Hamwi, Iskandar S. See all items with this value

Hudson, Tim See all items with this value

Chen, Yueyun (Bill) See all items with this value

November 2004

10

4

313-327

1083-0898 See all items with this value

1573-966X See all items with this value

This paper evaluates guaranty funds and solvency regulations. One main question addressed is how solvency regulations will benefit consumers. Many previous studies have found that most forms of solvency regulations do not have significant deterrent effects on insolvency. Even when solvency regulations are effective, they might still adversely affect consumers. This could happen because increasing the probability of solvency usually requires raising premiums. Therefore, it is interesting to see how regulators should design insurance regulations that benefit consumers. Insolvency of insurance firms provides a unique environment under which one is able to analyze the effects of solvency regulations and guaranty funds on the quality of insurance products and on consumers. This paper shows that guaranty funds are always desirable, but solvency regulations are of certain value only when they have the effect of protecting guaranty funds and alleviating the disincentives which they create.