Bundle 03

role of insurance:

1. growth

2. stabilitsation fin. cycle

3. distribution

Role of state

1. allocation

2. stabilisation

3. distribution (tax system / transfers)

• insurnace entails costs

  • contract design, sales process, underwirting, admin, cost of capital

• risk of over-insurance

• insurance = promise, no guarantee

• insurance challanged at innovation

• insurance companies can fail

Regulation: set of laws that govern the operation of financial institutions

Supervision: control that these laws are applied continously through off-side / on-site inspections

1. financial services are largely invisible and difficult to asses by consumers

2. assymetric info

3. time lag between entering contract and getting benefits

4. quality of services depends on other customer realtionships

5. financial stability and payment services are a PG

evaluating banks as a whole on my own is impossible

• Government / ministry of finance

• approved by parliament

Regulations

directly applicable law in all member states (stronger instrument)

Directives

need to be transposed into law by memberstates (most frequent instrument)

1. solvency (non failure)

2. liquidity

3. avoiding unfair practices

4. transparency

5. reporting

6. data protection

Prime focus is on capital adequacy

capital wo any obligation (Equity, past earnings)

capital w limited obligations (subordinated debt)

inject equity, without asking for a repayment obligation

1. stock issuance

2. retained earnings

3. sell assets above book value

4. capital ratio (reduce risk exposrue to rais cap ratio) “does not raise capital directly”

Comparing Banks and Insurance Companies in the EU Regulation:

1. Reasons for Regulation - Why?

• Banks: ensure financial stability, protect depositors, and maintain the integrity of the banking system.

• Insurance Companies: safeguard policyholders, maintain solvency, and promote a stable insurance market.

2. Regulatory Bodies - Who?

• Banks: Regulated by the European Central Bank (ECB), national central banks, and national supervisory authorities.

• Insurance Companies: EIOPA, national supervisory authorities

3. Regulatory Topics - What does regulation focus on?

• Banks: Regulation focuses on capital adequacy, liquidity management, risk assessment, lending practices, and compliance with anti-money laundering regulations.

• Insurance Companies: Regulation focuses on solvency requirements, underwriting standards, claims handling, policyholder protection, and investment risk management.

4. Regulatory Design - How is regulation devised?

• Banks: Directives (e.g., CRD IV, CRR) and Regulations (e.g., BRRD, SRM), as well as national legislation.

• Insurance Companies: Directives (e.g., Solvency II) and Regulations (e.g., IDD), along with national legislation.

• guaranteed minimum death benefit

• income

• withdrawed

• accumulation

Liquidity is assets usable for payment

Solvency is the ability of an institution to meet its long-term financial obligations.

Capital is the financial cushion available to an institution to absorb potential losses and support its ongoing operations.