Chapter: 4 – Insurance

Regulations of Insurance Industry:

An insurance policy represents a promise. Because of its importance to the economy and to
individual welfare, society has a particularly strong interest in insurance. An insurance company
is regulated primarily by the state; 'Beema Samiti' in case of Nepal. Insurance companies are
amongst the most regulated institutions. Insurers are regulated by the state or regulatory body
for following reasons:

1. Maintain Insurer Solvency

Insurance regulation is necessary to maintain the solvency of insurers. Solvency is important
for several reasons. First, premiums are paid in advance, but the period of protection extends
into the future. Financial strength of insurer is important here; if an insurer goes bankrupt and a
future claim is not paid, the insurance protection paid for in advance is worthless. Therefore, to
ensure that claims will be paid, the financial strength of insurers must be carefully monitored.

Because of possible financial hardship to insured's, beneficiaries, and third party claimants,
regulators must monitor financial strength of insurer.

When insurer become insolvent, certain social and economic costs are incurred; examples
include the loss of jobs by insurance company employees, a reduction in premium taxes paid to
the country etc. These costs can be minimized if insurer are timely monitored.

2. Compensate for Inadequate Consumer Knowledge

Regulation is also necessary because of inadequate consumer knowledge. Insurance contracts
are technical, legal documents that contain complex clauses and provisions. Without regulation,
an unscrupulous (dishonest) insurer could draft a contract so restrictive and legalistic that it
would be worthless.
Also, most consumers do not have sufficient information for comparing and determining the
monetary value of different insurance contracts. The average consumer would find it difficult (in
terms of cost, coverage, and benefits) to evaluate a particular policy based on the premium
whole. Hence, regulation is needed to disseminate information among consumers, protect
consumers against unscrupulous agents etc.

3. Ensure Reasonable Rates

Regulation is also necessary to ensure reasonable rates. Rates should not be so high that
consumers are being charged excessive prices. Nor should they be so low that the solvency of
insurers is threatened.

4. Make Insurance Available

Another regulatory goal is to make insurance available to all persons who need it. Insurance
are often unwilling to insure all applicants for a given type of insurance because of underwriting
losses, inadequate rates, adverse selection etc. However, the public interest may require
regulators to take actions that expand private insurance market (the insurance market for
limited customers) so as to make insurance more readily available to the large group of society.

5. Insurance As Part of the Social Safety Net

People prefer not to think about potential disasters. As a result, they tend to buy less insurance
than they should. It may therefore be possible to improve their welfare by inducing them to
increase their coverage. This can be done with tax subsidies (life insurance), by requiring
insurance (automobile insurance) etc.