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Non-linear Effects of Market Concentration on the Underwriting Profitability of the Non-life Insurance Sector in Europe

Author

Listed:
  • Jan Janku
  • Ondrej Badura

Abstract

Recent studies argue that more attention needs to be paid to the insurance sector in analyses of the financial sector, as it may be a significant factor in maintaining overall financial stability. In this paper, we analyze the relationship between market concentration and the underwriting profitability of the non-life insurance sector. We find that an increasing level of concentration over time leads, on average, to an increase in underwriting profitability (as proxied by the loss ratio). At high levels of concentration, however, this effect reverses, with rising concentration reducing underwriting profitability. The convex (U-shaped) nature of this relationship implies that the strongest incentives for collusive behavior arise when concentration is lowest. Additionally, we show that during a period of lower rates, weaker interest returns are offset by stronger underwriting results. However, this effect seems to be conditional on a high level of concentration.

Suggested Citation

  • Jan Janku & Ondrej Badura, 2021. "Non-linear Effects of Market Concentration on the Underwriting Profitability of the Non-life Insurance Sector in Europe," Working Papers 2021/9, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2021/9
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    References listed on IDEAS

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    More about this item

    Keywords

    Concentration; insurance sector; loss ratio; low interest rates; underwriting profitability;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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