An Empirical Investigation of Market Structure and Performance

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Jun Yang Collaborate with Xiao Wei and Yujia He Central University of Finance and Economics, 39 South College Road, Haidian District, 100081 Beijing, China

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of An Empirical Investigation of Market Structure and China Performance in Regional Insurance Market of China Outline of Topic Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Research Background and Motivation ∗ This paper tests the applicability of the structure-conduct-performance (SCP) hypothesis in the life insurance market of different provinces in China. ∗ The SCP hypothesis is the main theoretical framework in the industrial organization theory. ∗ The SCP hypothesis is mainly applied to analyze the relationships shared by the market structure, enterprise conduct and performance. ∗ The most well-known representatives of the SCP hypothesis are the Harvard School and Chicago School. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Research Background and Motivation ∗ Main view of the Harvard School: S C P (SCP hypothesis); ∗ Main view of the Chicago School: P plays the crucial role(ES hypothesis) and the relation is much more complicated than linear relation; ∗ Since generated, the SCP hypothesis has gained much attention from international scholars. ∗ Using this theory to analyze the relation of insurance market structure and performance in China is still under development. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Research Background and Motivation ∗ One problem: the low degree of performance of making profit is not consistent with the rapid development. ∗ Another problem: the degree of development in life insurance market is quite different from province to province. ∗ The purpose of this paper: analyze the relation of market structure and performance in life insurance market of China. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Literature Review ∗ Bain (1951) put forward three basic concepts of the modern industrial organization theory: market structure, conduct and performance (SCP). ∗ Choi and Weiss (2005) tested the SCP hypothesis in the US property-liability insurance market and found the ES hypothesis was supported. ∗ Pope and Ma (2008) tested it in the international non-life insurance sector and found it was supported when the level of liberalization was low. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Literature Review ∗ Chen (2007) tested it in Chinese case and found high degree of concentration and low efficiency of performance were the main characteristics of insurance market in China. And Both the SCP and ES hypothesis were not supported. ∗ Wang (2007) also found support that neither the SCP hypothesis nor the ES hypothesis was supported using data of 22 insurance companies in China from 1999 to 2004. ∗ Zhong (2009) tested it using the data of several life insurance companies in China and found that life insurance market in China was classified into the highest degree of monopoly market and the ES hypothesis was supported. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology ∗ We employ a panel data model which includes the data of 30 provinces and municipalities over the time period from 2005 to 2011. ∗ For some missing data, we use the interpolation method to generate them. ∗ In the stage of data preprocessing and analysis, we make the descriptive statistics of the data and unit root test for each time series data. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology The basic model of SCP hypothesis: ∗ ∏i is the variable representing the performance and usually measured by return on asset (ROA), return on equity (ROE), or price, etc; ∗ CONCn is an index measures the degree of market concentration; ∗ MSi stands for the market share of each market enterprise; ∗ X-EFFi and S-EFFi are the efficient variables: X-EFFi stands for pure technical efficiency(PTE); S-EFFi stands for scale efficiency(SE). Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology Pope and Ma (2008) generated a adjusted model: ∗ They want to use the profit margin to measure the performance of insurance companies. ∗ But they used the (1 -loss ratio) to measure the profit because of the data deficient Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology ∗ They also added several market structure variables: the number of competitors, degree of liberal, level of regulation, threat of substitution, economic factor and book of business to the basic model. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology Our model in this paper: ∗ we use the profit margin to measure the Performance and calculated as: Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology ∗ CR- the concentration rate of each market and calculated as: ∗ Competitors- the numbers of life insurance companies in each market; ∗ Fcn- the number of foreign life insurance companies in each market; Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology ∗ Econ- the first order difference of the natural logarithm of GDP for each province; ∗ Population- the proportion of population over 65 -year-old of each province; ∗ Policy- a dummy variable to indicate the application of the new accounting criterion; ∗ INV 1&INV 2 - control variables for return rate of the investment: the bank deposit rate and the range of fluctuation of Shanghai Composite Index Research Background and Motivation Literature Review respectively. Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology Descriptive Statistic of original panel data Variable Mean Median Maximu Minimu Observation Profit 0. 114 0. 118 0. 786 -0. 245 210 CR 0. 794 0. 785 1. 000 0. 536 210 Competitors 15. 652 12. 000 52. 000 3. 000 210 Liberal 0. 027 0. 000 0. 298 0. 000 210 Fcn 3. 557 1. 000 20. 000 210 Ln(GDP) 8. 944 9. 040 10. 870 6. 297 210 Population 0. 090 0. 089 0. 144 0. 053 210 INV 1 0. 027 0. 026 0. 034 0. 022 210 INV 2 0. 509 0. 653 1. 304 -0. 216 210 Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Data and Methodology Average Profit dynamic data of 5 Provinces Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Empirical Analysis and Results Parameters Estimates from the Cross-section fixed panel data model Coefficient Std. Error t-Statistic CR -0. 054374 0. 151935 -0. 357874 COMPETITORS -0. 004484 0. 001454 -3. 082947*** FCN 0. 008040 0. 002306 3. 487438*** LNGDP -0. 101921 0. 076945 -1. 324601 POPULATION -2. 679250 0. 444224 -6. 031311*** POLICY 0. 023583 0. 011097 2. 125150 INV 1 6. 531560 0. 885328 7. 377559*** INV 2 0. 021775 0. 005095 4. 273552*** C 0. 252867 0. 164956 1. 532931 Note: *** means statistically significant at 1%. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Empirical Analysis and Results ∗ The result of regression shows that the SCP hypothesis is not supported in the life insurance market of China; ∗ The highly centralized life insurance market in China is not the consequence of competition. And also the highly centralized market structure does not lead to a high profit rate of enterprises; ∗ Several factors influence the profit: the number of competitors, the number of foreign competitors, population structure and investment control variables. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

An Empirical Investigation of Market Structure and Performance in Regional Insurance Market of China Remark and Future Work ∗ The previous articles of scholars in China focus on the analysis for several provinces or companies; there are no researches consider the case with all provinces in China. Therefore, we fill the gap of in this area. ∗ The deficiency of this paper: we wanted to introduce the variable of efficiency to test whether the ES hypothesis is supported or not in life insurance market of China at first. However, there is no enough data to generate a proper proxy variable by now. ∗ Our future work: continue to explore this topic and try to include the efficiency variable in the model. Research Background and Motivation Literature Review Data and Methodology Empirical Analysis and Results Remark and Future Work

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