A new environment is surrounding the insurance business. The increasing liberalisation of markets has resulted in most prior supervision of products and tariffs being relinquished in favour of ex post supervision; the concentration and internationalisation of insurance companies has necessitated greater mutual understanding and closer co-operation between supervisory authorities in the different countries. Moreover, the supervisory authorities have had to meet the challenge represented by increased convergence between the different financial sectors – banks, insurance, securities and pensions – by drawing up solvency rules for insurance groups and financial conglomerates and co-operating closely or even merging with other financial sectors’ supervisory authorities. Finally, the new emerging risks have had to be taken into account and the protection of the insured has in some instances been increased, by introducing an additional level of cover, i.e. general funds for the protection of policyholders...

This risk of miscalculation is intrinsic to every insurance transaction. Premiums are set in advance, before the insurer knows what the actual cost of the services it has undertaken to provide will be. Economists call this an inversion of the normal production cycle. Even the most reasonable forecasts of expenditure on claims (number, cost, assessment of damage by the courts at the time of judgement as opposed to the date of an accident) and overhead costs may be exceeded. And because a very long time may elapse between payment of the premium by the policyholder and performance of the service promised by the insurer, the latter may in fact be insolvent without experiencing any cash flow problem, new premiums being used to pay out earlier claims...

A solvency ratio determines whether an undertaking meets a minimum capital adequacy requirement. This is because an insurer’s losses must be covered by charges to its shareholders’ equity – the greater the equity, the more remote the prospect of failure...

The competence of insurance supervisors and the quality of regulation limit the number of company failures but do not eliminate them entirely. All jurisdictions have experienced tragic situations for insurance policyholders...

Protection of insurance consumers can be said to have two basic aims: quality and security. The arrangements designed to guarantee contract quality, which include rules concerning information and transparency, have not been examined here. Nor has the licensing procedure, which constitutes a first safety barrier for the consumer: only companies meeting a certain number of requirements are authorised to write insurance...