Liberalization Outcomes and Competitive Behaviour in an Emerging Insurance Market

Abstract

AbstractThe liberalization of financial services industry has generally been associated with the creation of large firms, increased foreign presence and the ability to diversify into a broad range of activities. In this paper, we examine the effect of these outcomes on competitive behaviour in the non‐life insurance market in South Africa. Using annual data on 79 non‐life insurers, we employ the Panzar–Rosse model to estimate the H‐statistics competitive index for samples of large versus small insurers, domestic‐owned versus foreign‐owned insurers and single versus multi‐line insurers. Overall, our findings reveal that non‐life insurers in South Africa conduct their pricing under conditions of monopolistic competition. The sub‐market estimates of the H‐statistics indicate that the activities of small, foreign‐owned and single‐line insurers improve competitive behaviour in the market. This suggests that while liberalization outcome in increased foreign presence improves competition, the creation of large firms from consolidation reduces competitive pressures in the non‐life market. The results are robust to both static and dynamic specification of the Panzar–Rosse Model.