Analyzing the Role for a Consumer Financial Protection Agency

In the debate over the proposed establishment of a new Consumer Financial Protection Agency, much attention has been given to discussion of whether consumers are irrational or incompetent and therefore need paternalistic regulators to look after them, and whether inadequate consumer protection regulation was a contributor to the financial crisis. Arguments over these questions are misplaced. Consumer protection regulation is commonplace in financial markets, and is essential even where consumers are fully rational and financial crises are distant. The potential role for a CFPA should first be examined based on consideration of the benefits and shortcomings of current consumer protection regulation, and how a dedicated consumer protection regulator would be likely to change things. Specific details of proposed legislation that affect the structure and authority of a CFPA should be evaluated separately rather than being used to determine whether such an agency is a good idea or a bad one. Consideration of the general principles for and against establishment of an independent CFPA may help to illuminate the strengths and weaknesses of specific legislative proposals

The Emergence and Potential Consequences of First Party Insurance Bad Faith Liability

This article discusses the approaches to first-party insurance bad-faith law that have been taken by the states, using legal and economic reasoning to illuminate the potential benefits and costs of different approaches. Theory suggests that allowing policyholders to recover damages over and above the value of the insurance benefit owed will provide insurers with added incentives to engage in fair claims settlement. However, excessive or uncertain liability for insurance bad faith might create incentives for policyholders to file questionable claims and disincentives for insurers to investigate claims for fraud. The article analyzes a large dataset of first-party automobile insurance claims to investigate whether these adverse effects appear to have empirical relevance. The data show that claim characteristics in states that permit tort-based bad faith differ from those in other states. The findings are consistent with the idea that permitting tort-based firstparty insurance bad-faith settlements might reduce insurer incentives to challenge disputable claims

The Relationship between Auto Insurance Rate Regulation and Insured Loss Costs: An Empirical Analysis

This study points out a potential unintended effect of efforts to enhance affordability of insurance prices by regulating rates: It may ultimately lead to higher insurance costs. This is because rate regulation that suppresses insurance prices below competitive levels, or provides significant premium subsidies for some consumers, creates a variety of incentive distortions in the market. The article summarizes the theoretical arguments for this effect and provides empirical evidence of cost-increasing effects of rate regulation. The analysis uses state-level data on automobile insurance costs and claims rates for the period 1990 through 1998, and employs empirical methods that control for the possible reverse causation of high insurance costs leading to consumer demand for rate regulation. We find that bodily injury and property damage liability loss costs are higher in rate-regulated states, and that the bodily injury to property damage liability claims ratio is higher in regulated states

Do State Cost Control Policies Reduce Medicaid Prescription Drug Spending?

We present the first systematic analysis of state policies limiting prescription drug access under Medicaid during 1990–2004, documenting their impact on states’Medicaid prescription spending growth.We see substantial variation in the number and type of policies used by states, but a clear upward trend in restrictions over time. Analysis of state level annual spending growth shows that these restrictions have in general helped contain Medicaid prescription drug costs and that some approaches, such as the use of preferred drug lists (PDLs) and tiered copayment systems, may have been more effective than others

Consolidation and Efficiency in the U.S. Life Insurance Industry

This paper examines the relationship between mergers and acquisitions, efficiency, and scale economies in the US life insurance industry. We estimate cost and revenue efficiency over the period 1988-1995 using data envelopment analysis (DEA). The Malmquist methodology is used to measure changes in efficiency over time. We find that acquired firms achieve greater efficiency gains than firms that have not been involved in mergers or acquisitions. Firms operating with non-decreasing returns to scale and financially vulnerable firms are more likely to be acquisition targets. Overall, mergers and acquisitions in the life insurance industry have had a beneficial effect on efficiency. Journal of Economic Literature classification codes: G2, G22, G34. L11. Key Words: Efficiency, life insurance, mergers and acquisitions, scale economies, data envelopment analysis.

Rate Regulation and the Industrial Organization of Automobile Insurance

This paper analyzes the impact of rate regulation on the structure of insurance markets for private passenger automobile insurance. The paper argues that states' restrictions on automobile insurers' rates of return will distort the structure of the market by distorting insurers' entry and output decisions. Cross-sectional analysis of the numbers of firms and the relative market shares of firms of different organizational characteristics supports this argument, especially for those states which impose the most stringent regulation. The analysis suggests that increased regulatory stringency lowers the total number of firms selling in the market, and lowers the number of low cost and national firms in the market. The market shares of these latter two groups of firms are also significantly lowered by increased regulatory stringency. These findings hold even after controlling for other factors which may influence the relative prevalence of these firms in the market, and are robust to the assumption that regulatory stringency in a state is itself partially determined by the number and market shares of large, low cost producers.