Solvency Regulations in the Insurance Industry
In the previous article, we have explained why regulation is important for the insurance industry. We have also understood how the focus of regulation has changed from merely restricting prices to protecting the rights of the consumer. In this article, we will have a closer look at the solvency regulations i.e. the rules regulators create to ensure that insurance companies do not go bankrupt.
It needs to be understood that the financial services industry is a closed loop. Hence, bankruptcy of one company also ends up severely affecting the other companies. Hence, solvency is not the companys private matter. This is the reason why companies which manufacture goods and service do not have to follow regulations while utilizing their capital, while financial services like insurance companies have to!
The way insurance companies deploy the funds that they receive via premium is highly regulated. Some of the principles that form the basis of solvency regulation are as follows:
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