In the 1990s, large insurance companies failed in virtually every
major market, prompting a fierce and ongoing debate about how to
better protect policyholders. Drawing lessons from the failures of
four insurance companies, When Insurers Go Bust dramatically
advances this debate by arguing that the current approach to
insurance regulation should be replaced with mechanisms that
replicate the governance of non-financial firms. Rather than
immediately addressing the minutiae of supervision, Guillaume
Plantin and Jean-Charles Rochet first identify a fundamental
economic rationale for supervising the solvency of insurance
companies: policyholders are the "bankers" of insurance companies.
But because policyholders are too dispersed to effectively monitor
insurers, it might be efficient to delegate monitoring to an
institution--a prudential authority. Applying recent developments
in corporate finance theory and the economic theory of
organizations, the authors describe in practical terms how such
authorities could be created and given the incentives to behave
exactly like bankers behave toward borrowers, as "tough"
claimholders.
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