Capital Markets and the Supervision of Insurance Companies

Abstract

An insurance policy offers adequate security only if the company holds large reserves. In a free economy such reserve capital can be obtained only from the market, and investors will be ready to provide the capital only if the insurance company can be expected to earn sufficient profits. main task of the government supervisor is to make certain that the company's reserves remain adequate. This can be achieved only if the company is allowed to charge premiums which will lead to profits found satisfactory by investors. Good insurance at low prices may be impossible in an economy with free capital markets. In most countries private insurance companies operate under the supervision of the government. This supervision is very lax in some countries, whilst in others the activities of insurance companies are controlled and regulated in detail by the government. At the 19th International Congress of Actuaries in Oslo in 1972 the main subject for discussion was: The government control and supervision of the private insurance industry. basis of this discussion consisted of more than 300 pages of national reports, presented by actuarial societies in about 30 countries. reports indicate that the objectives behind the government supervision do not vary much from one country to another. There are, however, considerable differences among the sets of concrete practical rules, which have been laid down to achieve these objectives. Karl H. Borch, Dr. Philos. (Oslo University), holds the rank of Professor in the Norwegian School of Business Administration. He has served as Visiting Professor at U.C.L.A., Ohio State University, Oxford University and the University of Bonn, Germany. This naner was submitted in February. 1973. main objective of the government supervision is to protect the customer, i.e. the insurance buying public. A secondary objective, at least in some countries, seems to be to control the insurance company's activity as a financial institution. Some insurance companies are very large investors, and the government may find it desirable to control their investment policy. This can clearly lead to conflicts of interest. investments which best serve the interests of the holders of insurance policies, may not be those which top the government's list of priorities. This potential conflict of interest is, however, not discussed in any of the reports mentioned above, and is not pursued in this paper. In order to protect the insurance buying public, the government has laid down a number of rules which must be observed in the operations of an insurance company. Some of these rules have specific purposes, which naturally fall in one of the two following groups: (i) Rules designed to make certain that the insurance contracts nffrprpAr1 +,n