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February 6, 2023

Financial Systems

The banking sectors of most emerging nations have a significant amount of influence over such countries’ overall financial systems. Long-term contractual savings institutions, such as pension funds and life insurance firms, play a limited role in most nations, with a few noteworthy outliers (Singapore, Malaysia, Chile, and Korea). These countries are the exceptions to the rule. This underdevelopment of contractual savings may be primarily attributed to three factors: the low level of income; the presence of underfunded social security systems; and the adoption of stringent restrictions on insurance firms.
In the vast majority of developing nations, insurance business activities have been subjected to stringent regulations. Competition and innovation have been hindered by limitations on premiums and products, and accumulated money have been put in low-yielding government assets. The market has often been monopolized by state-owned businesses. Because of the very poor returns they have received on their assets, insurance firms have essentially been acting as tax collectors for inflation. In the last several years, many developing nations have begun the process of reforming their pension and insurance systems in an effort to mobilize long-term financial resources, foster the growth of private sector businesses, and boost capital markets. Reform efforts are especially robust in the nations of Latin America and Eastern Europe because of the severe financial strains that are being placed on the social security systems in those regions.
As insurance regulations are reformed, one of the questions that faces policymakers in developing countries is what the structure of a competitive industry would be and what kind of regulations would be required to ensure the safety and soundness of insurance assets without inhibiting competition and innovation. This is one of the questions that policymakers in developed countries are also facing. In contrast to the banking industry, which enjoys widespread international agreement on the significance of prudential regulations and the various forms they can take, the insurance industry continues to be characterized by significant differences in regulatory philosophy, even among developed nations.
The current report, which gives an overview of the structure, performance, and regulation of the US life insurance sector, was commissioned from Kenneth M. Wright, a former director of the American Council of Life Insurance. Even though the life insurance sector in the United States is very complicated, it is anticipated that emerging nations may learn something from its amazing history of innovation as well as the way it addresses problems of market structure, solvency regulation, and insurance taxes.
This article is part of a larger series of publications on contractual savings institutions that address economic and regulatory policy challenges. The series’ overarching goal is to encourage policy change in developing nations.

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