Seminar - Market Discipline and Government Guarantees: Evidence from the Insurance Industry

Seminar - Market Discipline and Government Guarantees: 
Evidence from the Insurance Industry

Date: 16 March 2023 (Thursday)

Time: 14:30 - 16:30

Venue: LKK 101
Language: English 

Speaker: 

• Prof. Tyler LEVERTY

  Associate Professor, Risk and Insurance, Wisconsin School of Business

We identify the effect of public guarantees on market discipline by exploiting the rich variation in U.S. state guarantees of property-liability in­surer obligations. We find that the demand for in­surer financing is significantly more risl{-sensi­tive in tl1e absence of government guarantees. For downgraded insurers, we find that premium grovvth in business not covered by state guaran­tees falls in relation to growth in covered busi­ness, with tl1e estimate of the difference being as high as 14.9 percentage points for commercial in­surers rated A- before the downgrade. We also find that premium growth in uncovered environ­men ts is significantly more responsive to up­grades. The findings suggest tl1at government guarantees significantly reduce market discipline and enhance stability in this financial sector.