Foreign Affiliates of the Largest Insurance Groups: Location-Specific Advantages

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ABSTRACT

This article has two objectives. The first is the documentation of the relative importance of the largest insurance or reinsurance companies in the world and changes that may have occurred in the past 15 years. The second objective is to identify some of the factors that may explain the increased internationalization and most-favored locations of the world's largest insurance groups in transition and developing economies. The results of this study have important implications. First, they indicate that as expected, location-specific factors such as the size of a market, human capital, and good governance do provide an explication of the Internationalization of insurance groups. second, they also show that other factors, such as cultural distance, regulatory barriers, and competitiveness have a significant impact on the choice of countries.

INTRODUCTION

Recent years have seen a rapid growth in global trade, foreign direct investment (FDI), and portfolio investment in the services sector. All services industries that, until recently, were largely national are becoming transnational. All countries are affected by the rise of services FDI and the broad-based growth of transnational corporations (TNCs) and European (EU) TNCs are taking the lead (United Nations Conference on Trade and Development [UNCTAD], 2004).1 The insurance industry has also succumbed to the general trend toward global markets and risks (SwissRe, 2000).

Fifteen years ago. A United Nations study2 revealed that the United States was the single most important home country for service TNCs. In the second half of the 1990s, EU source TNCs, having acquired experience within Europe, expanded into over countries in pursuit of the more ambitious goal of having a global presence.

The U.S. TNCs still have a strong presence in many services, but they are less dominant than 15 years ago, and in some industries they no longer occupy leading positions. In insurance, the home country composition of the largest TNCs has changed dramatically. European TNCs have taken over the lead from U.S. and Japanese firms. The rise to prominence of European TNCs has occurred in parallel with their increasing participation in cross-border mergers and acquisitions (M&As) and global insurance groups have been a major force in the consolidation process (Bank for International Settlements [BIS], 2001; SwissRe, 2001, 2006).

International diversification is a growth strategy that has a major impact on firm performance. This relationship has been studied extensively in the international strategy literature (Capar and Kotabe, 2003). International diversification offers prospective market opportunities. Firms with strong competencies that are developed at home can utilize these in international markets (Bartlett and Ghoshal, 1989) to generate growth. But it has also been suggested that international diversification is preferred into markets that are physically and culturally close and that other factors such as logistics, trade barriers are likely to increase the cost of operations rather than providing economies of scale (Katrishen and Scordis, 1998).

In response to foreign market opportunities made available by deregulation and globalization, many insurance firms have increased their FDI and acquired other insurers in part because of the belief that only very large insurers will have the cost advantages necessary to remain competitive in emerging global markets. For a variety of reasons, transition and developing economies tend to attract foreign insurers and the subject is today often debated in the business press to give examples of insurance groups opening representative offices in markets that are showing positive signs of future growth.3

Ma and Pope (2003) revealed that the removing of trade barriers has significantly improved the desirability of high-income, competitive markets host countries for international insurers. …