Policy Form and Rate Regulation in the Property-liability Insurance Market PDF Download

Author: Junhao Liu
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Languages : en
Pages : 77

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Book Description
The regulation of financial products plays an important role in U.S. financial markets. While there are benefits to regulation, policymakers must weigh these benefits against the costs. This dissertation studies the costs of complying with policy form and rate regulation in the U.S. property-liability (P/L) insurance market. In the first chapter, we estimate the cost of complying with regulation by exploiting the rich cross-sectional and time-series variation in regulation, focusing on the regulation of policy forms. The costs of complying with stringent form regulation are significant, approximately 3.1 percent of the general expenses for the average insurer per line of business and year-$1.8 billion for the industry per year. The compliance costs are higher in personal lines of insurance. The burden of these costs falls unevenly on insurers, with the regulatory effects isolated to the firms writing less than $5 million in premiums in a line of business per year. A potential way to reduce regulatory compliance costs is the use of digital technology to streamline the regulatory process. In Chapter 2, we leverage a quasi-experimental policy change which mandates use of an internet-based flow management tool that enables insurers and regulators to exchange form and rate filing information, and find that digitization lowers the costs of complying with regulation. The average insurer per line of business and year in the highest quartile regarding the proportion of business under the mandate saves 4.8 percent of general expenses. Our results also suggest a fixed cost of adopting the technology, with larger cost-saving accruing to firms that adopt the new technology more widely. While Chapters 1 and 2 are closely related, the scope of the cost estimation is different in the two chapters. Chapter 1 focuses on the policy form regulation, and it contrasts stringent form regulation with non-stringent form regulation by measuring the \textit{extra} costs of complying with stringent regulation compared to other types of regulation. In Chapter 2, we consider policy form and rate regulation as a whole and measure the costs of complying with all types of regulation. The two chapters complement each other and, in combination, provide empirical evidence of the costs of insurance product regulation.