Attorney General Regulatory Enforcement: Evidence from P/C

Insurance Companies

Authors: Chinmoy Ghosh and James I. HilliardAuthors: Chinmoy Ghosh and James I. HilliardDiscussant: Anne E. Kleffner Discussant: Anne E. Kleffner

ARIA August 7, 2007

Overview

Objective: Examine the effect of the Spitzer lawsuit on publicly traded p/c insurance companies.

Two “events”:– Regulatory compliance event– Change in regulatory environment

Overview

Effects associated with this event (will affect firms differently): – Direct effect for named firms– Indirect effect for non-named firms

Using a similar technology (contagion) Using different technology (competitive)

Overview

Methodology: Event study using a joint generalized least squares regression (SUR).

Results:– Named and non-named firms had significantly

negative returns upon announcement of the lawsuit.– For firms not named in the lawsuit, negative returns

were related to use of contingent commissions. – Evidence of contagion effect (but losses are reversed

shortly after the initial announcement).

Strengths

Well written Empirical work addresses issues with event

studies Examine both portfolio response to events and

variation in individual firm responses Results provide evidence of

– A direct effect for named firms– An indirect effect for non-named firms (“change in

regulatory environment,” but only in the short term

Suggestions

Section 3 needs to be more carefully aligned with hypotheses

Contagion effect – Might also exclude companies that do not pay contingent

commissions (i.e. include only those firms that use “common design parameters”). “…expect to see negative AR for companies using the same distribution method.”

– “…means that CC were believed to create value … that was lost as a result of the changing regulatory environment.”

Interpretation of full recovery by non-named firms

Suggestions

Competitive effect: “Firms that relied less on CC experience smaller losses in value.”

– Expect a positive (or less negative) effect for companies that do not use contingent commissions.

– Different expectation for firms that use contingent commissions (contagion effect) and firms that do not use common technology and may experience a positive effect.

Clarity required regarding statements made in hypotheses and results regarding effect on all firms or only firms that do/don’t use common technology.

Results

Results regarding investigation period– Discuss the reason for examining the investigation

period and why there are not any significantly negative returns (already impounded are only small or a noisy signal).

Results– “Investors believed CC were a value-enhancing tool

for insurance carriers and that regulation threatened industry profitability.”