Regulator Performance, Regulatory Environment and Outcomes: An Examination of Insurance Regulator Career Incentives on State Insurance Markets

Abstract

In this paper we test whether the past or future labor market choices of insurance commissioners provides incentives for regulators in states with price regulation to either favor or oppose the industry by allowing prices that differ significantly from what would otherwise be the competitive market outcome. Using biographical data on insurance regulators, economic and state specific market structure and regulatory variables, and state premium and loss data on the personal automobile insurance market, we find no evidence consumers in prior approval states paid significantly different "unit prices" for insurance than consumers in states that allow competitive market forces to determine equilibrium prices during the time period 1985-2002. We do, however, find evidence regulators who seek higher elective office following their tenure as insurance commissioner allow higher overall "unit prices" relative to competitive market states. The "unit price" of insurance in regulated states is not statistically different from the competitive market outcome for regulators that make lateral moves back into state government and it is mildly higher for regulators who enter the insurance industry following their tenure. Overall the results are consistent with the existence of asymmetric information in the regulatory process that agents use to enhance their career aspirations.

Keywords: Auto Insurance, Price Regulation, Regulatory Incentives, Revolving Door

JEL Classification: G22, G28, L51