Reserve Levels and Reserve Requirements for Profit-Maximizing Insurance Firms

Abstract

Virtually all western countries regulate the reserves of insurance firms, even when they do not directly regulate the premiums charged. The justification for such reserve requirements is usually based on consumer ignorance; it is alleged to be costly if not impossible for a typical consumer of insurance to determine the level of reserves held by insurance firms from which he buys; consequently, consumers would often be unprepared for insurer default.¹⁾ But even if one accepts the premise of consumer ignorance, the premise only implies that reserves regulation may be useful.