Could we rely on market discipline as a substitute for insurance regulation?
| Date | 15 February 2013 |
| DOI | https://doi.org/10.1108/13581981311297795 |
| Pages | 4-15 |
| Published date | 15 February 2013 |
| Author | Fernando Castagnolo,Gustavo Ferro |
| Subject Matter | Accounting & finance |
Could we rely on market
discipline as a substitute for
insurance regulation?
Fernando Castagnolo
Citigroup, London, UK, and
Gustavo Ferro
Instituto de Economı
´a, UADE and CONICET,
Universidad Argentina de la Empresa, Buenos Aires, Argentina
Abstract
Purpose – The purpose of this paper is to examine empirically whether the market discipline works,
and if so, whether it is a complement or substitute of prudential regulation in the insurance markets.
Market discipline is intended as “the power of ...market forces ... to evaluate and control the risky
behaviour of the financial institutions”. The authors’ formal hypothesis is that if market discipline
works as complementary to prudential regulation, the response of the insured is expected to be weaker
than if market discipline acts as a substitute to prudential regulation.
Design/methodology/approach – The authors designed an experiment examining policy
subscription reaction to adju stments in insurers’ risk rating s in three different regulatory
environments, to compare market discipline in each market. An econometric model was estimated to
test the reaction of policy subscription to changes in credit ratings of the insurers.
Findings – The findings indicate that more market discipline was exerted in the crisis period, and
more intensely where it is intended to replace regulation. A formal hypothesis was tested: in a less
regulated environment, consumers’ protection rests more heavily on their caution and use of market
information about the insurers’ financial condition.
Research limitations/implications – The research is constrained by the availability and detail of
the publicly available data.
Practical implications – The results imply that regulation and market discipline work more as
complements than as substitutes.
Social implications – Market discipline does not replace prudential regulation in the insurance
market.
Originality/value – The approach presented in the paper adds to precedent work studying
comparatively different regulatory environments, and also concerns the response of market discipline
in the financial crisis context.
Keywords Regulation, Insurance, Market discipline,Financial crisis, Credit ratings
Paper type Research paper
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JEL classification – L51, G22
A previous version, in Spanish, was placed in a public repository (“Seguros, crisis, regulacio
´n
y disciplina del mercado”. Munich Personal RePec Archive Paper (MPRA Paper) No. 25593.
10/2010. University Library of Munich: http://mpra.ub.uni-muenchen.de/25593/1/MPRA_paper_
25593.pdf ). Also, a previous version, in Spanish, was presented to the 2010 Annual Meeting of
the Argentine Association of Political Economy (“Regulacio
´n de Seguros: ¿Hasta do
´nde podemos
confiar en la disciplina de mercado?”. XLV Reunio
´n Anual de la Asociacio
´n Argentina de
Economı
´a Polı
´tica (AAEP). Universidad de Buenos Aires, 17-19 de November 2010. www.aaep.
org.ar/anales/works/works2010/castagnolo.pdf).
JFRC
21,1
4
Journal of Financial Regulation and
Compliance
Vol. 21 No. 1, 2013
pp. 4-15
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981311297795
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