Product Ratings as a Market Reaction to Deregulation: Evidence From the German Insurance Market

Abstract

This study provides the first investigation of information markets as a reaction to deregulation of product forms in insurance markets. The article studies the case of Germany, where insurance product ratings entered the market after relaxation of product regulation in 1994. The ratings' potential for enhancing the performance of a deregulated insurance market is analyzed by considering both market structure and governance characteristics of the rating market, since the theoretical literature predicts that both are important determinants of rating outcomes. Data from a unique panel data set containing disability insurance ratings from the three major rating agencies are also examined in light of theoretical predictions. Results suggest that market governance and competition characteristics are favorable for the production of unbiased and informative ratings. Ratings for disability insurance support this interpretation, since the characteristics of the ratings conform to theoretical predictions about ratings in well-functioning rating markets.

Can Regulation Improve Financial Information and Advice?

“…This implies that financial literacy and financial advice are complements rather than substitutes (Collins, 2012), and that regulation of the financial advice industry will be insufficient to improve outcomes for vulnerable consumers and investors (Bachmann and Hens, 2015; Schwarcz and Siegelman, 2015). Efforts to create simplified financial products (Bar-Gill and Warren, 2008), bias-free private market rating systems (Meyr and Tennyson, 2015), or government-provided financial information platforms (Schwarcz and Siegelman, 2015) may yield more widespread benefits.…”