Summary
This article tests economies of scale and economies of scope for the property-casualty insurance companies in Japan. We fit a composite cost function to a set of Japanese firms over the period from 1980 to 1995 and employ an error components model. Our main findings are as follows. First, statistically significant economies of scale are observed in both Japanese firms and foreign firms operating in Japan. Second, economies of scope are also statistically significant for Japanese firms and most of the foreign insurers between the "third sector" products and the rest of the property-casualty insurance lines.
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Extract
On the Cost Structure of the Japanese Property-Casualty Insurance Industry
INTRODUCTION
The Japanese property-casualty (hereafter P/C) insurance industry is currently undergoing major changes due to deregulation. Until the mid 1990s, entry into the insurance industry was tightly regulated, and insurance firms in Japan, including foreign companies operating in Japan, were legally required to use premium rates set by the insurance rating organization to sell fire, earthquake, personal accident, automobile, and compulsory automobile liability insurance. The industry was highly concentrated. In 1995, 26 Japanese P/C insurance firms and 29 foreign firms were in Japan.1 The market share of the four largest firms in the industry (all Japanese) received roughly 47 percent of the premium income.Then the "Financial Big Bang" (a series of financial deregulations taking place in the 1990s in Japan) and the U.S.-Japan Insurance Talks concluded in 1996 brought about major changes in the industry. The premium rates were gradually liberalized, with full liberalization taking effect in 1998. Foreign P/C insurance firms operating in Japan started offering low-priced insurance. The Insurance Business Law revised in 1995 removed the restriction on mutual entry between the life and P/C insurance sectors. Afterwards, several life insurance companies started offering fire and automobile insurance via newly established subsidiaries, and P/C insurance firms started selling life insurance via their new subsidiaries. Profitability of the P/C insurance companies declined gradually over the 1990s; the average ROE of the 20 J...See the full content of this document
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