Is there Market Discipline in the European Insurance Industry? An Analysis of the German Insurance Market

The financial services industry has undergone significant regulatory change in thepast two decades due to Basel II (banking) and Solvency II (insurance). Even though these promulgations are focused on European institutions, their influenceextends around the globe. An important dimension of this new regulatory environment is the explicit reliance on market discipline. The extent to which market discipline can be relied upon for successful regulation depends on the strength of its influence. The research reported here is intended to provide input for measuring this strength in the German insurance market. Specifically, we analyze the relationship between two measures of market discipline (premium growth and termination rates) and two market signals (changes in financial strength ratings and complaint statistics). Our results indicate that market discipline has only limited effect to date in the German insurance market. We therefore conclude that for regulators to utilize market discipline as a building block within the new regulatory framework, they will need to increase market transparency.