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Chapter 6 Conclusion
This paper takes Japanese property-liability insurance industry during 1986 to 2010 as the research object, extends the results of former literatures for banking industry to insurance industry and intends to investigate the impact of market competition on risks. We use Lerner index as the market competition variable and apply the fixed-effect generalized method of moments model to test the relation. We next follow Fernández and Garza-Garcíab (2015) to use the natural logarithm of the Z-index as the financial stability variable in place of risk variables to examine the effect of market power.
There are three main results in this paper. Firstly, for the whole research period (1986-2010), our findings suggest the existence of inverse relation between market power (competition) and total/underwriting risk in Japanese property-liability insurance industry. Insurance companies with higher market power are usually steady, the reason may be that they have better ability to decide the price and are more equipped and experienced on erasing information asymmetry, and therefore they carefully select their customers to minimize the possibility of loss. On the contrary, firms with low market power tend to take part in price competition in order to earn business and therefore they take on higher risks. However, we find a positive relation between market power and investment risk, which violates our initial anticipation. The possible reason is that insurers with high market power may have tendency to make aggressive investment decision basing on their stable operation.
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Secondly, we separate the research period into 1986-1996 and 1997-2010 by the Japanese financial reform in 1996. We find that before the financial reform, the market power (competition) only has inverse impact on total risk, but after 1996, the effect of market power on total risk turns out to be an upwardly U-shaped relation. Mergers and acquisitions may bring the difficulty of integrating the operations of different companies, and this is a more complicated and uneasy task in practice than in theory, which may have impact on the performance and profitability. In order to become bigger, the insurer may choose to merger or acquire other companies but they have to take on worse policies from them or spend more to stabilize the operation, resulting in higher risk.
Lastly, we use Z-index as financial stability for dependent variable to test whether market power (competition) determines Japanese nonlife insurance companies’ financial stability. The result shows that for the whole research period, firms with higher market power may improve their financial stability. Also, our finding presents the significance of market power’s (competition) effect in the period 1997-2010 but not for 1986-1996, which confirms that Japanese financial reform in 1996 might have influence on financial stability and this is consistent with our results of the effect on risks.
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