Extreme Events – Specimen Answer A.8.1(c)
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Q. You are another EU
insurance firm. Why might you have an interest in how successful or
unsuccessful the firm in (b) is at putting forward its case for greater
allowance for diversification between operational and other risks?
You may also want to argue for reduced regulatory capital requirements
for your own business
Conversely, if industry-wide support mechanisms are ultimately paid for
by the rest of the industry, then you may not want other firms to be unduly
weakly capitalised, because you might then end up contributing to any bail-outs
that they might benefit from or you might be worried about systemic
reputational issues that might hit the industry as a whole.
N.B. This line of argument seems less prevalent than
(i), perhaps because there is less perceived incentive on firms to pursue it.
This may be because stronger firms take the view that failure of weak firms
might reduce capacity and hence increase the profitability of survivors.
Alternatively, they may believe that if the stress is severe enough then losses
will eventually be picked up primarily by the public purse rather than by other
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