Study On The Relationship Between Diversified Management And Operating Performance Of Chinese Insurance Companies

The insurance industry is an important part of the national economy and its sustainable and orderly development is related to all aspects of the economy and social stability. With the revision of relevant laws and regulations and the introduction of new policies in insurance industry, Chinese insurance industry has been developing vigorously and its market structure has made enormous changes. The insurance companies have taken measures to diversify the products and regions so as to improve operating performance and enhance their own competitiveness. Therefore, the relationship among the market structure of insurance industry, the corporate conduct and performance of insurance companies has gradually become the focus of the academia.In the theories of industrial organization, the SCP paradigm raised by E.Mason and S.Bain (1951) has hit a milestone. This theory pointed out that market structure, corporate conduct and operating performance are linking with each other. In this paper, we use the SCP paradigm as research framework to analyze the impact of diversified management of Chinese insurance companies on operating performance under the influence of insurance market structure. We review the related theories and research methods about the insurance industry market structure, diversified management and operating performance and comb the history of diversified management and the characteristics of regional imbalances of Chinese insurance industry. Accordingly, we argue that as a kind of corporate conduct, diversified management of insurance companies is the middle part of the SCP paradigm. On the one hand, it is affected by the market structure. It reflects on the duality of market structure which is monopoly and competition affecting product diversification. And it also reflects on the regional diversification influenced by the imbalance of regional development. On the other hand, diversified management of insurance companies is an important determinant of operating performance. Therefore, we apply the "market structure-corporate conduct-operating performance" composition of the SCP paradigm to establish the "market structure-diversified management-operating performance" research framework correspondingly. We take empirical research methods to test our viewpoint. In this paper, the empirical researches are divided into three levels and the following three issues are discussed.1. On the level of provincial units of insurance companies, we discuss the impact of product diversification on business income. We analyze 8971 observations of provincial units of insurance companies from 2005 to 2013 and simply explain the relationship between the duality of market structure and product diversification. On this basis, we construct the new variable which is product diversification affected by the provincial market structure as the main independent variable. Namely, according to the market structure, we divide the effect of product diversification into two parts:a part affected by market monopoly and the other affected by market competition. By pretreatment, we select a sample with 7500 observations of provincial units of insurance companies and analyze the impact of product diversification on the business income of insurance companies by using fixed-effect panel regression model. The empirical results demonstrate that product diversification generally enhance the business income of insurance companies. We use the new variables of product diversification constructed by pretreatment which are market monopoly affected and competition affected, to further discuss this result and prove that product diversification affected by provincial market competition is the very cause of improving the business income of insurance companies, while the part influenced by provincial market monopoly does not have a significant impact on the business income of insurance companies.2. On the level of insurance companies, we discuss the impact of product diversification on total factor productivity. We comprehensively utilize Levinsohn-Petrin semiparametric method, OLS method and nonlinear estimation method to calculate the total factor productivity of 32 property insurance companies and 46 life insurance companies from 2005 to 2013 to comprise a sample with 301 observations. And then, we study the influence of product diversification on the total factor productivity of insurance companies. The results show that product diversification can increase the total factor productivity of insurance companies, among which the part affected by market competition is the actual factor. The conclusion of property insurance companies is the same with the insurance companies’ one, however, the conclusion of life insurance companies is not sensitive to product diversification. The reason is that the life insurance market has a higher degree of monopoly.3. On the level of municipal subsidiaries of insurance companies, we discuss the impact of regional diversification on the business development. Based on the theory of industrial spatial agglomeration, we construct a new directional variable to describe the location of insurance companies’subsidiaries. The new variable can better describe the subsidiaries’dependence on the economic center geographically and reflect the imbalanced regional development of Chinese insurance market. After that, we make this variable and business concentration index of insurance companies’ subsidiaries as indexes to measure the insurance companies’regional diversification. The empirical regression uses a sample with 578 observations from 114 insurance companies and tests the impact of regional diversification on the business development. The results show that the regional diversification significantly affects the business income and its growth rate.Combined with the results of the previous two empirical studies, we verify the correctness of conclusions of insurance company’s product diversification in the existing literatures as well as provide further research results on this phenomenon. According to the duality of market structure, we analyze the impact of product diversification on the business income and total factor productivity. The results prove that the effectiveness of market competition and the validity of product diversification provide a theoretical basis for insurance market structure optimization and a standard for insurance companies’diversified management. Based on the empirical results of insurance companies’regional diversification, we offer new ideas and perspectives for researches in this field. Namely, we not only use the common business concentration index to measure regional diversification like many existing literatures, but also observe and calculate regional diversification from the perspective of geographic distance and the imbalance of regional development. Thus, we put forward a sounder conclusion which would be reference for the insurance business development strategy and subsidiary location.In this paper, our main innovations are as follows:First, we classify the effect of product diversification based on the duality of insurance market structure and discuss the impact of product diversification affected by different market structures on the operating performance and total factor productivity. This result is more accurate than the existing ones in describing the influential mechanism of product diversification on the operating performance of insurance companies. It provides a foundation for the optimization of insurance market structure and the implementation scheme of product diversification. Second, we use Levinsohn-Petrin semiparametric method to calculate the total factor productivity of insurance companies and OLS method and nonlinear estimation method to test the results. Such an estimation method is an improvement of the mainstream on calculating the total factor productivity of the insurance companies, which is based on the production frontier theory (DEA, SFA). The Levinsohn-Petrin semiparametric method used in this paper can effectively eliminate the estimation error caused by the interaction among input, output and total factor productivity. Therefore, our results are more accurate and sounder than those estimated by the production frontier theory. Third, we construct a directional variable to describe the location of insurance companies’subsidiaries and measure the subsidiaries’ dependence on the economic center. Compared with the methods of measuring regional diversification used in existing literatures, our estimation is more in line with the conditions of imbalanced regional economic development in China and our results have higher reality and accuracy.