Insurance Rate Regulation, Management of the Loss Reserve and Pricing

ABSTRACT Insurance pricing is subject to stricter regulation in some states than others. This cross-sectional variation, coupled with the occurrence of staggered deregulation several states, enables a powerful test political cost hypothesis that managers manipulate accruals mitigate adverse effects rate regulation. We show insurers understate their loss reserve more regulated regimes, finding contrasts most prior studies documenting expense-increasing regulatory settings like utilities. theorize and find evidence regulator-enabled cartel-like collective making leads premiums being higher competitive level. Our results are consistent accounting manipulation used justify deviating from these high rates showcase role for cartel enforcement. JEL Classifications: M41; G18; G22; G32.