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Regulatory Forbearance and the Failure Cost for U.S. Property and Liability Insurers

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  • Yi-Hsun Lai

    (Department of Finance, National Yunlin University of Science and Technology, 123 University Road, Section 3, Douliou, Yunlin 64002, Taiwan, R.O.C. E-mails: bbgopher@yahoo.com.tw; laiYiHsu@yuntech.edu.tw)

  • Wen-Chang Lin

    (Department of Finance, National Chung Cheng University, Taiwan.)

  • Min-Ming Wen

    (Department of Finance and Law, California State University Los Angeles.)

  • Chien-Po Wang

    (Department of Business Administration, National Chung Hsing University, Taiwan.)

Abstract

This study examines the extent to which regulatory forbearance can affect the fragility of U.S. property and liability (P/L) insurance firms. By using a split-population survival model, we find that the risk-based capital (RBC) ratio is inversely correlated with the resolution cost paid by guaranty funds but is uncorrelated with the insurer failure rate. This implies that the RBC regulatory rules may embed some extent of forbearance that can lead to greater failure costs when insurers become insolvent. The policy implication of this study is that regulators should pay more attention to controlling failure costs by adopting more flexible intervention rules rather than merely focusing on forestalling insolvencies. Our empirical results also support the view that greater regulatory separation can reduce the insurer failure rate, while more stringent rate regulation can make insurers more fragile.

Suggested Citation

  • Yi-Hsun Lai & Wen-Chang Lin & Min-Ming Wen & Chien-Po Wang, 2015. "Regulatory Forbearance and the Failure Cost for U.S. Property and Liability Insurers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 40(1), pages 66-88, January.
    • Handle: RePEc:pal:gpprii:v:40:y:2015:i:1:p:66-88
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