Product diversification as a performance boosting strategy? Drivers and impact of diversification strategies in the property‐liability insurance industry

Abstract

AbstractWe investigate the relationship between product diversification and performance in the Dutch property‐liability (P&L) insurance industry for the period 2007–2018. We control for endogeneity by employing a two‐step approach: we first investigate the drivers of diversification and, as a second step, we investigate the impact of diversification on risk and return. We find that the impact of diversification is twofold, as it reduces an insurer's risk but is also associated with lower returns. Our results suggest that the relation between diversification and performance is not straightforward, but is influenced by the size of an insurance undertaking. Specifically, only smaller companies' performance is significantly impacted by diversification.