On the Systemic Relevance of the Insurance Industry: Is a Macroprudential Insurance Regulation Necessary?

The paper examines whether there is an economic justification for a macroprudential approach to insurance regulation based on the normative theory of regulation. First, the paper elaborates some basic foundations, such as the characterisation of a macroprudential approach to financial regulation as well as an explanation of the functions the insurance industry contributes to the financial system and the real economy. Then it addresses the research question by analysing whether the requirements are fulfilled for a normative theory-compliant macroprudential regulatory foundation. Contrary to the prevailing opinion, the paper finds that the insurance industry is of systemic relevance, at least in terms of the efficient functioning of the financial system as a whole and the potential costs in case of failure or malfunction. Furthermore, it identifies the fundamental ingredients needed for a theory-based justification of a macroprudential insurance regulation. The value of this paper is in clarifying terms and in systemizing the rationales for a macroprudential regulation with respect to the insurance industry. Both are of importance for the classification of arguments in the current political discussion. The paper also provides the basic groundwork useful for further research on systemic risk and macroprudential regulation.