4 REASONS FOR INSURANCE REGULATIONS

J.O. EMMANUEL
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Insurance regulations are sets of guidelines established by the government to regulate the insurance sector and the operations of insurance companies.

They are rules and regulations that are established by government agencies to guide the operations and practices of insurance business in a country.

There are four reasons for regulating insurance industry, namely; maintaining solvency margin, to make insurance available, the economic and social costs of insurance companies being insolvent, and to ensure reasonable premium rates.

1. Maintaining solvency margin: Solvency margin refers to the amount of money an insurance company will have after debt obligations has been settled.

Government regulates the insurance industry to ensure that insurance companies maintain necessary solvency margin.

Although insurance premiums are usually paid in advance, the corresponding financial compensation is only paid when the insured risk occurs or at a later date.

If the insurer goes bankrupt before the loss occur and the compensation is not paid to the insured, this would make insurance coverage useless.

Hence, it is necessary that insurance regulations are put in place so that insurance companies will maintain the solvency margin required to remain solvent.

2. Make insurance available: Another reason for regulating insurance business is to make insurance available.

Insurance regulations usually state the frameworks and terms of conditions under which certain insurance policies can be taken.

Insurance regulations also sets the minimum capital requirement for insurance companies so that they can continue to provide insurance coverage for a long time.

Through this, insurance regulations helps to ensure that everyone has access to insurance at all times.

3. Certain social and economic costs are incurred when insurance companies become insolvent: The insolvency of insurance companies always come with certain economics and social costs.

Firstly, because it may result in financial hardship for policyholders who may have purchased insurance policies from the insolvent insurance companies, the frequent insolvency of insurance companies may undermine public trust and confidence in the insurance system.

Secondly, if insurance claims for business interruption coverage are not paid as a result of the insurance company's insolvency, it could result in a disruption of business.

Thirdly, the insolvency of insurance businesses may also cause job losses for the employees of the insolvent insurance companies, thereby increasing the number of unemployed people in the society.

To protect all of these things from happening, government usually set regulations, which would state the minimum capital requirement needed to run insurance business.

4. Ensures reasonable premium rates: Another reason for insurance regulations is to ensure that insurance company charge reasonable premium rate.

Insurance regulations are usually put in place to prevent insurance companies from discriminatory pricing practice or charging exorbitant premium rates.

That way, consumers are protected as they can get affordable insurance coverage without the fear of being exploited by insurance companies.

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