Why is the cost of resolving insurance company failures so high? Evidence in this paper suggests that the state insurance regulatory bodies in charge of the liquidation process turn over an average of only 37 cents for each $1,00 of pre-insolvency assets to the guaranty funds.

State fuaranty funds (GFs) are quasi-governmental agencies that provide insurance to policyholders against the risk of insurance company failure. But insurance provided by guarantee funds, like all insurance, creates moral hazard problems, especially for companies that are insulvent of...