An Economic Theory of Insurance Regulation
The application of four theories of regulatory behavior are tested on the property-liability insurance industry through the use of a simultaneous equations system. Insurance profitability and regulation are the endogenous variables in the system. Regulation is measured both as the type of rate regulatory law in effect and a subjective assessment of the restrictiveness of administration of regulation in a state. The four theories tested are capture theory, minimization of conflict, maximization of political support, and agency theory. The analysis is based on private passenger automobile and homeowners insurance for the period 1973 through 1980. No theory adequately explains the results of regulatory behavior for both lines of insurance. The results of the two lines tend to contradict each other. The need for a new theory of regulatory behavior that includes consideration of the relative value of complementary products subject to regulation is indicated.
University of Illinois - Urbana-Champaign
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University of Illinois at Urbana-Champaign