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IAI Actuarial Core Principles · Business Economics · Relationship between the government and the individual firm

The government of a country decides to privatise a state-owned insurer and simultaneously sets up an independent regulator to supervise solvency and conduct. Which combination of economic arguments best supports this policy package?

Private ownership can raise efficiency through profit incentives, while an independent regulator remains necessary because policyholders cannot easily judge an insurer's solvency and conduct; this information asymmetry is a market failure that competition alone does not cure.

  1. APrivate ownership may improve efficiency through profit incentives, while regulation addresses information asymmetry and protects policyholdersCorrect
  2. BPrivatisation removes all market failure, so regulation is only needed to collect tax
  3. CRegulation is needed because insurance is a pure public good that private firms cannot supply
  4. DPrivatisation reduces the need for any solvency rules since competition ensures safety
  5. Regulation is needed to create a monopoly so that premiums fall

Explanation

Privatisation can sharpen efficiency incentives, but insurance involves asymmetric information and long-term promises that customers cannot easily assess, so prudential and conduct regulation remains justified. Insurance is not a pure public good, and competition alone does not guarantee solvency.

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