Week 7 Flashcards
What is solvency in insurance?
An insurers ability to pay long term financial obligation
What is insurance equity?
What you own reference really, its assets and liabilities
How are the goals of insurance regulation achieved?
Enhance market stability and conditions, Protect financial stability and deliver consumer protection
Describe differences between efficient markets and inefficient insurance markets?
Inefficient will have a lot of information asymmetries and consumer exploitations, a high amount of fraud, market is not self correcting, as well as prices which do not reflect information.
What can address market inefficiencies?
Regulation
What are the two theories of regulation and their meaning?
PIT public interest theory (helps with market inefficiency and government helps for welfare, asymmetrical information and helps again monopolies.)
RCT Regulatory capture theory (materlistiic capture which is when regulators motive is based on self interest and is usually optically corruptive and non-materialistic where regulator acts in interest of group, more gradual and subtle
What will happen is a insurer become bust and cannot pay out?
Well a few things.
- The government will step in with its funds and insruacen
- Due to policyholders being highly prioritied they are set higher during liquidation
- You may be transferred to another insurer
In RCT, materialistic and non-materialistic capture is also known as?
Materialistic (financial capture)
non-materialistic (cognitive or cultural capture)
What areas are in insurance regulation?
Sales and consumer regulation, formation and licensing regulations, solvency regulations, rate regulations and policy regulations.
What is IPT?
Insurance premium tax.
Why has IPT been described as tax regressive?
Because the 12% standard and 20% on some policies is a burden on smaller companies
How does IPT work?
Insurance companies collect it, they charge 12-20% on their premiums and when they collect the tax they pass it onto the government
What are 3 reasons why generally insurance regulation is not good?
It costs insurance companies a lot of financial burden and so fewer insurance companies, there’s an increased cost in product and small insurance groups may struggle to attract new customers especially it ITP increase and force insurance to hold more capital.
PRA stands for what?
Prudential regulators authority
What does the PRA do?
It oversees the overall soundness for insruance, that they can meet obligations and that they remain solvent.
