises, management challenges, pensions plan. These are the main setbacks in the insurance industry (Barr & Diamond 2006) The industry is exposed to market fluctuations due to its large assets portfolios. Recent years have been have been characterized with losses in most of the insurance firms as a result of the global financial crisis. For instance, in 2008 the pension funds in the, Organization for Economic Cooperation and Development (OECD) lost about $ 3.5 trillion in the market value, from $ 18.7 trillion in 2007. From statistics obtained from different countries, they indicated that most pension industry had made losses in 2008. These losses made the insurance industry feel virtually inadequate in the role as a long-term investor in the financial market too. In fact, the intense market pressure on the basic share prices increased the industry woes. In the United States for example, the entire funded states has reduced much more if compared to solvency for life insurers. As a result of this, the clients have been and will continually be most affected as they are the main contributor to the industry. It is then evident that it is not entirely possible for an employee to rely on the insurance industry for a reasonable retirement benefit (McNaara 2007). Managerial issues and poor governance have also been another reason where the insurance industry has not been performing accordingly. In fact, poor performance of the pension funds have been recently been hitting the headlines. As the industry handles sensitive issues involving many people, the managerial control of the firms, their regulations, accountability and supervision is critical. However, most firms in the industry have not entirely developed these characteristics. Conflicts have been evident among the fund members, the management and stakeholders (Barr & Diamond 2006). This has adversely affected the security of promises and pension security. Poor governance has created little trust among the stakeholders, increasing the need for prescriptive regulation, and definitely reduces the deliverance of excellent pension fund performance. For instance, an affair involving the Pensionskassen in Switzerland that concerned the pension fund managers who traded the same shares as the pension funds that employed them. This incidence, of course, prompted a review on the governance. In Hungary, the pension funds are basically non-profit institutions, have portrayed ineffectiveness in the managerial positions and looking after the interest of their members. Lack of transparency has also affected the firms; a survey carried out by indicated that retirement benefits given by multinational corporations were not clear on their management. The sponsoring employer raised concern over this. Thus, the management of funds is not clearly indicated (McNaara 2007). In addition, lack of resource and skills, weak engagement were among the challenges faced by the multinational corporations in meeting their goals in the global pension’s governance. In other countries for example, Mexico, most financial firms are faced with conflict of interest. The low level of education and low interest in matters of pension, the managers are increasing creating incentives for pension fund. However, little benefits are gained from his, inasmuch as the marketing campaigns are expensive and costly. The administration fees and costs are eventually paid by the members of the plans (Bank of France 2005). The current shift from defined benefit (DB) to definite contribution (DC) has brought about some implications in the industry. This is so due to the limitations in the DC plans. There are advantages to the employer in terms of regulation, easier management and different investments choice. Though the DC plans gives the employees greater control and are portable, its limitations have more advance effects on the employees. The risk is shifted from the employer to the employee, and there is no guarantee as to actual amount that the employee will get. This is a disadvantage as the retiree will not be able to come up with a budget or plan on how to utilize the money. Contributions which are based on profit-sharing plans are risk as it is not compulsory that the company or firm have a profitable year. Stock-bonus plan, is a profit-sharing plan whereby the employer contributions are done in form of employer shares of stock, the employee retirement fund is invested in the company stock. This is a risky plan as the retirement benefits and the employees’ job depend on the company. Any decline on the company will translates to lose of job and retirement funds. From the above descriptions of the DC, the employee may not entire benefit from the insurance industry as many conditions which have been set up, are to some extent seen only to favor the employers (McNaara 2007). Contributions from employees and employers are more than enough to cover expenditure in some countries such as Philippines since the number of pensioners is relatively low. However, the expected returns for the employees’ contribution is low because the cash-flow status in a way hides the right costs of the pension benefits promised. In fact the rate of contribution currently, will be insufficient to pay the benefits in future, this either calls for an increase in contribution or a cut in the benefit received. This therefore, will be a disadvantage to the retiree who may not fully benefit fro the scheme leading to a reasonable retirement benefits (Bovbjerg 2007). As a result of the above issues, there is need to for the provision of pension to be adequate. The importance of this is to ensure that the retirees do not have a financial crisis when they are in the resting years. The financial health of the insurance industry is very important to the beneficiaries. Therefore, it is very vital that the corporate pension plans needed to be funded especially during the global financial crisis. This will help improve their aggregate liabilities. This calls for the sponsor to increase their contribution in order to decrease the impact of financial crisis. For example, the Millian index did contribute $59.4 billion to the plans involving define benefit in 2010. In terms of governance, the basic regulation is to reduce the conflicts of interests and problems that arise in the firm. The insurance industry should