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Abstract We identify the effect of public guarantees on market discipline by exploiting the variation in US state guarantees of property–casualty insurer obligations. We find that guaranty funds have little effect on the risk‐sensitivity of insurer financing overall, with the exception of rating changes at the key threshold level of A.M. Best's A− rating. For insurers rated A− before a downgrade, we find that premium growth in business not covered by state guarantees falls in relation to growth in business covered by state guarantees. We estimate this difference in growth to be as high as 14.9% for commercial insurers.
Deng et al. (Wed,) studied this question.