Attorney General Regulatory Enforcement: Evidence from P/C Insurance Companies Authors: Chinmoy Ghosh and James I. Hilliard Discussant: Anne E. Kleffner ARIA August 7, 2007

Overview v Objective: Examine the effect of the Spitzer lawsuit on publicly traded p/c insurance companies. v Two “events”: – Regulatory compliance event – Change in regulatory environment

Overview v Effects associated with this event (will affect firms differently): – Direct effect for named firms – Indirect effect for non-named firms u Using a similar technology (contagion) u Using different technology (competitive)

Overview v Methodology: Event study using a joint generalized least squares regression (SUR). v Results: – Named and non-named firms had significantly negative returns upon announcement of the lawsuit. – For firms not named in the lawsuit, negative returns were related to use of contingent commissions. – Evidence of contagion effect (but losses are reversed shortly after the initial announcement).

Strengths v Well written v Empirical work addresses issues with event studies v Examine both portfolio response to events and variation in individual firm responses v Results provide evidence of – A direct effect for named firms – An indirect effect for non-named firms (“change in regulatory environment,” but only in the short term

Suggestions v Section 3 needs to be more carefully aligned with hypotheses v Contagion effect – Might also exclude companies that do not pay contingent commissions (i.e. include only those firms that use “common design parameters”). “…expect to see negative AR for companies using the same distribution method.” – “…means that CC were believed to create value … that was lost as a result of the changing regulatory environment.” u Interpretation of full recovery by non-named firms

Suggestions v Competitive effect: “Firms that relied less on CC experience smaller losses in value.” – Expect a positive (or less negative) effect for companies that do not use contingent commissions. – Different expectation for firms that use contingent commissions (contagion effect) and firms that do not use common technology and may experience a positive effect. v Clarity required regarding statements made in hypotheses and results regarding effect on all firms or only firms that do/don’t use common technology.

Results v Results regarding investigation period – Discuss the reason for examining the investigation period and why there are not any significantly negative returns (already impounded are only small or a noisy signal). v Results – “Investors believed CC were a value-enhancing tool for insurance carriers and that regulation threatened industry profitability.”