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Regulatory interventions drop in year before elections: Study

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Regulatory interventions drop in year before elections: Study

Insurance regulators often strategically delay interventions against failing firms in the year before elections, according to a new study.

The probability of regulatory intervention falls by 78% in the year before an election, according to a new study from the Wisconsin School of Business at the University of Wisconsin–Madison.

The extent of the electoral delays increases before tightly contested elections, where both elected and appointed regulators delay intervening with failing firms, according to the study. While appointed regulators mainly delay prior to elections in which the appointing governor is in a competitive race, they do not delay in elections in which the appointing governor is likely to be re-elected. Elected regulators delay before all elections, regardless of competitiveness, according to the report.

“The announcement of a regulatory intervention is basically an admission that a firm has failed on a regulator’s watch — it’s bad news,” Ty Leverty, a co-author of the study and Wisconsin School of Business associate professor of risk and insurance, said Tuesday in a statement. “Elected regulators who are at the mercy of political considerations are likely to be driven by those concerns, and our findings confirm that.”

There are several reasons why regulators could benefit from delaying interventions on failing insurers before an election, including that public officials might face questions about their competency when firms under their watch fail and thus have an incentive to delay action and want to generate favorable economic news before an election, he said.

The reduction in regulatory actions in election years was not a result of a lack of resources or state insurance departments being unusually busy, according to the study. The number of workers charged with monitoring the solvency of insurers did not change in election vs. nonelection years, nor did the number of routine financial exams performed by those employees.

However, the number of discretionary financial exams — those specifically requested by the insurance commissioner — declined during election years, even though the number of firms meeting the conditions for such an exam did not. Those exams are about 44% less frequent in the year before an election compared with the year after an election, according to the study.

“Delaying regulatory action before elections is costly for society, as the customers of the insurance company and taxpayers pay for much of the costs associated with an insurer bankruptcy,” Mr. Leverty said. “The study found evidence that suggests that delayed interventions before elections increase the cost of insurer failure by $0.40-0.48 for every dollar of pre-failure assets.”

The researchers combined detailed company-level data and failure data from 1989 to 2011 with matched data on the electoral cycles of the insurance commissioner, or the governor if the commissioner is appointed. The sample included about 3,200 firms and 300 separate elections in 50 states over 21 years.

 

 

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