Several normative and positive theories attempt to explain why regulation exists. Under the normative public interest theory of regulation, regulation exists to serve the public interest by protecting consumers from abuse. This regulatory theory flows directly from the goal of government seeking to rectify market imperfections. The objective is to maximize economic efficiency, including preventing or making right significant consumer harm that results from market imperfections. The premise that government can and will correct market imperfections presumes that government will function for the overall public good, and that it will be indifferent to conflicts of interest and special interest groups. The theory has its detractors who posit less noble purposes for regulation.
Under private interest theories of regulation—all positive theories—regulation exists to promote the interests of private parties. Thus, Peltzman suggests that self-interested regulators engage in regulatory activities consistent with maximizing their political support. Under this theory, regulators might exhibit pro-industry biases to gain industry financial and other backing. Conversely, regulators might engage in activities that appeal to consumers (voters), such as price suppression to gain their support, even if the long- term effects were detrimental.
The best-known private interest theory is the capture theory of regulation in which regulation is “captured” by and operated for the benefit of the regulated industry. Stigler and others contend that special interest groups, being well organized and well financed, influence legislation and regulation for their own benefit. Special interest groups in insurance could include insurers, re-insurers, agents, banks, securities firms, brokers, and the firms that provide services to these industry participants. Thus, for example, U.S. banks complain about being denied full insurance marketing powers because agents have been able to unduly influence legislators and regulators. Consumers, being widely dispersed, ill organized, poorly financed, and, on a given issue, not as well informed as special interest groups, may be ineffective by comparison. Regulation unduly influenced by special interests could be expected to result in
• restrictions on entry of new domestic and especially foreign insurers
• suppression of price and product competition
• control of inter industry competition from those selling similar or complementary products
Each of these phenomena is found in all life insurance markets to varying degrees. Under appropriate conditions, however, each can be and is justified under the public interest theory. Government’s difficult task is to recognize when an interest group’s public interest arguments mask self-interested, private motivations. Finally, in what might be termed a political theory of regulation, Meier asserts that regulation will be shaped by a type of bargaining that occurs between different private interest groups within the existing political and administrative structure. Interest groups include consumers, the regulator, political elites (courts and the legislative body), and the regulated industry. Political resources, saliency, and the complexity of regulatory issues determine interest group influence. These groups are not homogeneous, so bargaining outcomes vary from issue to issue.
There is little research to confirm or refute whether life insurance regulation has been meaningfully shaped in accordance with the foregoing theories. According to the conclusions of one researcher, “the overall impression . . . is that the insurance industry does not. Dominate the regulatory process.” Another researcher found evidence of the capture theory in one element of Canadian insurance regulation that could apply equally to U.S. regulation.