The Effects Of Subordinated Debt On Insurance Companies’ Risk-Taking And Systemic Risk

With the implementation of second-phase project of C-ROSS Ⅱ,the whole industry is facing a higher demand for capital replenishment.Compared with other capital instruments,namely,equity capital increase and the conversion of retained earnings to capital,the difficulty of financing through subordinated debt is relatively low.From 2018 to 2021,the issuance scale of subordinated debts continued to expand,which has played an important role in supplementing insurance companies’ regulatory capital.As instrument of capital replenishment and debt financing,subordinated debts may potentially affect insurance companies’ risk-taking.On the one hand,market discipline,as the third pillar of C-ROSS Ⅱ regulation framework,can constrain insurance companies’ risk-taking behavior.However,during the C-ROSS Ⅰ period,due to the imperfect information disclosure and the weakening of the supervision motivation caused by cross-ownership of subordinated debts,the creditors have little restriction on the risk-taking of insurance companies.In August 2022,the CBIRC issued a notice that insurance company was approved to issue perpetual bonds.The essence of perpetual debt is also subordinated debt,and its supervision is based on the current debt varieties.Therefore,in order to optimize the issuance mechanism of new capital instruments,predict and control their impact on insurance companies’ risks,it is necessary to test whether market discipline effectiveness has been improved under the market environment of the second generation period and the new issuance mechanism.It is also of great significance to identify whether the issuance of subordinated debt aggravates insurance companies’ risk-taking and how the mechanism works.In 2017,the report of the 19 th CPC National Congress proposed to "firmly hold the bottom line of avoiding systemic risks".On the basis of risk-taking research,further consider subordinated debts’ impact on the correlation between individuals and systems.Will the subordinated debt affect systemic risk? In addition to seeing that the capital replenishment strengthened the industry’s risk resistance,it is also necessary to pay attention to the possibility that the credit risk contagion of subordinated debts may lead to the increase of the industry’s systemic risk.This paper conducts research from five aspects: Firstly,sort out the literature on the impact of subordinated debt in financial industry at domestic and abroad,summarize research progress and deficiencies.Secondly,collect the policy documents of subordinated debt,first summarize its definition and attributes,then compare different insurance subordinated debt and different financial subordinated debt to illustrate the particularity of insurance subordinated debt.Thirdly,construct the influence mechanism of subordinated debt to restrict the risk taking of insurance companies.Further consider the impact of financial costs and management’s risk attitude,propose the possibility that subordinated debt can improve companies’ risk level.Combine the above theoretical analysis with the impact of subordinated debt on the correlation between insurance companies,and conclude the mechanism of the impact of subordinated debt on the systemic risk.Fourthly,take Chinese insurance companies from 2010 to 2020 as the research sample to empirically test the theoretical hypothesis.The conclusion shows that subordinated debt increases the overall risk and investment risk of insurance companies,but has no significant impact on underwriting risk.After further exploring the mechanism,it was found that the issuance of subordinated debt increased the capital buffer of insurance companies,and thus increased the willingness of companies to take risks.By constructing GARCH-CoVaR model to calculate the △CoVaR of listed companies,and using SVM to simulate the △CoVaR of non-listed companies as the evaluation index of systemic risk,the empirical results show that subordinated debt significantly improves the level of systemic risk of insurance companies.The conclusion of this study is intended to provide suggestions on the issuance mechanism and regulatory policy for regulators.In addition,it is suggested that insurance companies should not excessively rely on temporary capital instruments.The innovation of this study is as follows: Firstly,the study on the market discipline of insurance subordinated debt mostly used case analysis,and the sample did not cover capital supplementary debt.This study uses empirical analysis,and the sample covers all types of subordinated debt.Secondly,from the perspective of financial cost and management’s risk attitude,it is proposed that subordinated debt has the potential to enhance risk-taking of insurance companies.Thirdly,through theoretical analysis and empirical results,it is confirmed that subordinated debt will increase systemic risk of insurance companies.