رقابت قانونی و مدارا: شواهدی از صنعت بیمه عمر

Regulatory separation theory indicates that a system with multiple regulators leads to less forbearance and limits producer gains while a model of banking regulation developed by Dell’Ariccia and Marquez (2006) predicts the opposite. Fragmented regulation of the US life insurance industry provides an especially rich environment for testing the effects of regulatory competition. We find positive relations between regulatory competition and profitability measures for this industry, which is consistent with the Dell’Ariccia and Marquez model. Our results have practical implications for the debate over federal versus state regulation of insurance and financial services in the US.

The economic theory of regulation (ETR) has evolved over the past four decades to explain the relations of producers in an industry, their consumers, and their regulators. Stigler (1971) often is credited with the seminal work in describing how producers can influence regulators of their industry to win benefits that otherwise might accrue to others, although these benefits are constrained by information and organization costs (see, e.g., Peltzman et al., 1989). Subsequent researchers expand the theory to better explain the limits of influence held by producers with regulators (Peltzman, 1976 and Becker, 1983) and to generate empirical evidence in support of the expanded ETR (Danzon and Harrington, 2001 and Muth et al., 2003). While many studies of the traditional ETR focus on industries overseen by a single regulator, researchers have begun to explore the effects of multiple regulators, especially in the financial services industry (see, e.g., Merton, 1995, Kane, 1999 and Huizinga and Nicodème, 2006). Franks et al. (1998) specifically estimate both the direct and indirect costs of regulation for various sectors of the financial services industry in the UK, US, and France. A portion of their results imply that the cost of life insurance regulation is comparatively high in the US, which they attribute to the “extra layer” of state regulation. Franks et al. focus only on regulatory costs and not possible benefits, which they admit to being a generally serious omission in the finance literature. Merton, 1995 and Kane, 1999 suggest that one source of such benefits can be regulatory competition. Laffont and Martimort (1999) provide a theoretical framework showing that competition between multiple regulators raises the transaction costs of collusion between regulators and regulated firms. A major implication of their model is that separation of regulatory responsibilities among multiple regulators reduces regulatory forbearance and, therefore, producer gains attributable to their influence with regulators. This has become known as regulatory separation theory. Dell’Ariccia and Marquez (2006) develop an alternative regulatory model showing that, whether in financially integrated economies or within single economies, multiple regulators normally will generate a “competition in laxity” in setting and maintaining regulatory standards. In this study, we empirically test the very different implications of these alternative models of regulatory competition. In line with the theoretical work of Acharya, 2003 and Dell’Ariccia and Marquez, 2006, we focus on empirical examination of returns, i.e. profitability, of US life-health insurers during the period 1999 through 2003. The US insurance industry is particularly well-suited for testing because insurers are regulated by designated bodies in each state and territory in which they issue policies. An insurer writing business in the US can be subject to as many as 55 regulators.1 While state insurance regulators attempt to coordinate many standards via model legislation developed through the National Association of Insurance Commissioners (NAIC), state legislatures independently pass their own regulations pertaining to capital adequacy, policy forms and rates, market conduct, and agent licensing, so regulations often are not uniform (Grace and Phillips, 2007 and Klein and Wang, 2009). Further, regulatory compliance requirements and actions can vary across state regulators (Willenborg, 2000). Most state insurance regulators also have an economic development role within their states, which can only serve to further promote competition between state regulators. Insurers are net income generators for virtually all states in the US. In 2007, insurers paid premium, franchise, and income taxes and fees to states that exceeded the cost of state insurance regulation by approximately $15.5 billion (Lehmann, 2008). Fortunately for researchers, coordination of accounting standards via the NAIC allows us to collect and test comparable financial data for insurers domiciled in the US and also facilitates tracking of the number of regulators to which each insurer is subject. This means that US data are more homogeneous and tractable for comparative analysis than international regulatory data, which often are subject to heterogeneous legal systems, economic structures, and accounting practices. Our results generally support the implications of Dell’Ariccia and Marquez’s regulatory competition model. In particular, greater regulatory competition across the states in the US leads to higher profitability for regulated insurers, which suggests greater forbearance by state regulators and a “competition in laxity”. Our test results for capital adequacy measures also are consistent with those for profitability. These findings should be of interest to researchers, but also to political leaders, regulators, investors, and, of course, the insurance industry in the US and elsewhere.

Even though financial services firms—such as banks, investment companies, and insurers—face multiple regulators, empirical work related to multi-jurisdictional regulation of these essential industries remains relatively rare. Such research has been limited because theoretical models involving multiple regulators have not been well-developed until recently. Prominent models of regulatory competition were introduced by Laffont and Martimort, 1999 and Dell’Ariccia and Marquez, 2006, but they produce very different predictions about the effect of competing regulators on the firms that they regulate. Laffont and Martimort’s regulatory separation model predicts that firms facing more regulators are less likely to capture the regulators, which implies less regulatory forbearance. Alternatively, the Dell’Ariccia and Marquez (2006) model predicts that regulatory competition will lead to greater regulatory forbearance. The US life insurance industry, with over 50 regulators and relatively uniform and comprehensive financial data, represents an excellent arena for empirically testing the implications of these theories. Our results generally support the Dell’Ariccia and Marquez model in that greater regulatory competition is positively and significantly related to various measures of insurer profitability, especially operating return on equity. The economic significance of regulatory competition on profitability is particularly notable. Further confirmation is provided by the significantly negative relation that we observed between regulatory competition and risk-based capital. Overall, our results are consistent with regulatory competition leading to greater forbearance and, hence, stronger financial performance among the regulated firms. For years, state insurance regulators and their supporters in the US have contended that the regulation of insurers at the state level, which implies some redundancies and inefficiencies, actually produces economic benefits including better protection of consumer interests, in comparison with a single-regulator system (see, e.g., Pickens, 2003). The regulatory separation theory of Laffont and Martimort (1999) and supporting empirical literature provides a possible theoretical rationale for a system of multiple, competing regulators that can reduce the costs of regulatory capture by the regulated industry. Our results run counter to these arguments that regulatory competition essentially is good, however. These findings should be very relevant during a time when various initiatives that advocate at least some degree of federal regulation to supplant multi-state regulation are being considered by the US Congress. Recent changes in the balance of power in the executive and legislative branches, coupled with both direct and indirect emergency financial support by the US government to American International Group and several large, publicly held life insurers via their banking subsidiaries, only add impetus to this issue in the US. The implications of our findings for the regulation of financial entities across national borders are much tougher to judge. The subject of our empirical work, US insurance regulation, is a unique amalgam of competition and cooperation among state-based regulators who face the long-term risk of losing their sinecures to federal entities. We certainly cannot maintain that our findings can be projected to other nations. What we can say is our research suggests that the implications of the regulatory competition model developed by Dell’Ariccia and Marquez, apparently with the international banking system in Europe in mind, apply to a different financial industry and very different regulatory system “across the pond”. Further research on why US insurers cluster at the two extremes of the spectrum with regard to number of states licensed impresses us as warranted. The determinants of this separation and how managers of insurers exploit niches in the diverse regulatory environment provided by state regulation should be of particular interest. If the US moves toward a single-regulator system, will this render some firms’ strategies obsolete? Will it also affect the mix of firms in the industry? The US insurance industry data is well-suited for testing such regulatory issues. The applicability to and implications for international regulation also impress us as ripe areas for further exploration.