Does State Rate Regulation Matter? An Assessment of the Effects of More Stringent Regulation on Insurers' Performance in Homeowners Insurance

54 Pages Posted: 14 Dec 2018

See all articles by Patricia Born

Patricia Born

Florida State University

J. Bradley Karl

East Carolina University - College of Business

Robert W. Klein

Georgia State University

Date Written: July 27, 2018

Abstract

In this paper, we examine the effects of state rate regulatory stringency on insurers' loss ratios at the firm level in homeowners insurance. We use several different measures of regulation per se and regulatory stringency. In one model, we use the type of state rating law as our measure of regulation with different specifications in terms of how we group states based on their rating laws. In our second model, we utilize measures of regulatory stringency with respect to overall rate adequacy and how long it takes insurers to get rate changes approved. For this model, our measures of regulatory stringency come from two different data sources. In one specification, we construct regulatory stringency measures from a survey we conducted in which we queried companies on how they would characterize each state's rating environment with respect to rate adequacy and the time it takes to get rate changes approved. In an alternative specification of this model, we utilize information extracted from a database on insurers' rate filings from which we have developed several metrics related to regulatory stringency. In a third model, we interact our regulatory variables with a variable that indicates whether there was a catastrophic event in the prior year. Generally, we find that when the occurrence of catastrophes are not considered, prior approval regulation and more stringent regulation are associated with lower loss ratios. When we interact regulation with the occurrence of a catastrophe, we find that certain stringency measures are associated with higher loss ratios. We surmise that, under "normal circumstances," insurers find ways to work around or ameliorate the effects of tight constraints on their rates and/or long delays in getting them approved but this does not appear to be the case after a catastrophe. In future research, we will expand and refine our measures of regulatory stringency, further explore how insurers adjust or respond to stringent regulation, and estimate the effects of regulation on additional market outcomes.

Keywords: Homeowners Insurance, Catastrophes, Regulation, Political Economy

JEL Classification: L51, G18, G22

Suggested Citation

Born, Patricia and Bradley Karl, J. and Klein, Robert Warren, Does State Rate Regulation Matter? An Assessment of the Effects of More Stringent Regulation on Insurers' Performance in Homeowners Insurance (July 27, 2018). Available at SSRN: https://ssrn.com/abstract=3288760 or http://dx.doi.org/10.2139/ssrn.3288760

Patricia Born

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States
8506647884 (Phone)

J. Bradley Karl

East Carolina University - College of Business

Greenville, NC 27858-4353
United States

Robert Warren Klein (Contact Author)

Georgia State University ( email )

5387 Northchester Ct
Atlanta, GA GA 30338
United States
404-386-1591 (Phone)

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