Market Discipline and Guaranty Funds in Life Insurance

74 Pages Posted: 21 Apr 2015 Last revised: 19 Feb 2019

See all articles by Martin F. Grace

Martin F. Grace

Temple University - Risk Management & Insurance & Actuarial Science

Shinichi Kamiya

Nanyang Business School, Nanyang Technological University

Robert W. Klein

Georgia State University

George H. Zanjani

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: February 2019

Abstract

This paper studies the effects of company risk and guaranty funds on life insurance in force using company-by-state level data during the 1985-2010 period. Our primary objective is to use the variation in the timing of guaranty fund adoptions across states to identify the impact of public guarantees on market discipline. We first confirm the existence of evidence consistent with market discipline by documenting a negative relation between company risk (measured by changes in financial strength ratings) and changes in life insurance in force and annuity considerations. Effects are especially large for annuity considerations. We find some evidence of a decline in market discipline following the creation of government-backed guaranty funds in 16 states during the sample period, with the most significant effects being observed for firms with low financial ratings.

Keywords: Guaranty Funds; Deposit Insurance; Market Discipline; Regulatory Discipline

JEL Classification: G22; G28; E53

Suggested Citation

Grace, Martin F. and Kamiya, Shinichi and Klein, Robert Warren and Zanjani, George H., Market Discipline and Guaranty Funds in Life Insurance (February 2019). Available at SSRN: https://ssrn.com/abstract=2597052 or http://dx.doi.org/10.2139/ssrn.2597052

Martin F. Grace

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

Shinichi Kamiya

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Robert Warren Klein

Georgia State University ( email )

5387 Northchester Ct
Atlanta, GA GA 30338
United States
404-386-1591 (Phone)

George H. Zanjani (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

361 Stadium Dr, Ste 200
Tuscaloosa, AL 35487
United States

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