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

Jan Janku and Ondrej Badura

Working Papers from Czech National Bank

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.

Keywords: Concentration; insurance sector; loss ratio; low interest rates; underwriting profitability (search for similar items in EconPapers)
JEL-codes: C33 G22 G23 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-com, nep-ias and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2021/9

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