The Market Structure–Performance Relationship in the International Insurance Sector

ABSTRACT This article tests the applicability of the structure-conduct-performance (SCP) hypothesis in the international nonlife insurance marketplace. We employ a panel data regression methodology that includes 23 nations (developed and developing countries) over the time period of 1996 to 2003. The results reveal that the interaction of market liberalization and market concentration shares a complex relationship with market profitability. Our results show that the expectations associated with the SCP hypothesis are supported when the levels of liberalization are low. However, for markets that are highly liberalized the presence of foreign insurers significantly alters the dynamics of nonlife insurance markets. INTRODUCTION The relationships shared by a market's structure and its performance have received significant attention in the international insurance literature in recent decades (e.g., Outreville, 1990, 1992; Hussels, Ward, and Zurbruegg, 2005). However, the specific relationship shared by an insurance market's concentration and its profitability has received far less attention and, when examined, is typically focused on the U.S. marketplace (e.g., Joskow, 1973; Carroll, 1993; Chidambaran, Pugel, and Saunders, 1997; Bajtelsmit and Bouzouita, 1998; Choi and Weiss, 2005). Although this relationship is certainly worthy of investigation at the domestic level, the continuing liberalization and deregulation of the global insurance marketplace (Swiss Re, 2000) accentuate the importance of understanding these same issues at the international level--a subject for which no literature exists. (1) This article addresses this gap by performing the first examination of the relationship shared by market concentration and profitability within the nonlife insurance sector at the international level. We employ a panel data model structure that includes 23 countries whose observations span from 2 to 8 years from 1996 to 2003. The results reveal a complex relationship shared by a nation's level of liberalization, insurance market concentration, and profitability. Our results show that the effect of market concentration on insurance market profitability varies depending on the level of market liberalization. We also find support for the expectation that high barriers to entry for foreign competitors facilitate the ability of a concentrated marketplace to engage in collusive behavior and that the presence of foreign insurers may significantly alter the profitability of national nonlife insurance markets. The findings of this study will be of particular importance to national policymakers and regulators who seek a better understanding of the implications of changes in trade and regulatory policy. These findings will also be of interest to market competitors, both foreign and domestic, as they seek to better understand the relationships shared by market structure and profitability. The remainder of this article is organized as follows. The next section presents a literature review, followed by an abbreviated presentation of the theory associated with the market structure-performance relationship. Variable hypotheses based on this theory are then discussed, followed by data and empirical models. The article concludes with the presentation of significant findings and a summary of the results. LITERATURE REVIEW The earliest efforts to identify the relationship between a market's concentration levels and its profitability can be attributed to Bain (1951), who developed the concentration-profits hypothesis. Drawing on conventional price theory, Bain hypothesized that a concentrated market structure encouraged oligopolistic behavior by competitors. A later variant of the hypothesis formalized by Stigler (1964) came to be known as the collusion theory, and Tsutsui, Satake, and Uchida (2006) noted that the body of the associated literature is now more commonly known as the structure-conduct-performance (SCP hypothesis. …