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Joint insurance: risks and reforms


By Zhuo Xian, Department of Development Strategy and Regional Economy, Development Research Center of the State Council (DRC)

Report No 132, 2014 (Total No 4631)


Joint insurance, with two or more enterprises undertaking joint liability for payment, enables commercial banks to offer sufficient credit for micro-enterprises in a boom period of a business cycle. However, it has triggered a regional credit crisis in the recession of recent years.

Thus, many commercial banks have set up limits on micro-enterprises' access to financing, with the potential for the latter seeking financial assistance in irregular markets. The report says that in spite of the benefits that joint insurance has inevitably brought, it has flaws since more entities involved in obtaining joint insurance are likely to cause an increasing fragility of the whole system.

With an absence of accountability, these enterprises probably take high risks to take out more loans, at a time when commerical banks take risks in getting approval in a procyclical period, and when the government has to handle the crisis aftermath.

To meet the financing demands of micro-enterprises on the pre-condition of risk control, we suggest that a limited liability mechanism is adopted immediately, followed by the setting up of a government-led risk sharing system. Finally, we propose that a non-gurantee financing mechanism is necessary in the long term.