Uniform regulatory costs: analysis of welfare implications in the insurance industry

Abstract

This paper analyzes the implication of a uniform regulatory cost imposed by the regulator on all insurance firms. Using a standard von Neuman-Morgenstern utility function with risk averse buyers of insurance, the welfare implications of a uniform regulatory costs are analyzed. The regulatory cost which results in higher cost of insurance results in some potential buyers with low risk not buying insurance. This results in a smaller size of the insurance market and a reduction in consumer and social welfare. Insurance regulation, therefore, needs to identify and link regulatory costs to not only the asset side of the balance sheet but also to the risks on the liability side of the balance sheet.