Extreme Events – Specimen Answer A.8.1(c) – Answer/Hints

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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?

         i.            You may also want to argue for reduced regulatory capital requirements for your own business

       ii.            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 industry participants.

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