Purpose of insurance regulations

Some regulators consider that their primary duty is to ensure the solvency of the insurance companies, as financial failure will cause hardship to the consumers. Solvency is important, but is not the only risks faced by the consumer.

The regulator has also to pay attention to all four duties, as follows:
- Maintain insurer solvency

- Compensate for inadequate consumer knowledge
- Ensure reasonable rates
- Make insurance available

Consumers are not well versed in insurance and may be badly treated through legal contracts that are not transparent and not fair. A common example is the use of irresponsible projection to entice consumers to invest in insurance contracts, and to give a final payout that is much lower than projected. Badly worded or unclear language in policy documents also place consumers at a disadvantage as the consumers are not able to afford the legal fees to have the contracted interpreted in the court.

The regulator has also to ensure that the insurance rates are reasonable and that consumers are not overcharged due to their ignorance of the market or their inability to judge the value of the insurance protection that is provided.

At the other extreme, the regulator also wants to prevent irresponsible price cutting that may lead to insolvency of the insurers. If an insurer cuts price to an inadequate level, other insurers may be forced to follow, to protect their market share.

The regulator also aims to ensure that insurance is available, especially for people or risks that are considered to be unprofitable. As motor insurance is compulsory, it is necessary to ensure that it is available to people who are considered to be high risk, as they would otherwise by denied the right to drive a car.

Tan Kin Lian