The Valuation of Financial Companies: Tools and Techniques to Measure the Value of Banks, Insurance Companies and Other Financial Institutions

7

Regulatory Capital for Insurance Companies

Marco Grotteria

As it happens for banks, capital requirements play a key role in business and financial planning of insurance companies, and in their valuation. Contrary to the banking system, there is not such a thing as a global regulatory framework in the industry, but – although a certain progressive convergence can be observed internationally – the regulation remains mostly national and in some jurisdictions even sub-national. We will therefore briefly sketch out the main features of the regulatory schemes in US and Europe.

7.1 INSURANCE INDUSTRY REGULATION IN THE US

Different from the other financial service industries, the US insurance sector is not regulated at federal but at state level. All that said, it's worth noting that the entire US history was marked by continuous tensions between federal institutions and states, and by some temporary attempts of deeper intervention made by the Federal Authority. Nevertheless, the content of the several state regulations clearly shows a high level of harmonization, thanks to the work of the NAIC, as will be explained next.

The most important event in the history of US insurance regulatory system is undoubtedly the Supreme Court decision in Paul versus Virginia (1868). Samuel Paul was an agent in Virginia for some insurance companies based in New York and not licensed in Virginia. After being denied the license to sell insurance policies and having sold them anyway, he was declared guilty ...