Is regulation and supervision of insurance companies necessary?

The answer to the question posed must obviously depend on what an insurance company will do in the absence of any regulation. There should be no need for governmental intervention unless the company, when left to its own devices, is expected to engage in unfair or socially harmful practices. In the following we shall study this problem with the help of some simple models, based on assumptions which seem reasonable. We shall find, not surprisingly, that if the company primarily is interested in making a quick profit, some regulation may be necessary. On the other hand we shall find that if the management of the company takes a long-term view, no regulation should be necessary. We shall also see that there are limits to what a government can achieve by regulation of private insurance companies which operate in a free economy.