Why does the regulator insist on enhanced capital requirements?

The regulator insists on enhanced capital requirements primarily to minimize the risk of an insurance company becoming insolvent. This is a critical aspect of financial regulation within the insurance industry, as it ensures that insurers maintain a sufficient buffer of capital to absorb losses and meet their obligations to policyholders and claimants. By requiring companies to hold additional capital reserves, regulators aim to safeguard the financial stability of insurance firms, thereby protecting consumers and preserving confidence in the insurance market.

This capital adequacy serves a crucial role in preventing situations where an insurer may be unable to pay claims due to lack of funds, particularly in times of significant financial stress or unexpected claims surges. Enhanced capital requirements help to create a cushion that supports an insurer’s operational viability and long-term sustainability, ultimately contributing to the overall stability of the financial system.

While other aspects like protecting shareholders and adhering to industry standards are important, the primary focus of enhanced capital requirements is on safeguarding the interests of policyholders and the integrity of the insurance system from systemic risks associated with insolvency.