Research On The Key Elements Of The Safety Net For Surety Bond

The safety net for surety bond is an institutional system and policy framework to protect the interests of policyholders and claimants and cope with the surety risks positively. The public trust of surety bond industry is low as the protection of policyholder and claimant interests is absent since the introduction of surety bond in China. Especially, the phenomenon of many financing guarantee companies' closures has caused great impact to surety bond industry. The issue of safeguarding the interests of policyholder and claimant has come under scrutiny again. Therefore, the research on the key elements of the safety net for surety bond has important realistic and theoretical significance.From the existing literature, international and domestic academics still have a vague idea of the safety net for surety bond. Based on the existing research,firstly, the key elements of the safety net for surety bond were recognized by using the methods of literature research and qualitative research, the practice situation of the safety net for surety bond in United States, Canada and United Kingdom was provided from the perspective of the case empirical study, and current situation on the safety net for surety bond in China was investigated. Secondly, the rationale of prudential regulation was described in the tripartite agreement framework of surety bond, and a pricing model of owner's payment bond was presented based on binomial tree method.Thirdly, after describing the rationale of re-surety system, the evolutionary stable strategies and corresponding conditions of the re-surety system was found by utilizing evolutionary game theory. Finally, the internal connections among the different key elements of the safety net for surety bond were revealed after describing the rationales of the guaranty fund of surety bond and the market withdrawal mechanism for surety companies.The main inclusions include:(1) the key elements of the safety net for surety bond are composed with prudential regulation, re-surety system, guaranty fund of surety bond and surety market withdrawal mechanism. However, the key elements of the safety net for surety bond are not static, and some element may be strengthened or weakened in a special economic system and institutional environment.(2) The fair price of owner'spayment bond is influenced by many factors according to the pricing model. The simulation results show that the price of owner's payment bond would rise with an increase in owner's asset volatility, amount of bond or the agreement period of owner's payment bond. However, the price remains unchanged after the bonded amount reaches a certain level. The results also show that the price of owner's payment bond would decrease with an increase in owner's initial asset value or risk-free interest rate. The pricing rationale of the owner's payment bond provides a theoretical basis for improving the prudential regulation for surety companies.(3) The stable development of re-surety system needs to satisfy these conditions: the demand for surety bond is strong, the specified maximum leverage of a surety company cannot satisfy the demand,the incremental payoff of re-guarantee companies has to be positive, and the incremental payoff of guarantee companies has to exceed the filing costs after surety companies joining in the re-surety system. The explicit conditions provide a theoretical basis for the re-surety system arrangement in China.(4) The four key elements of the safety net for surety bond are intrinsically connected, mutually premise and complementary in a general economic system and institutional environment. They weave a safety net together to protect the interests of policyholder and claimant.Based on the above conclusions, the improving suggestions for China's safety net for surety bond includes:(1) consummate the prudential regulation for surety companies to regularize the surety's behaviors.(2) Establish guaranty fund of surety bond to improve the confidence of bond market.(3) Implement the re-surety system by stages to share risk effectively.(4) Improve the surety market withdrawal mechanism to build the last defense.