Life insurer efficiency and state regulation: evidence of optimal firm behavior

Proponents of an optional federal charter for life insurers argue that the current state-based system of insurer regulation increases insurer costs and reduces their revenues and profits. This study examines the impact of multi-state regulation on life insurer cost, revenue and profit efficiency. The main findings suggest that insurer cost efficiency is inversely related to the number of states licensed and directly related to total assets, after controlling for geographic concentration, insolvency risk and other firm-specific characteristics. Further, the results support the expectation that insurer expansion into additional states is optimal in that the additional regulatory and other costs associated with operating in more states are offset by higher revenues to the extent that insurer profit efficiency is not affected. A robustness test is conducted using an indicator variable for New York licensed insurers to examine the relation between regulatory stringency and insurer efficiency. This test confirms the results, even in the presence of the more stringent regulation of New York. These findings are consistent with the expectation that any regulatory cost savings that result from an optional federal charter, or single regulator, will be passed along to insurance consumers in a competitive insurance market.