The Impact of Introducing Insurance Guaranty Schemes on Pricing and Capital Structure
Journal
The Journal of Risk and Insurance
ISSN
0022-4367
ISSN-Digital
1539-6975
Type
journal article
Date Issued
2012-06
Author(s)
Abstract
The introduction of an insurance guaranty scheme can have significant influence on the pricing and capital structures in a competitive market. The aim of this paper is to study this effect on competitive equity-premium combinations while considering a framework with policyholders and equity holders where guaranty fund charges are volume-based, as levied in existing schemes. Several settings with regard to the origin of the fund contributions are assessed and the immediate effects on the incentives of the policyholders and equity holders are analyzed through a one-period contingent claim approach. One result is that introducing a guaranty scheme in a market with competitive conditions entails a shift of equity capital towards minimum solvency requirements. Hence adverse incentives may arise with regard to the overall security level of the industry.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SoM - Responsible Corporate Competitiveness (RoCC)
Refereed
Yes
Publisher
Wiley-Blackwell
Publisher place
Malden, Mass. USA
Volume
80
Number
2
Start page
273
End page
308
Pages
36
Subject(s)
Division(s)
Additional Information
Prof. Wagner is Professor at the HEC Lausanne; http://people.unil.ch/joelwagner; joel.wagner@unil.ch
Eprints ID
206680