Capital requirements or pricing constraints? An economic analysis of measures for insurance regulation

Abstract

Purpose

This paper aims to investigate the interaction between capital requirements and pricing constraints as measures for insurance regulation.

Design/methodology/approach

In a theoretical model framework, the author derives the insurer’s shareholder-value-maximizing response to capital regulation, price regulation and the unregulated strategy as a benchmark; all three strategies are presented in an analytical form.

Findings

The paper demonstrates that risk-based capital requirements exhibit an efficiency advantage over price regulation and allow for lower premiums. Moreover, the analysis identifies situations in which price floors make insurance more expensive, but have no positive impact on the safety level.

Practical implications

The comparison between capital regulation and price floors provides policymakers with a methodology to evaluate which regulatory tool is more appropriate. Also, the article discusses that maximum discount rates for European life insurers could be ineffective when the new regulatory framework Solvency II is in place.

Originality/value

In all, the article obtains analytical and informative results with relevant implications for insurance regulation.

Citation

Schlütter, S. (2014), "Capital requirements or pricing constraints? An economic analysis of measures for insurance regulation", Journal of Risk Finance, Vol. 15 No. 5, pp. 533-554. https://doi.org/10.1108/JRF-04-2014-0055