Abstract
Solvency is the premise of the sustainable management of insurance companies. Among factors that affect the solvency of insurance companies, diversification strategy is one that cannot be ignored. To study the impact of diversification on the solvency of property-liability insurance companies and how diversification will influence companies with different ownership, this paper adopts the dynamic panel GMM model and the unbalanced panel data from 2009 to 2015. The analysis is from two dimensions: product diversification and geographic diversification. Empirical study shows that product diversification will increase the solvency of Chinese-funded property-liability insurance companies but reduce the solvency of foreign-funded ones. As for the impact of geographic diversification on solvency, the more geographically diversified the premium income of Chinese-funded property-liability insurance companies are, the lower their solvency will be. However, geographical expansion has no significant solvency-related impact on foreign-funded property-liability insurance companies in China.
Highlights
Erefore, diversification has become a common choice for both Chinese-funded and foreign-funded P/L insurance companies
Does corporate diversification enhance solvency in emerging insurance markets like China? Does diversification have different effects on P/L insurance companies with different ownership? is paper discusses the impact of corporate diversification on solvency from the two perspectives, i.e., business diversification and geographical diversification
Shim found in his research that income diversification is beneficial to the banks since it will bring down the probability of insolvency and lessen the profit volatility [10]. e concrete manifestation of coinsurance effect theory in P/L insurance companies is as follows: due to the irrelevance of premium income and compensation expenditure of various business lines and regions, P/L insurers can have a more stable income and compensation expenditure through diversified portfolios
Summary
2.1. e Impact of Diversification on the Solvency of Insurance Companies. Synergistic effect theory is one of the basic theories to explain the motivation of enterprise diversification. anks to economies of scope or scale, synergies in enterprises can both reduce cost and increase sales [1,2,3,4]. E concrete manifestation of coinsurance effect theory in P/L insurance companies is as follows: due to the irrelevance of premium income and compensation expenditure of various business lines and regions, P/L insurers can have a more stable income and compensation expenditure through diversified portfolios. In this way, their solvency is enhanced [11]. Differences in market position, risk management level, and business philosophy of Chinese-funded and foreign-funded P/L insurers lead to differences in the impact of diversified operations on solvency. Erefore, we propose the following hypothesis: Hypothesis 5. (H5): diversification effects on solvency vary for P/L insurance companies with different ownership
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