When Insurers Go Bust

Guillaume Plantin is Assistant Professor of Finance at London Business School. He is the coauthor of "Theorie du Risque et Reassurance". Jean-Charles Rochet is Professor of Mathematics and Economics at the University of Toulouse and a visiting professor of finance at the London School of Economics and Political Science. He is the coauthor of "Microeconomics of Banking".

Foreword vii Acknowledgements viii Chapter 1: Introduction 1 Chapter 2: Four Recent Cases of Financially Distressed Insurers 4 2.1 Independent Insurance Company Limited 4 2.2 Groupe des Assurances Nationales 13 2.3 Equitable Life 17 2.4 Europavie 25 2.5 Why Are Insurers Subject to Prudential Regulation? A First Pass 27 Chapter 3: The State of the Art in Prudential Regulation 29 3.1 The Main Features of Prudential Systems 29 3.2 Regulation and Ruin Theory: Controlling the Probability of Failure 34 3.3 Conclusions 41 Chapter 4: Inversion of the Production Cycle and Capital Structure of Insurance Companies 43 4.1 Inversion of the Production Cycle in the Insurance Industry 43 4.2 An Analogy between Insurance Capital and Deductibles in Insurance Contracts 45 4.3 The Role of Deductibles in Insurance Contracts 47 4.4 The Role of Insurance Capital to Mitigate Informational Problems 50 4.5 Conclusion: The Inversion of the Production Cycle Creates Agency Problems That Can Be Mitigated by Capital Requirements for Insurance Companies 53 4.6 Appendix: Capital Requirements as an Incentive Device 54 Chapter 5: Absence of a Tough Claimholder in the Financial Structure of Insurance Companies and Incomplete Contracts 56 5.1 Absence of a Tough Claimholder 56 5.2 Prudential Regulation and Incomplete Contracts 59 5.3 The "Representation Hypothesis" 61 Chapter 6: How to Organize the Regulation of Insurance Companies 64 6.1 Simple Prudential Ratios 64 6.2 "Double Trigger" 66 6.3 An Independent but Accountable Prudential Authority 68 6.4 Granting Control Rights to the Industry via a Guarantee Fund 69 6.5 A Single Accounting Standard 71 6.6 Limiting the Scope of Prudential Regulation 72 6.7 What if This Is Not Enough? 73 Chapter 7: The Role of Reinsurance 75 7.1 Organization of the Reinsurance Market 75 7.2 Reinsurance and Prudential Supervision 81 Chapter 8: How Does Insurance Regulation Fit within Other Financial Regulations? 83 8.1 Insurance and Financial Conglomerates 83 8.2 The Regulation of Banks and of Insurance Companies Are Two Different Jobs 90 8.3 Insurance and Systemic Risk 93 Chapter 9: Conclusion: Prudential Regulation as a Substitute for Corporate Governance 97 References 99