Insurance Regulation in the United States and the European Union
November 5, 2009
by Robert W. Klein,
Joan T. Schmit
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In this discussion of regulatory frameworks, the authors investigate the similarities and differences between insurance legislation on either side of the Atlantic. They discuss the developmental history of state and federal regulation in the United States and European Union and present policy recommendations for reform in the US based on their analysis of various market trends.
The authors, all professors and experts in the field of insurance and risk management, explain that while the EU has developed a principles-based approach to insurance regulation and risk management, the US has maintained rigid, rules-based regulations that enforce a blanket approach to risk-pooling practices. The EU model provides guidelines for capital reserve standards, but allows individual firms to establish risk assessment and management practices on a case-by-case basis. The flexibility of this method yields a variety of risk strategies, limiting the possibility of systemic risk inherent in using a single standard model for all or even most insurers.
The EUs recent deregulation of insurers has led to increased competition between firms, which are encouraged to develop and use their own risk models in order to determine the regulatory target capital. According to cited studies, these developments have increased efficiency and greatly improved the supply of insurance, fostering healthy market conditions and administrative transparency. While the American system has stagnated under inflexible policies that fail to capture individual risk profiles, the report predicts that heightened competition among European insurers will develop the best risk model in the market, and will eventually result in lower prices for consumers and more stability for successful firms.
Supported by dozens of recent studies, reports, and articles, the authors conclude by presenting policy reform suggestions for US insurance regulations, closely adhering to the EU system that promotes beneficial competition between firms. They emphasize the need for legislators and consumers to recognize the ability of market discipline to substitute for government intervention.
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Robert W. Klein is Research Fellow at the Independent Institute. He is an Associate Professor and director at the Center for Risk Management and Insurance Research, Georgia State University. Klein is a contributing author to the forthcoming book Insurance Choices, edited by Lawrence S. Powell.
Martin Eling is Research Fellow at the Independent Institute, professor of insurance, and director of the Institute of Insurance Science at the University of Ulm (Germany). He received his doctoral degree from the University of Munster (Germany) and his habilitation from the University of St. Gallen (Switzerland). His research interests include risk management, asset liability management, and empirical aspects of finance and insurance. He has published articles in leading international journals such as the Journal of Risk and Insurance, the Journal of Banking and Finance, and Insurance: Mathematics and Economics.
Joan T. Schmit is a Research Fellow at the Independent Institute and holds the American Family Insurance Chair in Risk Management and Insurance at the University of Wisconsin, Madison. Dr. Schmit has published extensively in insurance and legal journals. Her area of expertise is the interaction of law and economics, primarily focused on the effects of tort law. Recently, she has expanded her research into the enterprise risk management field, including projects sponsored by the Casualty Actuarial Society and Society of Actuaries.