Market Reaction to Potential Federal Regulation in the Insurance Industry

The effect of federal insurance regulation has been a perennial topic of debate. Proponents have argued that federal regulation would result in a variety of benefits including greater product innovation, increased speed-to-market, reduction of regulatory costs, and additional cost efficiencies. However, opponents have argued that federal regulation could prove harmful to both insurance companies and policyholders due to federal regulators' inability to meet the diverse needs of policyholders across the country, difficulties with the operation of state guaranty funds, and potential “stickiness” of federal regulation. We investigate investor perceptions of the net effect of potential federal regulation in the U.S. insurance industry by studying the market response to the passage of the Dodd-Frank Act. Our results suggest that the market viewed the passage of the Act as a negative event for the U.S. insurance industry and that investor responses were primarily driven by increased regulatory uncertainty