October 05, 2015

Insurance sector: Again loony regulators are trying to cover for unexpected losses by analyzing the expected ones.

Sir, I refer to Alistair Gray’s report on “the capital [insurance companies] must hold against unexpected losses” “Insurers face tough new safety rules” October 5.

In it Gray writes: “A paper to be published quantifies the higher capital requirements for the designated insurers. The size of the hit will depend on each company’s mix of business and how systemically important regulators deem them to be. So-called non-traditional and non-insurance (NTNI) activities carry the largest surcharges, of between 12 per cent and 25 per cent.”

So again we have regulators, like those of banks, who set capital requirements for unexpected losses based on the expected risks they perceive. Loony! Do regulators really think they can perceive risks better than the insurance companies? Is there not a huge risk that both the insurance companies and the regulators will perceive the same risks, and so that there therefore will be an overreaction to these risks, which obviously means a sub-consideration of other risks? And boy, are these regulations just screaming to be gamed?

Also, at a moment that so many want infrastructure projects to be started as a way of reactivating the economy, who of the regulators is thinking about the fact that many of the risky long term projects, often financed by insurance companies… could perhaps not happen only because of wrong and distorting capital requirements.

Where have all humble regulators that know of the importance of not interfering gone? When will they ever learn, when will they ever learn?

Why do they in order to cover for unexpected losses not just set for instance a 10% capital requirement on all assets? Are they scared they would then look like less sophisticated regulators to the general public? If so, God save us from regulators suffering an inferiority complex.

@PerKurowski ©