Solvency regulatory models allow a more efficient allocation of capital and create incentives for more professional management of insurance companies

 MAPFRE Economic Research presents a report on insurance solvency regulation systems.

The “Insurance solvency regulation systems” report, prepared by MAPFRE Economic Research and presented today at Fundación MAPFRE – the institution that publishes the study – shows that in recent years, especially following the last financial crises, there has been a process of progressive and asymmetric convergence worldwide toward risk-based regulations (of type Solvency II).

The study argues that progress toward risk-based regulations can stimulate growth in supply and, consequently, an increase in the role played by insurance in the economy, in as much as it permits a more efficient allocation of capital, and creates incentives for more professional management of insurance companies based on considerations and parameters of a technical nature.

It also highlights the existence of institutional and market preconditions affecting the speed and possibility of further progress being made in regulatory models of this type in the different markets.

The requirements found by Economic Research include the following:

  • Statistical information to make it possible to model their risk.
  • Trained, knowledgeable, skilled staff to undertake risk modeling tasks.
  • Efficient financial markets that make it possible to undertake efficient asset liability management.
  • A regulatory framework that does not set limitations on the acquisition of financial assets.
  • Absence of legal barriers to reinsurance operations, making it possible to disperse and mitigate technical risks adequately.
  • Development of an organizational and business culture so that boards of directors are in a position to take a leading role in the process of managing companies’ risks.
  • Absence of legal limitations so that companies can make adjustments in the pricing of their products.
  • Valuation mechanisms that facilitate the functioning of the market discipline mechanism.

Asymmetric development

The study analyzes the state of progress and the complexities associated with this process of regulatory convergence in large mature markets (such as the U.S. and the Euro area), as well as in emerging markets (Latin America and Asia-Pacific), and the effort being made by the International Association of Insurance Supervisors (IAIS) to develop harmonized frameworks for oversight of large international groups.

The development of regulations in the insurance industry has been undertaken progressively and asymmetrically by countries and regions. The first step on the road to standardizing solvency requirements was taken in the European Economic Community insurance market in the 1970s with the creation of Solvency I; this was followed up in 2016 with the European Union taking the definitive step of implementing Solvency II. The same occurred in the USA with the creation in the early 1990s of the risk-based capital system (RCB), which is currently under review under the Solvency Modernization Initiative (SMI).

The adoption of Solvency I and RBC type models constituted a benchmark for regulatory progress in the world’s other insurance markets, particularly in emerging markets.

In Latin America – except in Mexico and Brazil, which have made more progress in the process of regulatory adjustment – the report says that there is still some way to go

in implementing risk-based regulatory solvency capital calculation models, especially with regard to the quantitative requirements pillar.

In the Asia Pacific region, reference is made to Australia and Japan, as two mature and developed insurance markets that show a greater degree of progress in their regulations.

However, the report reminds us that risk-based regulatory models entail greater complexity, since they require the existence and development of new institutional and market infrastructure and, therefore, involve protracted processes of design, implementation and internalization.

The report was presented by: Manuel Aguilera, general manager of MAPFRE Economic Research; Sergio Álvarez, general manager of Insurance and Pension Funds; and Julio Domingo, general manager of Fundación MAPFRE.

You can view the complete report here

Related news: