Crisis

Question 1

3 Concepts related to regulatory failure

Answer 1

FFC
1. Regulatory Fallibility
2. Regulatory Forbearance
3. Regulatory Capture

Question 2

What is Regulatory Fallibility?

Answer 2

Regulators are human and humans make errors

Question 3

What is Regulatory Forbearance?

Answer 3

The failure of a regulator to intervene promptly in a troubled company

Question 4

What are the reasons for regulatory forbearance?

Answer 4

• the company may recover without intervention
• the company may object to intervention

Question 5

What are the consequences of regulatory forbearance?

Answer 5

• If company recovers -> no consequences
• If company doesn’t recover -> impact to policy holders and strain on guaranty funds may be worse than if regulator had intervened earlier
  ○ Data shows that troubled companies often take increased risks when trying to recover
  ○ These increased risks could be successful or they could make a bad situation worse

Same as regulatory capture

Question 6

What is Regulatory Capture

Answer 6

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

Question 7

What are the reasons for regulatory capture?

Answer 7

• The interest group may be good at influencing a regulator
• Political interference

Question 8

What are the consequences of regulatory capture?

Answer 8

• If company recovers -> no consequences
• If company doesn’t recover -> impact to policy holders and strain on guaranty funds may be worse than if regulator had intervened earlier
  ○ Data shows that troubled companies often take increased risks when trying to recover
  ○ These increased risks could be successful or they could make a bad situation worse

Same as regulatory forbearance

Question 9

What are some checks and balances for regulatory failure?

Answer 9

• Duplication
• Diversity of Perspective
• Market Discipline

Question 10

What is duplication?

Answer 10

• Multi-state insurers are subject to regulation in each state of operation
• 1 state may miss warning signs of a troubled company
• But it’s unlikely that all states would miss the warning signs
• Avoid Fallibility

Question 11

What is diversity of perspective?

Answer 11

• Different Regulators have different perspectives regarding regulation
• Some prefer strong regulation (higher costs but protects consumers)
• Some prefer weak regulation
• Competing perspectives encourage centrist solutions (prevents overregulation / deregulation)
• Reduce Capture -> see issues clearly

Question 12

What is market discipline?

Answer 12

• 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
  -Reduce Forbearance -> without availability of bailout funds, regulators are more likely to take action