AN ANALYSIS OF PROPERTY-CASUALTY INSURERS: State-specific Control Variables

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A large literature has investigated the determinants of insurance prices. Several control variables are included in the paper’s regressions to ensure that these non-tax determinants do not affect our inferences about the effects of state taxes on insurance prices. The first set of control variables addresses cross-state variation in the price of insurance.

Two variables are used to control for the effects of product sales regulation on prices.7 The first regulatory control variable is RATEREG, a categorical variable indicating whether the state is one of the 26 that regulate insurance rates. The second regulatory control variable is RESTRICT, which ranks each state from one to 51, based on Conning & Company’s survey of insurance managers in 1991. The survey assesses the relative freedom among states to manage personal and commercial lines of business. The higher the ranking, the more restrictions the state places on insurers’ ability to design, price, and market their products.

Negative coefficients are expected on RATEREG and RESTRICT. In his survey of the numerous empirical studies evaluating the effects of state regulation on insurance prices, Harrington (1984) concludes that the evidence generally is consistent with insurance rates decreasing in the stringency of state regulatory oversight. Similarly, Vines (1996) reports that customers in rate-regulated states bore less of the industry’s Federal income tax increase following the Tax Reform Act of 1986 than customers in other states. payday loans

Negative relations between PRICE and the product sales regulation variables also are expected because insurers have incentives to manage the statutory reports to appear less profitable in rate regulated states. Regulators use the same financial information that determines tax bases to evaluate an insurer’s profitability. In high-tax, rate regulated states, the tax and regulatory incentives are aligned, increasing the returns to premium understatement and (in income tax states) loss overstatement. In low-tax, rate regulated states, tax and regulatory incentives conflict.