TY  - JOUR
AU  - Hall,Brian J.
TI  - Regulatory Free Cash Flow and the High Cost of Insurance Company Failures
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6837
PY  - 1998
Y2  - December 1998
UR  - http://www.nber.org/papers/w6837
L1  - http://www.nber.org/papers/w6837.pdf
N1  - Author contact info:
Brian Hall
Harvard Business School
Baker Library 185
Boston, MA  02163
Tel: 617/495-5062
Fax: 617/496-7379
E-Mail: bhall@hbs.edu
AB  - Why is the cost of resolving insurance company failures so high? Evidence in this paper suggests that the state insurance regulatory bodies in charge of the liquidation process turn over an average of only 33 cents for each $1.00 of pre-insolvency assets to the guaranty funds (the state agencies responsible for paying claims).  This very low ex ante regulatory failure -- the assets of the company are not worth much, reflecting regulatory problems prior to liquidation. Or the low recovery rate could reflect ex post regulatory failure -- a regulatory version of the 1986).  In this latter case, cash-rich liquidators, who pay their own expenses out of the liquidation receipts first, are reluctant to turn over the money from asset sales to the guaranty funds. The evidence suggests that the low recovery rates arise from both types of regulatory failure.
ER  -