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Insurance Regulation in the United States and the European Union: A Comparison
by Robert W. Klein,
Joan T. Schmit
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.