Financial Convergence Analysis: Implication for Insurance and Pension Markets

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Financial Convergence Analysis: Implication for Insurance and Pension Markets


Introduction

The relevance of this article is caused by a growing significance of insurance companies and pension funds in the developed countries and emerging markets economies in the process of financial convergence taking place in the insurance and pension markets. In this context it is necessary to point out a special role of these institutions themselves: (1) insurance companies provide protection of property-casualty interests of legal and natural persons--enterprises, entrepreneurs and citizens, (2) pension schemes form an old-aged citizen's acceptable level of income provision.

In economics the term convergence is used and defined in several approaches. The first debate discussed the problem of the best financial system existing in the global capital market (Holz 2003) via economic-historian context (1).

The second debate revolved around the evolutionary paradigm, according to which the convergence is based on the "survival of the strongest" principle. Under such scenario, there is no need for institutional changes, as in the long-run international competition will encourage companies to minimize their costs for external (borrowed) capital (Bratton, McCahery 2000). This perspective describes the institutional competition as traditional market product competition (2). The financial system here is considered as a system of minimal complexity, where the structural relationship between the components does not play any role. It is supposed that competition and convergence will result the most efficient financial system: either market-or bank-oriented (Hansmann, Kraakman 2000).

In the 1980-s the idea appeared that the bank-based financial systems are more prone to economic growth and hence will dominate in the world. In the late '90s, after a series of Robert Levin publications, the direction of the debate about the convergence of economies shifted towards the impact of convergence on economic growth (Levine 1997). In the last decade, the vector of economic systems research (in the neo-classical "mainstream") has shifted back towards a market-oriented systems (Liberal economics: United States, Great Britain etc.) as the best source of economic growth (Hathaway 2000; Rajan, Zingales 2000).

Another direction of the convergence theory development is connected with harmonization of capital markets regulation and supervision, as well as with mechanisms for coordination of the various states and regions of the world economy macroeconomic policies. In this sense the convergence is figured out as levels of economic and socioeconomic development of countries, regions, industries, individual companies, etc. Here the concept of convergence is most often used for spatial income inequality study (regions, countries and so on), to answer the question whether different economies reach more even distribution of income via convergence. This direction is based on R. Solow neoclassical growth model. The most well-known is the concept of [beta] (beta)--and [sigma] (sigma)--convergence, proposed by R. Barro and H. Sala-i-Martin (1998). These concepts are based on a log-linear approximation of the Solow growth model with the Cobb--Douglas production function and give the new framework of the convergence theory as a method of industrial market organization study.

Applied research of the convergence phenomenon spread to the financial markets in connection with the integration process in the European region, and focused mainly on the financial integration analysis. The role and influence of the financial convergence on different segments of the financial market, as well as various aspects of financial integration were considered by many authors (Lane 2008; Ozcan et al. 2008; Adam et al. 2002; Baele et al. 2004). For example, L. Baele defines financial integration as a market for a specific financial instrument, when economic agents with similar characteristics are acting in the same administrative environment according to equal rules. …

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