{"id":7759,"date":"2019-12-18T08:30:42","date_gmt":"2019-12-18T06:30:42","guid":{"rendered":"https:\/\/www.sciencespo.fr\/research\/cogito\/home\/?p=7759"},"modified":"2019-12-18T17:57:59","modified_gmt":"2019-12-18T15:57:59","slug":"regulating-insurance-in-europe-a-frustrated-ambition","status":"publish","type":"post","link":"https:\/\/www.sciencespo.fr\/research\/cogito\/home\/regulating-insurance-in-europe-a-frustrated-ambition\/?lang=en","title":{"rendered":"Regulating Insurance in Europe: a Frustrated Ambition"},"content":{"rendered":"
\"AXA

AXA office building in Milan by Sergio Monti Photography via Shutterstock<\/p><\/div>\n

Finance immediately brings to mind the banking system and financial markets. The insurance sector\u2019s major role is often overlooked. It plays a major role because no economic actor \u2013 be it an individual or a business \u2013 can do without insurance. This role is also important because insurance companies wield substantial capital and are major investors. The significance of the insurance sector, which, like banks, was affected by the 2008 financial crisis, suggests that it also should be better regulated. The European Union set this objective at the beginning of the 2000s, but it is no easy task given the heterogeneity of national practices. Presentation by Pierre Fran\u00e7ois<\/a>, sociologist of enterprises.
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How to ensure that an insurance company will be able to meet its commitments? While insurers have their own tools to meet this requirement, they must also comply with external rules. Because they manage risk and play a decisive role in the operations of contemporary economies, the insurance sector has been regulated since the 1960s. Western European rules were slowly formalized in a series of European directives.
\nUntil the end of the 1990s, this prudential framework was based on simple principles, defining a series of accounting ratios. In short, companies had to hold X amount of capital for Y commitments, according to the risks they covered. These ratios were meant to serve as warning signals: above or below a certain value, the company was in danger of failure, requiring intervention.<\/p>\n

Solvency II, a radical reform of prudential regulation<\/h4>\n
\"European

European Parliament Gideon Benari, via Flickr CC BY 2.0<\/p><\/div>\n

At the dawn of the 21st century, a regulation that had taken over half a century to develop and was apparently effective (companies subject to it did not go bankrupt) suddenly came into question.
\nOver the next fifteen years the European Union developed new prudential rules that were brought together in the European Solvency II Directive, designed to ensure the solvency of insurance companies. These new rules, which are infinitely more complex than the previous ones, were inspired by a series of reforms that they took to a greater extreme: ones that were introduced in accounting, with the implementation of so-called \u201cfair value\u201d accounting(1)<\/sup><\/a>According to the fair value method, the assets must be valued in the balance sheets at the value at the balance sheet date. This method is opposed to “valuation at historical cost”, according to which the asset remains valued in the accounts at its price on the date of purchase, even if its market value has changed in the meantime <\/span><\/span>