practice in order to attract more clients and maintain them. Apart from attracting the customers the, good governance will also ensure that trust is created among the stakeholders, less supervision and regulation. More people will tend to invest in and it will be a benefit to the members. It ill also require to be ‘risk-based’. For instance, the more complicated the strategic investment made on the pension funds, the more sophisticated administrative plans for the scheme plans and tight operational oversights are necessary (Bovbjerg 2007). The pensions fund should have a governing board; which may be a person or group of persons that is responsible for oversight and operation of the pension fund. This board is the ultimate maker of decisions. It also has the responsibility for strategic decisions that include choosing investment managers, setting investment policy and reviewing the performance funds. The major role of the board is to ensure that good governance and excellent management is observed in the industry. From sample collected from different countries, they have indicated that superior performance is associated to strong performance. Good governance will also bring indirect reimbursement to pension funds. It will help spare the costs of overregulation and facilitate supervision by the appropriate authorities. The risks will also be managed and controlled effectively (Bovbjerg 2007). The management should be effective in its operation in order to create an environment that will be suitable for the industry to thrive. Settlements of any conflict that may have adverse effect to the firm should be carried out in an orderly way. Transparency in the firms should be practiced so that the customers may gain confidence with the firm operations. The management should therefore, be accountable of every financial report of the firm. This will prevent any loss and misuse of funds within the company. Training of the staff in the company is very essential. Training, basically equips the employee on how to effectively carry out their duties in the firms. They will be well equipped with tools on ho to handle the customers and the funds that is entrusted to them. The training should also be accompanied by self-assessment. This is very significant in that the evaluation will assist in ensuring the objectives of the company are met. It is therefore, important and advisable for a firm to practice good governance and management to ensure that the fir runs accordingly resulting to adequate and reasonable retirement benefits to the retirees (Acharya et al. 2009). The government should also take an active role in ensuring that the insurance industry is running well. This will not only help in maintaining good governance but will also assist in ensuring that the citizens have a good life and are able to obtain the basics after retiring. Their dependence on the government will also decreasing assisting the government in channeling the government funds to other important issues. The government must also ensure that all the pension funds managers have the required qualifications run the firms. Other roles that the government is playing include for example, the United States government have disqualified some persons from the pension funds board. These include those convicted of criminal acts and breaches. This will therefore, ensure that the citizens’ funds are on safe hands. In case of different plans that is, defined contribution and defined benefits, the employees is should well be advised and trained on these plans so as to make the right decisions on which plans suit them best. This is because the employees need to think before retirement. Without the knowledge of the plan the employee may not be able to think before the retirement time has come. This will assist in their planning for their future. However, some employees opt for the two plans, that is, defined benefit and defined contribution. Some investment plans may not be easy for some members to be prepared for. This is because, for example some employees have been complaining on the defined contribution. The complaints are from high fees to poor performance and investment (Bank of France 2005). Improvement on financial education will however, assist in overcoming some of this complains. Information should be readily available to the customers to ensure that any gap between the individual plan members and pension providers is filled. The employees should play a major to ensure that the employees benefit from the retirement benefits. This is very important as they are directly involved with the employees. They also have superior information on the current and future earning, which are significant to the employees’ financial needs. The employer should come up with the best pension that suits the employees so that the employees may not feel exploited by their employers. This is especially so important when the employer is applying the defined contribution plan. The plan should suit the company activities too (Acharya et al. 2009) In conclusion the insurance has miles to go in order to achieve its target on ensuring that the customer gains a reasonable retirement benefits. The industry recent activities need to have positive changes in order to achieve its set objectives. The employers, who are the main people in contact with the employees, have to play a major role for the benefit of employees. The management of the pension funds should also be effective in carrying out its role while the government should ensure that the citizens have smooth and adequate benefits through its policies and regulations. The employees must have the basic financial education on the pension plans and how to effectively use the money when they retire. REFERENCES Acharya, V, J Biggs, M Richardson and S Ryan, 2009, “On the financial regulation of insurance companies”, Stern School of Business, Working paper Bank of France, 2005, “Interest rate risk management by life insurance companies and pension funds”, Financial Stability Review, June Barr, N and P Diamond, 2006,“The economics of pensions”, Oxford Review of Economic Policy, vol. 22 Bovbjerg, B, 2007, Employer-Sponsored Health and Retirement Benefits, Washington, DC: U.S. Government Accountability Office McNaara, M, 2000, Principle of Risk Management and Insurance, London: Addison-Wesley Read More