Decomposing diversification effect: evidence from the U.S. property-liability insurance industry

Khuhro

et al. 2021

JAEBS

The objective of the study is to measure product diversification’s impact on insurance firm’s financial performance in Pakistan. Analysis are carried out to examine how ownership structure, capitalization, group membership, firm size, diversification across business lines, industry concentration affects firm’s financial performance. Data from 2009-2019 is collected to measure the impact of diversification (entropy) on the risk- adjusted returns. Findings of the study reveal that business line diversification has strong positive effect on firm performance (for both ROA and ROE) which means that diversified firms perform better than non-diversified firms. For managers these findings are useful as they propose the need for diversification, capitalization, increase in size and group affiliation to enhance firm profitability.

Section: Why Diversifymentioning

confidence: 90%

Section: Introductionmentioning

confidence: 99%

Product Line Diversification and Its Impact on Firm Performance

Rehman

Khuhro

et al. 2021

JAEBS

“…Since the probability of its happening and non-happening are doubtful, it can be termed as a natural uncertainty. To deal with such mishaps, firms rely on various insurance contracts (Che, Liebenberg, Liebenberg, & Powell, 2017), employ risk mitigation techniques, and initiate prior preventive measures to reduce the impact of such events (Park, Hong, & Roh, 2013). The financial and economic risks identified as a second category in the above section are managed and controlled by the use of financial derivatives (Stulz, 2003).…”

Section: Corporate Risk Management and Firm Riskmentioning

confidence: 99%

Does corporate risk management lead to risk mitigation and firm performance? Evidence from Asian emerging markets

Rehman

et al. 2023

MRR

Purpose This study aims to verify the significance of Andersen (2008) corporate risk management (CRM) framework in Asian emerging markets (AEMs) to control firm risk and improve firm performance. Design/methodology/approach The cross-sectional analyses are performed on a sample of 4,609 firms across nine Asian emerging countries using 2SLS estimation technique. Findings The empirical findings show that the adoption of CRM not only enhances firm performance by increasing the firm ability to capitalize on the market opportunity but also plays a significant role in reducing firm risk. The findings of this study assert that by institutionalizing risk management practices into an integrated CRM framework, the firm can reap multiple benefits by maintaining better contractual agreements and strategic partnerships with key stakeholders. Originality/value The study shifts the focus of CRM away from Western countries toward AEMs, which has been afflicted by high risks and uncertainties. The effectiveness of CRM against firm risk is established by dividing firm risk into firm-specific risk and systematic risk. Furthermore, this study also establishes that CRM not only leads to high returns but also reduces firm operational and production costs. Overall, the study provides a compelling argument to implement CRM for improving organizational performance and managing risks in a strategic and integrated manner. The findings are also relevant to risk management practitioners, as well as to academicians interested in the broader fields of corporate finance and strategy.

Risk Manage Insurance Review

“…The authors find evidence that undiversified insurers consistently outperform diversified insurers, and they estimate the diversification penalty to be 1% of return on assets or 2% of return on equity. Overall, existing academic research focusing on US insurers finds mixed results on the impact of diversification on firm performance (e.g., Ai et al, 2018; Berger & Ofek, 1995; Berry‐Stölzle et al, 2013; Che et al, 2017; Elango et al, 2008; Lamm‐Tennant & Starks, 1993; Mayers & Smith, 1990).…”

Section: Development Of Hypothesesmentioning

confidence: 99%

Insurance groups, product diversification, and the role of surplus lines affiliation

Baggett

Cole

2022

The market share of surplus lines insurers has grown considerably. We examine the impact of surplus lines representation within insurer groups on the extent of product diversification. Initial evidence suggests that groups with greater surplus lines representation are more diversified than other groups. These results hold when controlling for the joint impact of surplus lines representation and size, as well as surplus lines representation and the percentage of overall business written in personal lines. However, when examining the subsample of groups affiliated with surplus lines insurers, we find some evidence that supports the product focus hypothesis, which states surplus lines insurers are used to further focus on existing product lines already being written by other members of the group.