Date of Award
Doctor of Philosophy (PhD)
Insurance industry is an important component of the US economy. In 2013, the industry sold policies worth $ 1.8 trillion and employed 2 million people. Most of the US population has exposure to different kinds of insurance like automobile, health, life etc. which makes the sector politically sensitive. The incentives that various stakeholders face will be critical for the sector. Hence, I use my dissertation as an opportunity to explore how the political and regulatory processes affect the policy outcomes.
In the first chapter, I examine how two different selection systems for state insurance regulators, election and appointment, affect policy outcomes in a market with multiple competing firms. In the United States, in some states, insurance regulators are elected (by ballot) while in other states they are appointed (by the Governor). Traditional theory suggests that elected regulators are pro-consumers while appointed regulators are pro-industry. I collected data on premiums paid by an individual on an auto insurance policy across 48 states to show that elected regulators choose policies salient for most consumers (e.g. lower premiums) in contrast to appointed regulators (higher premiums). This impact is larger and statistically significant in the counties where a majority of state’s population is concentrated. This is because the marginal cost of reaching out to voters is much lower in areas with higher concentration of population. State level data confirms that premiums per capita written by auto insurance firms is much lower in states with elected regulators as compared to states with appointed regulators. Different states have given insurance regulators varying degrees of regulatory powers to fix premiums on automobile insurance premiums.
The second chapter captures the response of the industry to arbitrary fixing of premiums on auto insurance policies. Elected regulators tend to prefer lower premiums on auto insurance policies as compared to appointed regulators. Since the premiums are regulated, insurance firms compete on the unregulated aspects of the market. Competition between firms ensure that the extra revenue earned by charging higher premiums (in states with appointed regulators) is used to other a better product (higher payments on claims filed by policyholders). Hence, an elected regulatoroffers a bundle of lower prices and inferior product. And an appointed regulator does not ensure pro-industry outcomes as there are no systematic differences in profits in states with elected or appointed regulators (as shown by previous research).
The third chapter of the thesis examines the influence of interest groups on effective insurance premium tax rate. I focus on market concentration as a proxy for the ability of the firms in an industry to organize into an interest group to capture regulation. I find that states with a higher degree of market concentration in the insurance industry tend to have lower effective insurance premium tax rate. To establish causality, I use the coast to area ratio in the state as a source of exogenous variation in the market concentration. This is because exposure to the coast increases the probability of catastrophic events such as hurricanes which leads to the exit of several insurance firms. I find empirical evidence that a 1 percent increase in market concentration is associated with a 0.6 percent reduction in the effective insurance premium tax rate.
Sharma, Ghanshyam, "Essays on Insurance Regulation" (2017). All Dissertations. 2540.