I am looking for any papers that might explore this issue. Following are a
few of my thoughts that I am trying to find some support for in the
literature:
There are two perspectives here, one of the investor/insurer manager, one
of the consumer. Let's look at the consumer first.
In theory, a high rating should be a positively priced commodity. Companies
with higher ratings are more financially secure, thus consumers should be
willing to pay more for their products. Companies with shaky finances (like
the ones that went insolvent in Andrew) should be able to sell their
products cheaper because consumers are getting what they pay for: if they
want the claims paid in 30 year storms, they pay $100, if they want claims
paid in 500 year storms, they pay $140. The market should determine what
price security is worth. This is how the bond market works, where the bond
rating determines yield. It is also how the unregulated reinsurance market
works.
In the regulated world (like we tend to have in personal lines), what happens?
Regulation often eliminates the "solvency premium" as an unjustified cost
through arbitrary rate of return standards in ratemaking. Guaranty
associations are in place to assure consumers that even if they make
foolish decisions to do business with unsound companies their claims get
paid. These actions disrupt the market's natural tendency to reward
security with higher prices and profits.