This paper provides new information on the effects of deregulation and consolidation in financial services markets by analyzing the Spanish insurance industry. The sample period 1989-98 spans the introduction of the European Union's (EU) Third Generation Insurance Directives, which deregulated the EU insurance market. Deregulation has led to dramatic changes in the Spanish insurance market; the number of firms declined by 35%, average firm size increased by 275%, and unit prices declined significantly in both life and non-life insurance. We analyze the causes and effects of consolidation using modern frontier efficiency analysis to estimate cost, technical, and allocative efficiency, as well as using Malmquist analysis to measure total factor productivity (TFP) change. The results show that many small, inefficient, and financially underperforming firms were eliminated from the market due to insolvency or liquidation. As a result, the market experienced significant growth in TFP over the sample period. Consolidation not only reduced the number of firms operating with increasing returns to scale but also increased the number operating with decreasing returns to scale. Hence, many large firms should focus on improving efficiency by adopting best practices rather than on further growth.

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This paper provides cross-country evidence on the association between soundness and competition in the life insurance industry where competition is measured by the Boone indicator. We analyze 10 European Union (EU) life insurance markets over the postderegulation period 1999-2011. The results indicate that competition increases the soundness of the EU life insurance markets but incentivizes EU life insurers to hold less capital. Since the Boone indicator measures competition based on the reallocation of profits from inefficient insurers to efficient ones, our results suggest that efficiency is the mechanism through which competition contributes to insurer solvency. The soundnessenhancing effect of competition is greater for weak insurers than for healthy ones. Results show that competition on average decreased in the years after the financial crisis.

This paper provides cross-country evidence on the association between soundness and competition in the life insurance industry where competition is measured by the Boone indicator. We analyze 10 European Union (EU) life insurance markets over the postderegulation period 1999-2011. The results indicate that competition increases the soundness of the EU life insurance markets but incentivizes EU life insurers to hold less capital. Since the Boone indicator measures competition based on the reallocation of profits from inefficient insurers to efficient ones, our results suggest that efficiency is the mechanism through which competition contributes to insurer solvency. The soundnessenhancing effect of competition is greater for weak insurers than for healthy ones. Results show that competition on average decreased in the years after the financial crisis.

This paper applies a multiobjective goal programming (GP) model to define the profile of the most profitable insurers by focusing on 14 firm‐decision variables and considering different scenarios resulting from the exogenous change in interest rate and GDP per capita growth variables. We consider a detailed database of Spanish non‐life insurers over the period 2003–2012 taking into account two dimensions of insurers’ results: underwriting results and investment results. A prior econometric analysis is used to find out relevant relations among the variables. Next, a GP model is formulated on the basis of the relationships obtained. The model is tested in a robust environment, allowing changes in the coefficients of the objective functions, and for several scenarios regarding crisis/noncrisis situations and changes in interest rates. We find that having the stock organizational form, being an unaffiliated single company and maintaining low levels of investment risk, leverage, and regulatory solvency are recommended for result optimization. Growth and reinsurance utilization are not advisable for optimizing the results, whereas size should be positively emphasized even more in instability periods and when interest rates increase. The results also show that the optimal level of the diversification/specialization strategy depends on economic conditions. More specialization is advisable as negative changes in interest rates increase. However, we find that the optimal values of the diversification variable are higher for the crisis scenarios compared to the corresponding noncrisis scenarios, suggesting that diversification creates value in crisis. Further sensitivity analyses show the soundness of the conclusions obtained.