Guaranty Funds, Government Shareholding and Risk Taking: Evidence from China

Abstract

This study examines the risk-subsidy, monitoring and ownership structure hypotheses in relation to guaranty funds using a sample from the Chinese insurance industry. Compared to the American model, Chinese insurance guaranty funds possess the following distinct features: pre-assessment, separate accumulation and partial responsibility for peer bankruptcy. We find that the risks of insurance firms decline following the establishment of guaranty funds. Pre-assessment provides a limited risk incentive to insurers and one that is easily offset by stakeholder monitoring. In terms of the ownership structure hypothesis, we find that foreign insurers are more risk-driven than their state-controlled counterparts. Our findings have implications for countries striving to lessen the adverse effect of guaranty funds as well as for the improvement of insurance regulation policy in China.