^aZurich Financial Services, Mythenquai 2, CH-8022 Zurich, Switzerland. E-mail: ceo@zurich.com

Abstract

Regulatory interventions must be designed to meet economically sound goals. I argue that, although this may sound simple in theory, in practice it is not. Today's perpetually changing environment requires regulatory frameworks and processes to constantly adapt. At least for the insurance industry such regulatory responses – or a lack thereof when in fact they are needed – can be a serious source of risk. In this article, I highlight some of these threats that I believe to be of special importance. The process of designing new regulation is not always perfect. Too often regulators react to political pressure or regulation emerges through litigation and not in response to sound economic criteria. This can deeply impair contractual certainty and thereby entail far-reaching implications for the insurance industry. Another threat to insurance is that the design of regulatory frameworks increasingly fails to clearly distinguish insurance from banking and other financial services. This leads to the risk that the insurance industry will increasingly be forced to comply with regulation that is not optimally geared towards its business. Perhaps the most important threat though, is that regulation fails to recognize the integration of borderless markets. As markets continue to transcend borders, national regulation increasingly spills over from one local jurisdiction to another leading to the risk of conflicting regulations. Moreover, differing local regulations impair the realization of economies-of-scale and lead to excessive compliance costs. Local and regional regulatory solutions should be questioned and new approaches that span the supranational and global levels considered. Finally, I believe the only way to ensure that regulation will be flexible enough to keep up with the dynamics of insurance markets is for it to be principles-based as opposed to rules-based.