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Regulatory Free Cash Flow and the High Cost of Insurance Company Failures

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  • Brian J. Hall
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    Abstract

    Why is the cost of resolving insurance company failures so high? Evidence in this paper suggests that the state insurance regulatory bodies in charge of the liquidation process turn over an average of only 33 cents for each $1.00 of pre-insolvency assets to the guaranty funds (the state agencies responsible for paying claims). This very low ex ante regulatory failure -- the assets of the company are not worth much, reflecting regulatory problems prior to liquidation. Or the low recovery rate could reflect ex post regulatory failure -- a regulatory version of the 1986). In this latter case, cash-rich liquidators, who pay their own expenses out of the liquidation receipts first, are reluctant to turn over the money from asset sales to the guaranty funds. The evidence suggests that the low recovery rates arise from both types of regulatory failure.

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    File URL: http://www.nber.org/papers/w6837.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6837.

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    Date of creation: Dec 1998
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    Publication status: published as Hall, Brian J. "Regulatory Free Cash Flow And The High Cost Of Insurance Company Failures," Journal of Risk and Insurance, 2000, v67(3,Sep), 415-438.
    Handle: RePEc:nbr:nberwo:6837

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    2. James G. Bohn & Brian J. Hall, 1997. "The Moral Hazard of Insuring the Insurers," NBER Working Papers 5911, National Bureau of Economic Research, Inc.
    3. Andrei Shleifer & Robert W. Vishny, 1995. "A Survey of Corporate Governance," Harvard Institute of Economic Research Working Papers 1741, Harvard - Institute of Economic Research.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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    Cited by:
    1. Iman van Lelyveld & Franka Liedorp & Manuel Kampman, 2009. "An Empirical assessment of reinsurance risk," DNB Working Papers 201, Netherlands Central Bank, Research Department.

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