The Effect of Political Frictions on the Pricing and Supply of Insurance.

This article examines how political frictions influence pricing and supply in the long-term care insurance (LTCI) market, focusing on the role of state insurance regulators. Using detailed data on premium increase requests submitted by insurers for identical policies across different states, the study finds that regulators are 13% more likely to approve requests and grant 4% larger increases after election years. Additionally, Republican-affiliated regulators approve premium increases more frequently and at higher levels than Democratic regulators, who tend to be more stringent. These political factors affect insurers’ cash flows and contribute to market exits, with companies under Democratic regulators earning only 60% of the cash flows of those under Republican regulators and facing higher dropout rates. The findings highlight the significant impact of regulatory political incentives on LTCI market dynamics and suggest that reforms such as a nationally organized, rotating committee of regulators could mitigate these frictions.