Concentration and financial stability in the property-liability insurance sector: global evidence

Abstract

Purpose This paper aims to examine the effect of concentration in the insurance sector on insurer stability for a large set of developed and developing countries. In particular, the authors test whether concentration reduces financial fragility in the insurance sector (“concentration-stability view”) or decreases stability in the insurance sector (“concentration-fragility view”). Design/methodology/approach The authors use a data set of 14,402 firm-year observations of property-liability insurers who appear in A.M. Best’s Statement File Global database during the period 2004-2012. They use regression analyses to examine the effect of concentration on the stability of insurance firms and apply different measures of concentration. Findings The results provide empirical support for the “concentration- fragility view”; that is, higher levels of concentration are associated with decreases in the insurance sector’s financial stability. Research limitations/implications The results have important policy implications, given that a primary purpose of insurance regulation is to protect policyholders against insurance firm defaults. Originality/value No previous research analyzes how recent trends in competition and consolidation, which have led to changes in insurance market concentration, affect the stability of insurance firms around the world. This research is the first paper that provides evidence on the relation between concentration and stability in the insurance sector.

On the Corporate Demand for Insurance: Evidence From the Global Reinsurance Market

“…(), Altuntas et al. (), and Altuntas and Rauch (). The following section discusses our measures of: access to capital , riskiness of business environment , (3) quality of regulation and governance , and (4) insurance market structure in detail (see the Appendix for a summary of the variables).…”

“…Since our sample contains some countries with observations from just a few insurers, our results might also capture a firm‐ as opposed to country‐level effect in some cases. To ensure that our results are not driven by a small number of insurers from a given country, we drop countries with fewer than 50 firm–year observations from our sample (Altuntas et al., ; Altuntas and Rauch, ). For robustness, we repeat our analyses after excluding countries with fewer than 100 firm–year observations from our sample .…”

“…Insurers exposed to higher underwriting risk also have more uncertain future cash flows than insurers exposed to lower underwriting risk (Lamm‐Tennant and Starks, ). Hence, following the previous literature (Lamm‐Tennant and Starks, ; Adams, ; Altuntas et al., ; Mankaï and Belgacem, ; Altuntas and Rauch, ), we include the standard deviation of insurers’ loss ratio over the sample period in the model . Underwriting risk is measured by the standard deviation of the ratio of net claims incurred to premiums earned.…”

“…Following previous studies (e.g., Gungoraydinoglu and Öztekin, ; Fields et al., ; Altuntas et al., ; Altuntas and Rauch, ), we treat country‐level variables separately in our models. We do so because of two reasons.…”

Economic crisis and determinants of solvency in the insurance sector: new evidence from Spain

“…Although Cummins et al . () report a positive relationship between concentration and soundness in European life insurance firms, Altuntas and Rauch () and Shim () conclude that higher market concentration is associated with lower financial stability in the insurance sector, providing empirical support for the ‘concentration‐fragility view’.…”