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Florida State University Journal of Transnational Law & Policy

Abstract

The very serious and extremely costly problem of insurer insolvencies is prevalent throughout the world. Governments have to adopt various regulatory systems to combat the extensive costs associated with these insurer insolvencies. In the United States, solvency regulation is predicated on a risk-based capital (RBC) system. The National Association of Insurance Commissioners (NAIC) created a model RBC system that most states have adopted, at least in some form. Despite the RBC system and the efforts of regulators, insurer insolvencies remain a serious issue in the United States. The continuing insolvencies raise questions about how to improve the RBC system as the United States begins to reform its solvency regulation system. Utilizing the Coase theorem as an analytical framework, this article identifies the costs associated with the insurance transaction. Furthermore, it explains how regulation seeks to mitigate these costs and avoid insolvencies. The article specifically addresses the RBC system in the United States and the regulatory system currently being implemented in Europe-Solvency II. By examining the RBC system from an economic perspective, this article helps identify the costs, possible shortfalls, and potential areas of improvement associated with the system. As the United States begins its own solvency regulatory reform, it enjoys the luxury of learning from the successes and failures of solvency regulation systems in other parts of the world. Accordingly, this article examines Solvency II and identifies certain characteristics that may be useful in improving the RBC system. This article also explains how implementing specific aspects of Solvency II could help increase total economic welfare and ultimately improve the United States' insurer solvency regulation system from an economic perspective.

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