Information asymmetry in insurance firms and supervisory institutions relations: problems, consequences and remedies

Information asymmetry in insurance firms and supervisory institutions relations: problems, consequences and remedies

Robert Kurek

 

Keywords: information, information asymmetry, insurance supervision

 

Summary: The study presents information asymmetry characteristics in a relation between supervision institution and insurance firm, discusses reasons for this phenomenon occurring, analyses the possible effects for individual insurance firms and the entire market and also indicates the possibilities and methods for eliminating its negative consequences. Due to the fact that a supervisory on institution has access to all information regarding an insurance firm under assessment, information asymmetry in the relation between a supervisory authority and an insurance company, by definition, should not take place. However, the performed research into this phenomenon indicates that some of its symptoms can be observed, which results from imperfections ingrained in the information itself, from the cognitive limitations of supervisory institutions staff (decision makers), as well as the indirect implementation, by a supervisory institution, of the information disclosed by insurance firms on a voluntary basis. The consequences of information asymmetry may become the reason for an improperly performed assessment by the supervision authority and may influence the decisions made. The performed analysis also puts an emphasis on the fact that classically described information asymmetry effects, such as adverse selection and moral hazard, in cases of asymmetry occurrence in the relations between a supervisory institution and an insurance company, should be supplemented by a costly verification of the current situation (collecting information and its credibility verification) which, depending on the scale, is significant for supervisory authorities in the process of the performed assessment and in taking due decisions, as well as for the proper allocation of the resources at the disposal of insurance institutions and also for the correct functioning of the entire insurance market. Each area of information asymmetry, in relations between a supervision institution and an insurance firm, generates a different type of protection possibilities against its occurrence, its reduced scope and for minimizing its effects, which has also been discussed in the study. Due to the fact that legal regulations and information submission arrangements are not capable of eliminating all information limitations for asymmetry occurrence to be correctly identified, it is necessary to keep monitoring all information processes taking place in relations between a supervision institution and an insurance firm. An indispensable condition for eliminating the limited capacity in recognizing insurance companies’ attributes by supervision authorities is studying the influence of all new regulations and researching the phenomena influencing the course of the supervisory processes. However, the fact that a different (larger) information scope is available for a supervisory institution does not necessarily have to influence the decisions made by this institution.

 

 

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