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Risk managment and insurance - Essay Example

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Lencsis (1997) describes insurance regulation as the set of laws and standards stipulated by insurance regulatory authorities to govern the conduct and operations of insurers. Lencsis notes that the laws and standards in this case are meant to protect the insured by requiring…
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Risk managment and insurance
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Risk Management and Insurance Risk Management and Insurance What is meant by the term insurance regulation"? Lencsis (1997) describes insurance regulation as the set of laws and standards stipulated by insurance regulatory authorities to govern the conduct and operations of insurers. Lencsis notes that the laws and standards in this case are meant to protect the insured by requiring the insurance companies to be financially solvent and capable of meeting their obligations, pay claims promptly, and conform to certain market demands. The regulation of an insurance entity begins at the point of licensing. The licensing pertains to reviews of insurer’s finances, business practices, and management to ensure that the entity being licensed is capable of providing the coverage promised to policyholders.
Why is the solvency of insurers of such great importance to regulators?
Lencsis (1997) argues that the promotion of insurance solvency is the most vital goal of insurance regulation. It is of great importance to the regulators since it makes the outcome of insurance transactions certain and predictable. This is because, predictable results are the essence of insurance. As a result, the maintenance and promotion of the solvency of the insurer are at the regulators heart.
The other explanation in this respect is that individuals insured are not capable of protecting themselves in respect of insurance transactions. This is due to the fact that insurance is more than a contingent promise that is to be provided in the future. As such, the promise is worth a company standing before it. Typically, a consumer cannot monitor or evaluate the solvency of an insurance company. Furthermore, insurance accounting and actuarial procedures are difficult and complicated, thus requiring a regulator to monitor the solvency of the insurance companies on behalf of the public (Lencsis, 1997).
The other importance in respect of solvency regulation is that it ensures that the public is protected in case the insurance company becomes insolvent. Lencsis (1997) notes that the state of insolvency of an insurance company may cause a lot of tribulations and massive losses to the insured entities.
Insurance solvency regulation is also of importance to the regulator especially with regard to life insurance, and to some extent property insurance, since they are responsible for sizable amounts of insured savings. Therefore, since the insurers’ operations parallel fiduciary operations, solvency regulation must be regulated for public interest (Lencsis, 1997).
How do the regulators try to establish and maintain insurers solvency?
The solvency of an insurance company is very important to the regulators as it protects the insured from unscrupulous dealers and insurance companies that may become insolvent leading to massive losses. Insurance regulators use various prescriptive approaches to establish and assure insurers’ solvency. One of these approaches relates to the capital standards requirement. The capital and surplus is meant to cover against unforeseen increases in obligations and decreases in the asset values. In this case, insurers are required to maintain a given amount of surplus and capital to manage and conduct their operations. The regulator also has the discretionary authority to take control of a company in case it is in a hazardous condition which may make it unable to pay its policymakers. States usually have fixed minimum surplus and capital requirements and risk-based capital (RBC) (Klein, 2000).
The other way by which regulators establish and maintains insurer solvency is through reserve capital requirement. In this case, insurers are required to set aside reserves to be utilized for future benefit payments and to meet any contingent losses on investments. In the past, life insurance companies were required to maintain mandatory reserves for any contingent losses on bonds and stock based on regulatory valuations and the designation of credits (Klein, 2000).
Klein, R. W. (2000). Regulating insurer solvency in a brave new world. Center for Risk management & Insurance Research. Georgia State University.
Lencsis, P. M. (1997). Insurance regulation in the United States: An overview for business and government. Westport, CT: Greenwood publishing Group. Read More
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