The Impact of Diversification on Performance in the Insurance Industry: The Roles of Globalisation, Financial Reforms and Global Crisis

• Published in: Geneva papers on risk and insurance. Issues and practice 2015-10, Vol.40 (4), p.585-631
• Main Authors: Hsieh, Meng-Fen, Lee, Chien-Chiang, Yang, Shih-Jui
• Format: Article
• Language: English
• Subjects: Capital markets; Comparative analysis; Diversification; Economics and Finance; Finance; Flood damage; Hypotheses; Insurance; Insurance companies; Insurance industry; International; Liability insurance; Liberalization; Original Article; Profitability; Property & casualty insurance; Property rights; Regulation of financial institutions; Return on assets; Risk Management; Studies; Volatility
• ISSN: 1018-5895; 1468-0440
• DOI: 10.1057/gpp.2015.6

This paper builds on the diversity–performance relation in the cross-country literature by examining the property-liability insurance industry across 62 countries. It is, to the best of our knowledge, the first paper to explore the heterogeneity across countries over time by utilising the dynamic panel generalised method of moments approach, thus connecting directly with the current debates on the diversity–performance relation. The results show that a higher level of diversification leads to higher returns and insurers' risk, while intending to decrease the degree of leverage. Furthermore, globalisation and financial reforms have more significant impacts on performance in non-high-income countries. The results indicate that income diversity can improve an insurer's performance under the condition of financial reforms, but liberalisation with direct credit and interest rate control variables leads to higher competition and erodes an insurer's profitability. During global crisis periods, insurers in high-income countries that are well diversified are able to adjust their leverage ratio faster than insurers in non-high-income countries.