Capital Market Development, Competition, Property Rights, and the Value of Insurer Product‐Line Diversification: A Cross‐Country Analysis

Abstract

In this article, we show that the effect of product diversification on performance is not homogeneous across countries. Diversified insurance companies perform significantly worse than their focused competitors in countries with well‐developed capital markets, high levels of property rights protection, and high levels of competition. In addition, we find that the diversification–performance relationship for insurance companies depends on company size. For large insurers operating in countries with less developed capital markets, diversification significantly increases performance. Our results suggest that the optimal organizational structure may be different for insurers operating in emerging economies than for insurers operating in developed countries.

The determinants of efficiency and productivity in the Swiss insurance industry

“…Berger et al (2000) note that the conglomeration hypothesis dominates for some types of financial services (i.e., larger insurers with emphasis on personal lines and vertically integrated distribution systems) and the strategic focus hypothesis dominates for other types (i.e., smaller insurers with emphasis on commercial lines and nonintegrated distribution systems). Berry-Stölzle et al (2013) confirm that the diversification-performance relationship for insurance companies depends on company size. This may explain the empirical puzzle of why 9 Yuengert (1993) finds increasing returns to scale for U.S. life firms with up to US$15 billion in assets, whereas Cummins and Zi (1998) find these only for firms with up to US$1 billion in assets.…”

The Combined Effect of Enterprise Risk Management and Diversification on Property and Casualty Insurer Performance

“…Given the increasing number of firms using ERM, academic interest is shifting from examining determinants of ERM adoption and CRO appointment to more interesting and timely questions related to the financial consequences, value effects, and/or efficiency effects of ERM (e.g., Gordon, Loeb, and Tseng, ; Grace et al, ). The fact that most studies use announcements of CRO appointments or ERM adoption as proxies for ERM implementation without being able to distinguish firms based on quality of ERM (e.g., Hoyt and Liebenberg, ; Pagach and Warr, ; Berry‐Stölzle and Xu, ) may explain the inconsistent results that have been reported in this literature. For example, Hoyt and Liebenberg () simultaneously model the determinants of ERM adoption and the effect on firm value using Tobin's Q as a proxy, and conclude that ERM adoption results in a 20 percent value premium.…”

“…Additionally, it may be difficult and expensive for senior management of highly diversified firms to properly manage an increasingly dissimilar set of business operations (Jones and Hill, 1988). The empirical evidence in the insurance literature suggests that the costs of being diversified often outweigh the benefits, with many studies concluding that product line and/or geographic diversification result in reduced performance and/or value relative to more focused peers (Berger, Cummins, and Weiss, 2000;Elango, Ma, and Pope, 2008;Liebenberg and Sommer, 2008;Berry-Stölzle, Hoyt, and Wende, 2013).…”

Insurer Growth Strategies

“…However, they also find that firms with greater levels of product diversification but lower levels of geographic diversification gained benefits that outweighed the costs associated with inefficiency. Berry-Stolzle et al (2013) find that the relation between line-of-business diversification and performance is dependent on organizational structure and varies by country, where product diversification most negatively impacts performance in countries with developed capital markets and performance varies by firm size. 13…”

“…Berry‐Stolzle et al. () find that the relation between line‐of‐business diversification and performance is dependent on organizational structure and varies by country, where product diversification most negatively impacts performance in countries with developed capital markets and performance varies by firm size…”