Regulatory examinations and life insurance development
| DOI | https://doi.org/10.1108/JFRC-09-2021-0077 |
| Published date | 16 March 2022 |
| Date | 16 March 2022 |
| Pages | 525-552 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Bojan Srbinoski,Klime Poposki,Patricia Born,Karel Van Hulle |
Regulatory examinations and life
insurance development
Bojan Srbinoski
Department of Economics, Finance Think –Skopje, Skopje, Macedonia
Klime Poposki
Department of Insurance, University St. Kliment Ohridski, Bitola, Macedonia
Patricia Born
Department of Risk Management/Insurance, Real Estate and Legal Studies,
Florida State University, Tallahassee, Florida, USA, and
Karel Van Hulle
Department of Accountancy, Finance and Insurance, KU Leuven, Leuven, Belgium
Abstract
Purpose –Solvency and market conduct regulations play a crucial role in supporting life insurance
development by boosting consumer confidence and securing a stable environment for insurers to write
business. Theregulation encapsulates not only the legal frameworkbut also its enforcement. This study aims
to focus on the latter and investigate the impact of solvency and market conduct examinations on life
insurancedevelopment within a homogenous legal environment in the USA.
Design/methodology/approach –To test the relationshipbetween the regulatory examinationsand life
insurancedevelopment, this study uses annual data for 51 US statesover the period 2013–2018 and uses fixed
and random effectspanel regressions controlling for the possible omitted variablesbias and serial correlation.
This study constructstwo groups of indicators to measure the robustness and ability of regulatorsto prevent
insolvenciesand opportunistic market practices andestimate their effects on market development.
Findings –The results showthat more stringent regulators with respect to solvencyexaminations deter life
insurers from theirmarkets and channel to those markets with lenient examiners, hurting the developmentof
life insurancein the stringent states. Additionally, regulatorsboost consumer confidence by providing robust
market conductpractices, which results in higher lifeinsurance demand.
Originality/value –This study contributesto the debates about the pros and cons of the current state-led
regulationin the USA and the general benefits/costs of regulation for insurance market development.
Keywords Solvency, Insurance regulation, Life insurance development, Market conduct
Paper type Research paper
1. Introduction
The debate about more federal involvement in the current decentralized regulatory
framework in the US insurancemarkets lasts for several decades. The critical opinion on the
current regulatory system is mainly descriptive, listing the inefficiency as the main
drawback and the better consumer protection as a primary benefit of such regulation
(Harrington, 1991,1992;2009;Tennyson, 2008;Grace et al., 2009). Empiricalstudies confirm
the costly process of the duplicative regulation in the USA (Leverty, 2012) and uncover a
negative market response to more federal involvement in the current system
JEL classification –G22, G28
Life insurance
development
525
Received19 September 2021
Revised20 January 2022
Accepted15 February 2022
Journalof Financial Regulation
andCompliance
Vol.30 No. 5, 2022
pp. 525-552
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2021-0077
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
(Fier and Liebenberg, 2013). However, the literature lacks empirical proof whether the current
state-led regulatory setup stimulates or curbs insurance development in t he USA.
On the other side, the positive influence of institutional and regulatory quality on
insurance developmentacross countries is firmly substantiated (Ward and Zurbruegg,2002;
Hussels et al.,2005;Chang and Lee, 2012;Kwon, 2013;Lee and Chang, 2015). Better
regulation boosts consumer confidence and secures a stable environment for insurers to
write business. The solvencyand market conduct regulations are especially important in the
life insurance industry becauseof its systemic relevance (Cummins and Weiss, 2014;Koijen
and Yogo, 2017;Kaserer and Klein, 2019;Caldera,2021) and the danger of policyholder runs
(Harrington, 1992). While theregulatory quality is a complex phenomenon that includes not
only a set of the legal environments and regulatory systems but also their efficient
implementation, we investigate the latter segment, more specifically, whether the
enforcement of the regulatorymeasures influences life insurance development.
The US life insurance industry is experiencing declining pressures inthe recent decade.
The unfavorable low-interest-rateenvironment makes the traditional life insurance savings
products unattractive (Swiss Re, 2018). While the life premiums per capita returned to pre-
2008-crisis level, the economic importance of life insurance sector fell below the level of
1990s, averaging 3% the country’s GDP during 2014–2020.Moreover, the US life industry is
geographically diverse. The Northeast states tend to have higher number of (domestic) life
insurers with respect to the market size and more developed markets in comparison to the
South and Southeast states (Figure 1). The US market’s temporal and regional differences
provide ideal opportunity for examining the importance of regulatory forces on life
insurance development.
We examine the impact of regulatory(solvency and market conduct) examinations on life
insurance development in the USA. The closest to our study is Kwon (2013), who
investigates the significance of the structure of the regulatory agency and regulatory
measures in insurance markets. He finds that the presence of solvency and market
prudential measures significantly raise the insurance consumption across countries by,
presumably, generating greater consumerconfidence. However, our study is not concerned
Figure 1.
Map of life premiums
per capita (darker
circle is higher)and
domestic lifeinsurers
per 1,000,000
population(larger
circle is higher)
JFRC
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