Regulatory Separation as a Mechanism to Curb Capture: A Study of the Decision to Act against Distressed Insurers

Abstract

Because of state-based regulation, single-state insurers are subject to oversight by a unique, domiciliary regulator (i.e., regulatory integration), whereas in the case of multi-state insurers, regulatory responsibilities are spread across several regulators (i.e., regulatory separation). In this study, the author draws upon recent theoretical literature pertaining to incentive problems and governmental organization to motivate an empirical study of the regulatory closure decision in insurance. Specifically, the author investigates whether there is evidence of the effect of regulatory separation and, if so, whether it appears to mitigate certain capture problems in the U.S. property-liability business. For a population of distressed companies, the author finds that the likelihood of solvency-related regulatory action is significantly-positively related to the number of states in which the insurer operates, whereas there is no evidence of a negative relation between closure and size. In contrast, for distressed single-state insurers the author finds evidence of a significant-inverse relation between closure and size. For companies subject to regulatory separation, as proxied by whether they write business in more than one state, these results do not support regulatory capture in the form of leniency towards larger distressed insurers (i.e., too-big-to-fail).