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Regulation (Reducing asymmetries of information (Requiring full disclosure…
Regulation
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Need for regulation
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Risk that if one company collapses,it can cause a systematic financial collapse of he system.
Asymmetry of information, expertise and negotiating strength that exists between the product provider and the end customer.
Exacerbated by:
Financial transactions are often long term in nature and can have a significant impact on the future economic welfare of individuals
Most of the population not well educated on financial matter and find the range of products offered both complex and confusing.
Moral hazard
The action of a party who behaves differently from the way they would behave if they were fully exposed to the consequences of that action.
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Related to information asymmetry, with the party causing the action generally having more information than the organisation that bears the consequences.
Not the same as anti-selection,which is also taking advantage of particular aspects of an insurance contract, but within the terms offers by the insurer
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Costs of regulation
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Indirect costs
Alteration in consumer behaviour, who may be given a false sense of security or a reduced sense of responsibility for their own actions
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Anti selection
People will be more likely to take out contracts (or exercise a guarantee or option) when they believe their risk is higher than the insurance company has allowed for in its premiums (or pricing of guarantees and options).