Research Handbook on the Economics of Insurance Law

Research Handbook on the Economics of Insurance Law

Research Handbooks in Law and Economics series

Edited by Daniel Schwarcz and Peter Siegelman

Insurance law and insurance economics each have long and distinguished scholarly histories, but participants in the two disciplines have not always communicated well across academic silos. The Handbook encourages more policy-relevant insurance economics scholarship and more economically sophisticated legal scholarship by bringing together original contributions from leading scholars in insurance law and insurance economics on a range of issues involving insurance law and regulation.

Chapter 10: Economics of state versus federal regulation

Martin F. Grace

Subjects: law - academic, commercial law, insurance law, law and economics

Extract

This chapter examines the theory and evidence regarding the level at which the insurance industry should be regulated. Banking and insurance, two major financial service industries, have different regulatory treatment in the United States. One is now mostly federally regulated (banking) and the other is predominantly regulated by the states (insurance). The state’s regulatory oversight for insurers, discussed further below, is mostly an historical artifact and begs the question where the regulation of financial services rightly goes in our federal system. The theory of the optimal administration and provision of public goods, such as insurance regulation, is based on Oates’s (1972) theory of fiscal federalism. This theory posits that efficiency is maximized when the benefits and costs of a particular government activity are internalized to the level of government making the regulation. A simple example is whether all the benefits (and costs) of solvency regulation, which is currently conducted at the state level, remain solely within a particular state or extend to other states’ residents? Using this theoretical approach this chapter examines the available empirical evidence to provide some guidance on the optimal provision of insurance regulation. It would be nice to state unequivocally that insurance regulation is optimally placed at the federal or state level. However, the evidence is not so clear.

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