Catastrophe Risk and the Regulation of Property Insurance Markets

In this paper, we evaluate state regulation of insurance markets subject to catastrophe risk and, more specifically, homeowners insurance and commercial property insurance. When insurers suffer substantial losses following a catastrophic event, pressures on property insurance markets can increase as insurers attempt to raise their prices and reduce their exposures. This can bring insurers into conflict with regulators who seek to maintain the affordability and availability of insurance. Some states may also use their residual market mechanisms as a means to provide subsidized coverage for high-risk properties. While these regulatory actions may seem well intended, the concern is that they can interfere with market adjustments and undermine the supply of private insurance. To gain some insight on these issues, we examine how state rate regulation and the relative size of state residual market mechanisms affect various outcomes in homeowners and commercial property insurance markets generally and specifically following a large catastrophe in a state. Our findings indicate that regulatory attempts to constrain rates and larger residual markets tend to have negative effects on certain outcomes in homeowners insurance markets, all other things equal. However, we do not find that these effects become more pronounced following a catastrophic event except for market concentration. Further work is needed to develop better ways of measuring how changes in catastrophe risk and rate regulation affect property insurance markets