Recognising the long-term value of insurance

The size of the private pension market held by insurance companies is significant. Insurers are also major long-term institutional investors. Should regulation discourage insurance companies from holding long-term assets, this could affect the insurance industry’s ability to provide efficient savings and pension products. It would likewise reduce the industry’s role as a long-term investor in the financial markets and thus its crucial role as a stabiliser of market volatility.

Any reduction in the level of savings or private pension provisions could result in increased costs for social welfare systems and could have an impact on the wider economy.

Differentiation, not discrimination
The fewer restrictions placed on the number and type of rating factors that insurers can use, the more competitive and innovative they can be. This benefits both policyholders and society as a whole, as shown in the previous section. Such risk assessment does not constitute unfair discrimination, in fact quite the opposite. Differentiation is the fairest way to ensure that the premium charged accurately reflects the risk. It is also the fairest way to ensure that a maximum number of people can be offered insurance at an affordable price.

Risk assessment is not only economically efficient, it also helps to reduce moral hazard and adverse selection, as shown in the example of smokers and non-smokers on p8. The person seeking insurance will always know more about their risks than the insurer. Nevertheless, the risks to the insurer can be minimised through appropriate risk assessment and information collection. This benefits all insureds.

If legislators impose restrictions on the information that can be gathered or used by insurers, perhaps in order to avoid perceived unfairness, insurance companies may charge higher premiums to policyholders in order to compensate for the higher degree of uncertainty surrounding the risks they are taking on. Here it is also important to mention the importance of the collection and free dissemination of data, such as ensuring public access to local authorities’ data related to flood risk.

Freedom to insure what is insurable
As we have seen, risk assessment and risk-based pricing in a private market not only enable insurers to set fair premiums but also enable them to innovate and develop new or more sophisticated products for existing or emerging risks. Such insurance markets are the most dynamic and cost-effective. Any regulation to make specific types of insurance compulsory should therefore always be carefully considered, as despite being well-intentioned it could actually have the opposite effect to that intended; ie stifling innovation and economic efficiency.

An effective regulatory environment is key to the successful operation of the insurance market. To be effective, the regulation needs to fully take into account the unique characteristics of insurance.