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Do Elections Delay Regulatory Action? New Study Says “Yes”

by Peter Kerwin Tuesday, January 16, 2018

Research from Wisconsin School of Business finds likelihood of regulatory interventions taken by state insurance officials against failing firms falls 78% in year before elections

         

State insurance departments play a vital role in monitoring the solvency of insurers and taking prompt action against failing firms to protect customers and the broader local economy. But new research from the Wisconsin School of Business at the University of Wisconsin–Madison suggests that insurance regulators often strategically delay interventions against failing firms in the year before elections.

The study by Ty Leverty, Wisconsin School of Business associate professor of risk and insurance and Gerald D. Stephens CPCU Distinguished Chair in Risk Management and Insurance, along with Martin Graceof Temple University, found the probability of regulatory intervention falls by 78% in the year before an election. And the extent of the electoral delays increase before tightly contested elections, where both elected and appointed regulators delay intervening with failing firms. 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.

“The announcement of a regulatory intervention is basically an admission that a firm has failed on a regulator’s watch—it’s bad news,” says Leverty. “Elected regulators who are at the mercy of political considerations are likely to be driven by those concerns and our findings confirm that. Appointed regulators who are at the mercy of the appointing Governor also delay interventions, but only before competitive gubernatorial elections.”

Leverty notes there are several reasons why regulators could see a benefit in delaying intervening on failing insurers before an election:

  • public officials might face questions about their competency when firms under watch fail and thus have an incentive to delay action;
  • public officials want to generate favorable economic news before an election; and
  • the costs of closing a company fall on a relatively small group with strong interests in the outcome (the owners, employees, and customers) while the benefits, such as a healthy industry and economy, are widespread, making public officials more susceptible to interest group pressure before an election.

The study found that the reduction in regulatory actions in election years was not a result of a lack of resources or state insurance departments being unusually busy. The number of workers charged with monitoring the solvency of insurers did not exhibit any change in election vs. non-election 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 did see a decline 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 to the year after an election.

Leverty points out the cost of such delays can be significant for both insurance company customers and taxpayers.

“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,” says Leverty. “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 approximately 3,200 firms and 300 separate elections in 50 states over 21 years.

The paper, “Do Elections Delay Regulatory Action?” is forthcoming in the Journal of Financial Economics.