Avoiding the risks of regulatory red tape

The extent of regulation of insurance companies has grown significantly in recent decades. The ‘freedom with publicity’ regime which defined the regulatory approach from 1870 to 1970 appeared to work and ran with the grain of the market. Arguments that are given today for prudential regulation of insurers tend to be spurious or not well founded. Much government regulation of insurance companies is unlikely to achieve its declared objective and might even encourage problematic behaviours within insurance markets. Regulation to ensure good governance and good information flows to markets may have some benefits and is less likely to cause the problems that other forms of regulation create. A case can be made for regulation designed to promote the objective of consumer protection. However, all the benefits of such regulation can be achieved with far fewer costs by creating a voluntary system of government regulation. Whether an insurance policy was written by a company which was part of the government regulatory system should be very clear to consumers at the point of sale.

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