October 1, 2003 by Canadian Underwriter
A new U.S. study suggests regulators should cut financially unstable insurers off at the pass, rather than trying to “rehabilitate” them. Commissioned by the U.S. Council of Insurance Agents and Brokers (CIAB) and prepared by Stewart Economics Inc., the study looks at the impact on policyholders of state regulatory practices with regards to solvency. The researchers found that state regulators were more focused on trying to fix weak companies than in getting rid of those troubled companies, a system that puts policyholders at risk. “The declared purpose of insurance regulation is to have a sound industry and to protect policyholders. What has happened recently is an inversion of those regulatory priorities. Failed companies are being kept alive, so the industry is less sound,” the report concludes.
The report notes that companies will naturally be “eliminated” by market competition and this is a process regulators should not impede by trying to save financially weak companies. In fact, the study speculates that a great number of players will become insolvent in the next few years – or these weak operations will exit the market in some fashion due to impending financial failure. Insurers have struggled with pricing and expense reduction, both of which are contributing to financial instability for many players, the report observes.