Research - 04.06.2014 - 00:00 

Regulation in the insurance market

Simpler regulations promote competitiveness, according to a study by the Institute of Insurance Economics at the University of St. Gallen. Seventy-six insurers in Germany, Austria and Switzerland provided information about the consequences of regulation. <br/>


3 June 2014. Increasingly forceful interventions by the state in their business are causing insurance companies greater and greater concern. While the insurers acknowledge the need for and benefit of regulation in the wake of the financial crisis, they criticize legislators and supervisory bodies for losing sight of the industry’s competitiveness for the sake of consumer protection. The scope and complexity of burgeoning regulation are becoming a problem and a disproportionately heavy burden on small insurers in particular, according to a study by HSG’s Institute of Insurance Economics on behalf of the Swiss Insurance Association.

Switzerland scores well in international comparison

The economists Martin Eling and Sabine Kilgus surveyed 76 insurers in German-speaking areas and asked how they rated the effectiveness and efficiency of regulation. The major auditing companies and the Swiss Financial Market Supervisory Authority (FINMA) were also included in the survey. In summary: the quality and implementation of regulation are rated better overall in Switzerland than in Germany and Austria. For instance, FINMA’s risk-oriented approach to supervision is considered pioneering and recommended for consistent development.

On the other hand, the insurers were critical of indiscriminate adoption of international regulations such as the new unisex tariff classification and the new EU law on insurance agents and brokers. Under the unisex tariff classification, for example, life insurance companies are no longer permitted to differentiate between premiums for men and women, even though their average life expectancies are substantially different.

And the new law on insurance agents and brokers has led to an excessive increase in documentation requirements especially in Germany, although it is far from certain whether the benefits will outweigh the costs.

EU regulation out of touch with reality

The new equity requirements for insurance companies in the EU are also deemed to be “economically questionable”. For example, no capital securitization is prescribed for investments in government bonds from Greece. This trend in the EU towards regulation that is out of touch with reality is also cited as an explanation for why the assessment of the insurers surveyed in Switzerland is more positive overall than that of their German and Austrian counterparts.

The authors of the study recommend that these aspects be taken into account to increase the quality of regulation and to link this to political demands. Specifically, they call for solvency supervision and reporting to be simplified on the grounds that numerous academic studies show that simpler regulation is better regulation.

At the same time, however, the study calls for more transparency by insurers towards customers and the public, but information must be prepared in a form that can be compared and understood by customers. The goal must still be to increase market discipline and hence competition. Ultimately, this will lead to better services for customers.

Image: Photocase / Zettberlin

Discover our special topics