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

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.