| Summary: | The economic reasons for life insurance regulation have not been well developed in the finance literature. In this paper we discuss some justifications that have been advanced for regulation and argue that they are not persuasive. The most rigorous arguments in favor of the regulation of life insurance companies are as follows. First, regulation can prevent the adverse affects of information asymmetries in markets for illiquid contracts. Second, regulation can be used to ensure that insurers commit to contracts. In the case of life insurers these contracts may be incomplete, and it may be difficult to determine the terms of the contracts objectively; this is particularly so with U.K. with-profit contracts, for example. These justifications for regulation, combined with a public choice analysis of regulation, lead us to conclude that regulation should be voluntary and provided by competing private and government agencies. Finally we propose a method of moving toward such a regulatory framework starting from the current regulatory institutions in the United States and the European Union (EU). An approach based on the "mutual recognition" concept used, at least in theory, in the EU would provide an approximation to the regulatory approach we believe can be justified by economic principles.
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