Is There Market Discipline in the European Insurance Industry? An Analysis of the German Insurance Market

Economists often argue in favour of market discipline as a means to distribute resources effectively and efficiently. These same arguments likely influence decision-makers as they incorporate market discipline as the third pillar of Solvency II, the European insurance regulatory scheme currently being implemented. Success for Solvency II, then, is dependent in part on the strength of influence found in market discipline. Our research indicates that the German insurance market demonstrates the existence of such discipline, although the actual effect appears smaller than previously found in the U. S. insurance market. Solvency II, therefore, seems to be following an appropriate path, although further research is needed to evaluate whether or not enhancements to market discipline within the European market are warranted. The Geneva Risk and Insurance Review (2012) 37, 180-207. doi:10.1057/grir.2011.8; published online 1 November 2011