Market Reaction to Regulatory Capture and Political Risk in a Highly-Salient Environment

The catastrophic losses from the combined 2004 and 2005 hurricane seasons resulted in significant price increases and mass non-renewals in the residential property insurance market in Florida. The public outcry to these insurer decisions yielded a highly salient insurance pricing environment. On November 29, 2006, Governor-elect Crist called for a special legislative session to provide relief to Florida residents and businesses, making good on his campaign pledge of addressing high insurance costs. We hypothesize that the call for the special session was indicative of consumer groups having captured the regulatory/legislative process, to the detriment of the insurance industry. The apparent shift in regulatory capture from the insurance industry to consumers implies an increase in political risk. Consistent with our hypothesis, we find that publicly traded homeowners' and commercial multi-peril insurers with Florida exposure experienced a negative stock price reaction to the announcement of the special session