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IAI Actuarial Core Principles · Business Economics · Government intervention in a market

Which argument is most commonly used to justify government regulation of financial services firms such as insurers?

Regulation of insurers is mainly justified by information asymmetry: consumers cannot easily assess product quality or solvency, risking mis-selling and failure. Rules on solvency and conduct protect policyholders and maintain confidence in the financial system.

  1. AFirms have no incentive to earn profit
  2. BInformation asymmetry between providers and consumers can lead to mis-selling and insolvency riskCorrect
  3. CCompetition always produces monopoly
  4. DConsumers over-demand regulated products
  5. Taxes cannot be levied on financial firms

Explanation

Policyholders cannot easily judge an insurer's solvency or the suitability of complex products, so regulation addresses this market failure through solvency and conduct rules. The other statements are not accepted economic justifications.

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