market shares be achieved within a reasonable period in mandatory lines such as MTPL and medical (and thereafter sustained), and that a minimum aggregate premium retention level of say 30% to 40% be maintained (to remove the disguised brokers). Finally, the insurance sector could be required to publish efficiency benchmarks, such as premium per employee, combined ratio and net expense ratio.

# **<mark>Box 3:  Competition – why insurance is different from banking</mark>**

<mark>There is a large amount of empirical evidence that scale economies apply to the insurance sector up to a relatively large size of operation. For non life insurance this is partly an overhead spreading issue but the credibility of claims data also increases (roughly to the square root of the number of claims) with size. Thus large non life insurers can price more accurately. Smaller insurers often follow the leaders‟ pricing structures and attempt to compete on some other basis. Unfortunately there is little credible data in new insurance markets and insurers will typically not know the real cost of their product for some years. Thus under the pressure of too many competitors it is relatively easy for insurers to under-price and undermine the financial position of the whole sector (consumers tend to be efficient at finding the cheapest insurance price). This will be exacerbated if investment returns are high and some insurers believe that they can cover underwriting losses. Under-pricing combined with under-reserving leads to prolonged disputes and settlement delays and adversely affects the development of the sector.</mark> <mark>For life insurers scale is important because of the enormous investment that is required in building and retaining marketing and distribution capacity (typically up to 70% of total costs). Thus a start up life insurer can expect to be making accounting losses for some time, even if its intrinsic value (i.e. NPV) is increasing. However the underlying processes tend to be more stable than for non life insurance and the actuarial profession usually</mark> <u><mark>provides a control mechanism.</mark></u> _Composite insurers_

**While the IAIS insurance core principles require that life and non life activities are preferably handled in separately licensed entities (to pre-empt cross subsidies and adequately secure the assets covering life insurance policy liabilities) there is an exception if the supervisory authority is ‘satisfied that the insurer has satisfactory processes requiring that risks be handled separately on both going concern and winding up bases’** .  If MENA supervisors decide to grandfather the existing composites (for example to leverage limited human resources), it is essential that the life insurance assets are clearly identified, cannot be charged or lent, are held by a custodian and are otherwise completely ring fenced.

_Solvency regimes and guarantee funds_

**A desirable approach to developing a risk based supervisory model is to initially have relatively simple but modern solvency requirements and first focus on ensuring that proper information is being provided.** It is also essential to ensure that supervisors‟ analytical and intervention capacity is up to necessary standards.  Developing markets that have taken this approach typically seek technical assistance in producing relevant operating manuals and in performing the initial full scope on site inspections.  Supplementary general reserve requirements where they exist bear no relationship to an insurer‟s risk levels and would be better replaced with

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