Competition in the general insurance industry

Abstract

Using a large sample of cross-sectional data for 1998 of companies operating in the general insurance industry we attempt to shed some light on the issue of competition in this industry. Companies offering products and services in the general insurance market are believed to trade under very competitive conditions. In order to test this widely-held claim we investigate whether firms' pricing policies reflect competitive or monopolistic market features. Under competitive conditions companies are forced to pass on any increase in costs in prices and thus their revenues will rise pari passu should wages, underwriting costs or other expenses increase. By contrast, a firm operating under monopolistic competition responds to an increase in marginal and average costs by increasing price and reducing output, resulting in a less then complete pass-through in revenue; profit falls. Our study is the first, to our knowledge, to apply this research methodology to the general (casuality/liability) insurance industry. Firms in this industry generate revenue through underwriting of insurance risks and from investing their assets. As underwriting and capital markets are in general segmented (catastrophe bonds apart), our empirical approach is based on the insurance and portfolio behaviour of firms and not on an integrated view of both. Previous investigations of this kind have focussed on the banking industry. Contrary to widely held views we find that competition is less than perfect. JEL Classification Numbers: D4, G22

Information sharing, market competition and antitrust intervention: a lesson from the Italian insurance sector

“…7 With reference to the insurance industry, less attention has been devoted to applying this technique. So far, the paper by Murat et al (2002) appears to be the only attempt to apply the Rosse-Panzar test to an insurance industry, specifically the Australian one.…”

“…Choi and Weiss (2005) examine the relationships between market structure and performance in the US property-liability insurers for the period 1992 to 1998, and are able to support the ES hypothesis. Regarding the NEIO studies, Murat et al (2002) apply the Panzar-Rosse technique to the Australian insurance market: their evidence suggests that the industry is characterized by a monopolistic competition environment. Souma and Tsutsui (2005) investigate the Japanese life insurance industry by means of a simultaneous equation model, finding that competition increased in the period under study (1996 to 2002).…”

“…Murat et al (2002) compute the input prices always dividing each category of expenses by the total assets. 10 Similar interaction terms are introduced byGelos and Roldos (2004).Information sharing, market competition and antitrust intervention…”

Impacts of Risk Based Capital Regulation in Malaysian Islamic Insurers (Takaful)

“…To measure the competitiveness of FTO in Malaysia, Panzar-Rosse (PR) method will be employed which is initially suggested by Panzar and Rosse (1987), then the method is applied by Murat, Tonkin and Jüttner (2002) and recently by Coccorese (2012) in measuring the competitiveness in the insurance industry. The revenue of the ith firm of the FTO at time t is estimated by Equation 11 and is explained in Table 3 Hence, the sum of the elasticities of the reduced form revenue is corresponded by H with respect to all the factor prices.…”

On the Role of Patience in an Insurance Market With Asymmetric Information

“…In an empirical study of the Australian general insurance industry, Murat et al (2002) find that insurers are able to sustain a considerable amount of market power. This result is obtained since insurers do not completely pass on increases in their production costs to consumers.…”