Regulatory Forbearance in the Supervision of Property-Casualty Insurers in the U.S : Implications for and the Effects on Outcomes for 'Distressed' Companies

In this paper, we discuss our research on the effects of regulatory forbearance on the outcomes for high-risk and distressed property-casualty insurance companies. A fundamental question that has been examined in the extant literature is whether greater regulatory forbearance tends to increase or decrease the costs of insurer insolvencies. This literature has also examined whether regulatory management of insurer receiverships increases the costs of insolvencies under certain conditions. We intend to extend this literature by examining additional measures of regulatory forbearance as well as by employing more current data. Our measures of forbearance will include both formal/public and informal/non-public regulatory actions. Our intent is to estimate how regulatory forbearance and other factors affect outcomes for distressed insurers (i.e., does greater forbearance increase or decrease the likelihood that an insurer will be liquidated?). A review of the data indicates that there are a large number of instances where companies appear to be in financial trouble (e.g., they fall below one or more Risk Based Capital action thresholds) but there is no record of formal/public regulatory interventions with these companies. We surmise that, in many (if not most) cases, these firms are subject to non-public regulatory intervention, but unless the insurer subsequently becomes subject to public regulatory intervention, the non-public regulatory intervention never becomes part of the public record. Therefore, the traditional criteria for classifying “impaired” insurers understates the number of potential impairments and masks the full impact of regulatory intervention. In this paper we provide statistics on impaired and inactive insurance companies for the period 1996-2017. We also present the results of logistic regressions using principal components factors that identify risk factors (latent traits) for impaired insurers in relation to when they were first subject to formal regulatory action for the same data period