Firm Size and Growth in the United Kingdom Life Insurance Industry

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ABSTRACT

This study tests whether the organic growth rates of United Kingdom (UK) life insurance firms are independent of size, as predicted by Gibrat's (1931) Law of Proportionate Effects. Using data for 1987-1996 and the three subperiods, 1987-1990, 1990-1993, and 1993-1996, we find that smaller life insurance firms tended to grow faster than larger ones in the 1987-1990 period and that larger life insurers tended to grow faster than smaller ones in the 1990-1993 and 1993-1996 periods. But over the ten-year period, we find no significant difference between the growth rates of small and large firms, thus supporting Gibrat's Law as a long-run tendency in the UK life insurance industry. When we examine firm-specific determinants of asset growth, we find evidence in 1987-1996 and 1987-1990 that more diversified life insurance firms experienced higher growth rates on average than more specialized life insurers. We also find that the growth of life insurance firms was related to input costs during the 1990-1993 and 1993-1 996 subperiods.

INTRODUCTION

Gibrat's (1931) proposition that the proportionate organic (or internal) growth rates of firms are independent of their size has been the subject of many cross-sectional and sector-specific studies published in the industrial economics literature over the last decade or so (e.g., Cabral, 1995; Chesher, 1979; Evans, 1987; Hall, 1987; Harhoff et al., 1998; Weiss, 1998). The overall conclusion arising from most of the prior research is that self-generated corporate growth rates tend to vary randomly across firms and over time, as predicted by Gibrat's Law of Proportionate Effects (Geroski et al., 1997). In other words, growth is independent of size, and other firm-specific factors, in single and multiperiod states. However, to our knowledge, prior research has not investigated whether corporate growth rates in insurance markets follow the Gibrat process. This is surprising given that insurance markets in developed economies such as the United Kingdom (UK) (see Carter, 1998; Richards and Colenutt, 1975) and the U nited States (US) (see Globerman, 1986) have long been characterized by rapid market change, dynamic rates of firm growth, and innovative product development. Of the 840 UK registered insurers in 1997, 177 firms were engaged solely in life insurance, while 65 of the largest operatives (composites) wrote both life and general insurance business (Association of British Insurers, 1998). Like other parts of the financial services sector, the life insurance industry has been operating in an increasingly competitive environment spurred on by the World Trade Organization's liberalization of international trade in services and the gradual arrival of the single European market in financial services (Carter, 1998). As a result, insights into the firm size-growth relation should be particularly relevant to the insurance industry, where new entrants have taken an increasing share of new business premiums (Swiss Re, 1999).

Our research is motivated in two further respects. First, the question of whether small life insurers grow as fast as (or faster than) large life insurers is an issue of some importance to policymakers, industry associations, and others. For example, insights into the relation between self-generated corporate growth and firm size could help policymakers frame rules that achieve desired objectives in policy areas, such as the licensing of new entrants to the market and employment and wealth creation. Second, the structure and evolution of the insurance industry will be of interest to the distributors and consumers of insurance products. For example, evidence suggesting a lack of empirical linkage between the past performance and future growth of life insurance firms is likely to influence the decision making behavior of brokers, policy holders, and investors. Therefore, we seek to address the dearth of empirical research by using 1987-1996 data from the UK life insurance industry to test whether the observed g rowth rates of life insurance firms follow the Gibrat process and, more generally, to investigate the determinants of the growth of life insurance firms. …