Exit Rights and Insurance Regulation: From Federalism to Takings

Abstract:     
Rate regulation has commonly been imposed on natural monopolies in order to prevent excessive profits by the regulated firms. Use of regulation in turn creates the risk of confiscation of firm assets if the rates of return are not sufficient to cover both the variable and fixed costs of the business, leading to constitutional protections against insufficient rates. Rate regulation has often been extended to competitive industries, such as insurance, where it has no similar intrinsic rationale. The reduced returns, and higher costs to the regulated firm necessarily drive the rates below the required competitive return in ways that no hearings or appeals can fix. When firms therefore seek to exit form a competitive industry to forestall the risk of regulation, they should be allowed to so as of right, even if firms in monopolistic industries are not accorded that privilege. Nonetheless many states, such as Florida with its Wind Insurance Program, have been able to force firms to remain in the state, thereby imposing enormous burdens both on shareholders and on policyholders in other jurisdictions. Although the Constitution contains no explicit guarantee of an exit right, such must be recognized in competitive industries to implement the constitutional guarantees against confiscation.

Note: This is a description of the article and is not the actual abstract.

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