Vaughn - Crisis

Question 1

What are the 3 reasons for regulatory failure?

CFF

Answer 1

• regulatory Fallibility
• regulatory Forbearance
• regulatory Capture

Question 2

What is regulatory fallibility?

Answer 2

Regulators are human and humans make errors

someone messed up!

Question 3

What is regulatory regulatory Forbearance?

Defintion, Reasons for, conequences of

Answer 3

Defintion: failure of a regulator to intervene promptly in a troubled company. The regulator is aware!

Reasons: company may recover without intervention or the company object to intervention

Consequences: Company recovers then no consequence. If company fails the impact to policyholders and guarntee funds may be worse as the company could take risky actions in attempt to recover

Question 4

What is Regulatory Capture?

Defintion, Reasons for, conequences of

Answer 4

Defintion: tendency for a regulator to assume the mindset of an interest group

Reasons: the interest group may be good at influencing a regulator or succumb to political interference

Consequences: Company recovers then no consequence. If company fails the impact to policyholders and guarntee funds may be worse.

Question 5

What are the checks and balances in the US Insurance regultory system to limit failures?

D²P²M

Answer 5

• Duplication
• Diversity of Perspective
• Peer Review
• Peer Pressure
• Market Discipline

Question 6

How does Duplication help prevent regulatory failure?

Answer 6

• multi-state insurers are subject to regulation in each state of operation
• 1 state may missing warning signs of a troubled company
• but it’s less likely that all states would miss the warning signs

Beeds to be balanced against the costs: The Costs of a mistake overwhelm the extra costs of regulation.

2 sets of eyes is better than one

Question 7

How does Diversity of Perspective help prevent regulatory failure?

Answer 7

• different regulators have different perspectives regarding regulation
• some prefer strong regulation (higher costs but protects consumers)
• some prefer weak regulation (lower costs but can be harmful to consumers)
• competing perspectives encourage centrist solutions (prevents overregulation / deregulation)

Question 8

How does Peer Review help prevent regulatory failure?

Answer 8

NAIC coordinates peer review groups FAD & FAWG
* FAD = Financial Analysis Division
* analyzes nationally significant insurers
* refers unusual findings to FAWG
* FAWG = Financial Analysis Working Group
* consists of 16 highly experienced financial regulators
* (not the same as regulatory duplication by state regulators)

Question 9

How does Peer Pressure prevent regulatory failure?

Answer 9

• any state can investigate or take action against any insurer operating in their state
• such action by 1 state can pressure other states to do the same

Question 10

How does Market Discipline prevent regulatory failure?

Answer 10

• state-based regulation cannot easily access federal bailout funds (eliminates moral hazard of relying on federal government)
• provides incentive for states to exercise strong regulation

No federal money, means more incentive to take action