https://macropaperwarehouse.com/authors/johnny-tang/Johnny TangHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/regulatory-competition-in-the-us-life-insurance-industry/https://macropaperwarehouse.com/papers/regulatory-competition-in-the-us-life-insurance-industry/<p>This paper quantitatively assesses the consequences of jurisdictional competition in the US life insurance industry, an $8 trillion market. The central question is whether competition between state regulators over capital requirements for captive reinsurance subsidiaries — a form of regulatory competition — increases or decreases total surplus, and by how much.</p> <p>US life insurers are regulated at the state level. Since the early 2000s, states have competed to attract captive reinsurance subsidiaries (captives) by setting lower capital requirements on these entities. The externality structure is asymmetric: the captive state earns tax revenues on liabilities transferred to captives and sets their capital requirements, but bears default costs only for policyholders in its own state. Consumer states bear default costs for their own residents even when those policies have been transferred to an out-of-state captive. This mismatch between who sets capital requirements and who bears default costs creates the externality that drives the race-to-the-bottom dynamic studied in the paper.</p>