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The Effect of Political Frictions on the Pricing and Supply of Insurance

Author

Listed:
  • Jessica Liu
  • Weiling Liu

Abstract

Political frictions significantly affect both pricing and supply in the long-term care insurance (LTCI) market. Comparing the same insurer’s requests submitted for the same policy at the same time to different state regulators, we find that they are 13% more likely to be approved and receive 4% more of the requested amount after an election year. Over time, regulatory pushback on premium increase requests leads to persistently lower cash reserves and increases the probability of company dropout. An insurer who receives one-standard-deviation less of their requested increase is 20% more likely to leave the market next year.

Suggested Citation

  • Jessica Liu & Weiling Liu, 2024. "The Effect of Political Frictions on the Pricing and Supply of Insurance," The Review of Financial Studies, Society for Financial Studies, vol. 37(4), pages 1149-1189.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:4:p:1149-1189.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad073
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    More about this item

    Keywords

    G22; G28;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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