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Rate Regulation and the Cost of Capital in the Insurance Industry

Published online by Cambridge University Press:  19 October 2009

Robert A. Haugen  and
Charles O. Kroncke
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Extract

We have discussed some of the effects of rate regulation in the property and casualty insurance industry. One consequence of the regulatory environment is that an optimal capital structure may clearly exist in this industry. If the rate of return to the insureds is generally deficient, we would expect that property and casualty stock companies would have an incentive to lever themselves to the maximum extent permissible by selling insurance. The classic monopoly of the economic literature finances its lucrative investment opportunities in a competitive capital market. The stock insurance company invests in that market, but the relative distribution of the return earned there may be less than equitable due to the process and standards of rate regulation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 6 , Issue 5 , December 1971 , pp. 1283 - 1305
Copyright
Copyright © School of Business Administration, University of Washington 1971

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