Stress Testing for Insurance Companies

Lourenco Miranda

Financial regulation and supervision embody the two most powerful and influential instruments of the state for sculpting, shaping financial systems and safeguarding financial stability. They cohabit with the direct financial market interventions of the state in the development of its monetary and fiscal policies. The major role of regulation and supervision is to introduce public assessment and publicly anticipated properties into the existing operations of financial institutions.

In general, the need for public regulation and supervision of finance is justified by the historic and significant market failures. The most noticeable representations of these are the negative externalities, asymmetric information, adverse selection, unfair competition, market incompleteness and monopolistic set-up of the too-big-to-fail institutions. The increased globalisation of the industry and the markets, the growing interconnection and integration of the financial sector drive the need for regulatory consistency and a break in the regulatory/supervision paradigm and a consequent shift from only a microprudential supervision to a macroprudential regulatory approach. The point of departure is to a

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