Regulatory separation as a mechanism to curb capture: A study of the decision to act against distressed insurers

Because of state-based regulation, single-state insurers are subject to ove rsight by a unique, domiciliary regulator (i.e., regulatory integration), w hereas in the case of multi-state insurers, regulatory responsibilities are spread across several regulators (i.e., regulatory separation). In this st udy, the author draws upon recent theoretical literature pertaining to ince ntive 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 separati on and, if so, whether it appears to mitigate certain capture problems in t he U.S. property-liability business. For a population of distressed compani es, the author finds that the likelihood of solvency-related regulatory act ion is significantly-positively related to the number of states in which th e insurer operates, whereas there is no evidence of a negative relation bet ween closure and size. In contrast, for distressed single-state insurers th e author finds evidence of a significant-inverse relation between closure a nd size. I;or companies subject to regulatory separation, as proxied by whe ther they write business in more than one state, these results do not suppo rt regulatory capture in the form of leniency towards larger distressed ins urers (i.e., too-big-to-fail).