MR Microinsurance_2012_03_29.indd - International Labour ...

Access to insurance and financial sector regulation
Prudential supervision is concerned with the effective monitoring and mitigation
of risk. Yet development focuses on facilitating business innovation and
enterprise, which often entails taking risks. This conflict is healthy if it provides
incentives for discussion about the future; it can also be debilitating if interest
groups become entrenched in irreconcilable positions. Regulation involves using
sets of rules, standards and codes of practice that are generally tried and tested
techniques, while development through innovation may require new rules and
standards. Schumpeter (1942) used the term “creative destruction” to describe the
development process. In creating new knowledge, rules and standards, old ones
must be dispensed with or adapted. Herein often lies the conflict between
development and regulatory processes.
However, in a deeper sense, regulation and development are not incompatible.
In fact, they are complementary. A well-regulated and supervised financial-services
sector is not an end in itself. A regulator promotes financial soundness
because it is a vital component of economic growth and development.
Financial institutions enter the market in large part because the regulatory
regime offers a well-regulated, stable and sound financial system. Thus, supervision
and development work hand in hand to promote a sound and progressive
financial-services sector.
To understand the development role of the insurance regulator, a broader
view of the insurance business and its role in economic development is also
needed. Effective coordination between the supervisory and development roles is
vital, so that rules or regulations can be business-friendly without undermining
the basic tenets of good supervision. As illustrated in Box 25.1, the delicate balance
between the supervisory and developmental roles is best achieved within
one organization with a shared purpose rather than through separate agencies
with possibly conflicting goals.
There are several synergies between financial stability and financial inclusion
as it pertains to insurance. Zingales (2009) notes that regulation plays a key role
in bolstering trust in insurance and is an important factor in the development
of a nascent industry. From a prudential perspective, proper access to insurance
is not possible if entities that accept insurance premiums are not well regulated.
Furthermore, for an insurance industry to experience healthy growth, it needs
to have a strong and stable foundation. Huge volumes of small policies can
form such a foundation because they do not represent a concentration of risk,
and they should have a stable claims experience due to the law of large
numbers.
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