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Market Reaction to Regulatory Action in the Insurance Industry: The Case of Contingent Commission

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  • Jiang Cheng
  • Elyas Elyasiani
  • Tzu‐Ting Lin

Abstract

We examine the market's reaction to New York Attorney General Eliot Spitzer's civil suit against mega‐broker Marsh for bid rigging and inappropriate use of contingent commissions within a generalized autoregressive conditionally heteroskedastic (GARCH) framework. Effects on the stock returns of insurance brokers and insurers are tested. The findings are: (1) GARCH effects are significant in modeling broker/insurer returns; (2) the suit generated negative effects on the brokerage industry and individual brokers, suggesting that contagion dominates competitive effects; (3) spillover effects from the brokerage sector to insurance business are significant and mostly negative, demonstrating industry integration; and (4) information‐based contagion is supported, as opposed to the pure‐panic contagion.

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  • Jiang Cheng & Elyas Elyasiani & Tzu‐Ting Lin, 2010. "Market Reaction to Regulatory Action in the Insurance Industry: The Case of Contingent Commission," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 347-368, June.
    • Handle: RePEc:bla:jrinsu:v:77:y:2010:i:2:p:347-368
    DOI: 10.1111/j.1539-6975.2009.01327.x
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    4. Papadamou, Stephanos & Siriopoulos, Costas, 2014. "Interest rate risk and the creation of the Monetary Policy Committee: Evidence from banks’ and life insurance companies’ stocks in the UK," Journal of Economics and Business, Elsevier, vol. 71(C), pages 45-67.
    5. Jared F. Egginton & James I. Hilliard & Andre P. Liebenberg & Ivonne A. Liebenberg, 2010. "What Effect Did AIG's Bailout, and the Preceding Events, Have on Its Competitors?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 13(2), pages 225-249, September.
    6. Uwe Focht & Andreas Richter & Jörg Schiller, 2013. "Intermediation and (Mis-)Matching in Insurance Markets—Who Should Pay the Insurance Broker?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 329-350, June.
    7. Gao Siwei & Plehn-Dujowich Jose M., 2015. "Incentive Contracting with an Independent Underwriter: Does It Benefit Insurers?," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 9(2), pages 231-259, July.
    8. Eckert, Christian & Gatzert, Nadine & Heidinger, Dinah, 2020. "Empirically assessing and modeling spillover effects from operational risk events in the insurance industry," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 72-83.
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