Abstract
The objective of the study is to measure product diversification’s impact on insurance firm’s financial performance in Pakistan. Analysis are carried out to examine how ownership structure, capitalization, group membership, firm size, diversification across business lines, industry concentration affects firm’s financial performance. Data from 2009-2019 is collected to measure the impact of diversification (entropy) on the risk- adjusted returns. Findings of the study reveal that business line diversification has strong positive effect on firm performance (for both ROA and ROE) which means that diversified firms perform better than non-diversified firms. For managers these findings are useful as they propose the need for diversification, capitalization, increase in size and group affiliation to enhance firm profitability.
Highlights
Globalization, de-regulation of markets, advancement in technology has opened up borders for businesses across the globe
Several studies have focused on the analyzing the relationship between business line diversification and nonlife-insurers (Elango, Ma & Pope, 2008; Pavic & Pervan, 2010; Lee & Kang, 2015; Ai et al, 2018) To the best of our knowledge, we found no empirical evidence with respect to the product diversification’s impact on insurance firm’s performance in Pakistan
The reason for focusing on insurance firms is that in Pakistan since deregulation of financial markets numerous opportunities arose which led to rise in new entrants into the insurance industry and many firms implemented diversification strategies to generate cost savings by cross selling products, entering into new business lines and markets, create hybrid products according to individual customer needs
Summary
Globalization, de-regulation of markets, advancement in technology has opened up borders for businesses across the globe. Product diversification is considered to be an important strategy for maximizing firm value and minimizing risk, but it has certain costs associated with it. Product diversification has been analyzed with respect to property-liability or life-health insurance companies or companies that diversify across both types Despite several studies on the insurance industry, still there is limited evidence with respect to the performance effect of product diversification. Several studies have focused on the analyzing the relationship between business line diversification and nonlife-insurers (Elango, Ma & Pope, 2008; Pavic & Pervan, 2010; Lee & Kang, 2015; Ai et al, 2018) To the best of our knowledge, we found no empirical evidence with respect to the product diversification’s impact on insurance firm’s performance in Pakistan
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