Abstract
PurposeThis paper aims to examine the relationship between geographical diversification and the underwriting performance for the world's largest reinsurance groups. It also aims to verify that the form and nature of the relationship between diversification and performance follow an S‐shaped curve with increased diversification of the largest reinsurance groups.Design/methodology/approachAnalysis in the paper is based on the concept of Geographical Spread Index defined and calculated by UNCTAD. Data on largest reinsurance groups in the world are published annually by Standard & Poor's for only a limited number of reinsurance groups. To overcome the small sample problem, a re‐sampling procedure from the original sample, similar to a bootstrap sample, is used to validate the results.FindingsThe results show that, overall, international geographical diversification has a positive effect on a reinsurance firm's underwriting performance but that this relationship is not linear. It rather follows an S‐shaped curve. Although data limitation does not allow more sophisticated investigations, the results reported in this paper are nevertheless significant. It seems that at an early stage of expansion in proximate markets there are efficiency gains for the firm. With increased internationalization there may be a diminution in performance because of higher transaction costs or learning costs for new markets. Further expansion in foreign markets brings back efficiency and higher performance.Research limitations/implicationsOnly cross‐section data for a small sample of companies are available and therefore it is not possible to analyze the dynamics of geographical diversification. A firm may deliberately expand for long‐term strategy reasons such as market share even though this is detrimental to medium‐run performance. Also, the analysis cannot provide any answer to the existence or not of a maximum level of international diversification beyond which performance would decline.Originality/valueIn the literature on firm diversification in the financial services sector, product diversification and performance has received significant attention with mixed results but except for a few papers, the internationalization aspect has not been examined. The reinsurance sector is important since reinsurance activities are, by nature, more geographically diversified than other financial activities. Furthermore, the largest European reinsurance groups dominate this worldwide market and many reinsurance companies have, in the past decade, increased their foreign direct investment and acquired other companies in part because of the belief that only very large players will have the cost advantages necessary to remain competitive in global markets.
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