In the year leading up to an election, state regulators are much less likely to take action against failing insurance companies, according to a new study.
The study, conducted by researchers at the Wisconsin School of Business, compared data from about 3,200 firms from 1989 to 2011 with data on the electoral cycles of insurance commissioners—or governors in states where the commissioner is appointed.
Researchers concluded that the probability of a regulatory intervention against failing insurance firms of all types—including health insurers—falls by 78% in the year before an election. They defined intervention as any proceedings related to conservation, rehabilitation or liquidation of failing insurers.
While the number of routine financial exams performed and the number of workers charged with monitoring firms’ solvency doesn’t change when there’s an upcoming election, the number of discretionary financial exams did. Such exams were about 44% less frequent in the year before an election compared to the year after an election. Researchers suggested this is evidence that insurance regulators “strategically delay interventions upon failing firms before elections.”
Regulators who were elected delayed taking action against failing firms in all elections, regardless of competitiveness, while appointed regulators only delayed action in election years when their appointing governor was in a competitive race.
The study’s findings may be noteworthy for health insurers that are close to insolvency, as it gives them a better idea of when regulators might opt to intervene. A slew of consumer operated and oriented plans, better known as CO-OPs, have shut down in recent years, requiring them to work with closely state regulators to mitigate the effects on consumers and the local economy.
As for why regulators are less likely to take action in election years, the study offers up several possible explanations. For one, public officials might delay taking action against a failing firm because they would then face questions about their competency.
“The announcement of a regulatory intervention is basically an admission that a firm has failed on a regulator’s watch—it’s bad news,” Ty Leverty, an associate professor of risk and insurance, said in a study announcement.
In addition, the costs of closing a company often fall on a relatively small group with strong interests in the outcome—such as owners, employees and customers—making public officials more susceptible to interest-group pressure before an election.
Whatever the reason, when regulators delay action against failing firms, it can end up costing customers and taxpayers more. Indeed, the study found evidence that suggests delayed interventions before elections can increase the cost of insurer failure by $0.40 to $0.48 for every dollar of prefailure assets, Leverty said.