All financial firms should by law be compelled to submit an annual business model to the regulator and supervisor for assessment if they are to continue to trade. This should be a basic condition to provide adequate consumer protection and the integrity of the financial supervisory and regulatory systems.
As has been stated before, the business models of insurance companies and banks, the two major financial sectors, are totally different. While banks borrow short and lend long, a flawed business model if ever there was one, insurance companies are often compelled to have a capital adequacy of at least 110 per cent of its likely liabilities. And, of the various branches of insurance – unemployment, health, home, motoring, disaster, etc. – the greatest moral hazard is motor insurance; it is the low hanging fruit, in that it is the easiest for insurance companies to make lots of money while paying out a relatively low percentage of claims.
First, unlike life and health insurance, or even unlike home and contents insurance, motorists are compelled by law to have insurance. Unlike life and pensions insurance, for example, there is no need to base actuarial assumptions on a continuous mortality investigation report and the one in two hundred event assumption is in many ways only theoretical since there is no longevity risk. Generally, there are two broad kinds of insurance regulation: firm-specific and industry-wide. Firm-specific regulation and supervision is when the authorities are focusing on a single firm, going through its books, interrogating its staff, and talking to a sample of its customers. This may arise out of a formal complaint, market rumour, suspicion or a randomised stress test.