Solvency regulation in the property/casualty insurance industry

Patricia Munch Danzon, Dennis Smallwood

Expert InsightsPublished 1979

Outlines current policy issues relating to solvency regulation, describes existing regulation and then estimates its effects. Cross section analysis is used to estimate the effect of regulations on the number of companies operating in a state and the frequency of insolvencies. Minimum capital requirements appear to reduce the number of insolvencies only by deterring small firms with a higher probability of failing from entering the market. Other forms of regulation have no effect on entry or insolvencies. The value of solvency regulation to consumers thus depends on whether the net value of firms that are deterred from entry is positive and exceeds the administrative cost of regulation. Comparison of the characteristics of solvent and insolvent firms provides evidence that is consistent with a model of insolvency as the (unlucky) outcome of wealth-maximizing risk taking, rather than simple fraud.

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Danzon, Patricia Munch and Dennis Smallwood, Solvency regulation in the property/casualty insurance industry. Santa Monica, CA: RAND Corporation, 1979. https://www.rand.org/pubs/papers/P6349.html.
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