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Deregulation, Consolidation, and Efficiency: Evidence From the Spanish Insurance Industry

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J. David Cummins
Maria Rubio-Misas

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Abstract

This paper provides new information on the effects of deregulation and consolidation in financial services markets by analyzing the Spanish insurance industry. The sample period 1989-1998 spans the introduction of the European Union’s Third Generation Insurance Directives, which deregulated the EU insurance market. Deregulation has led to dramatic changes in the Spanish insurance market; the number of firms declined by 35 percent and average firm size increased by 275 percent. We analyze the causes and effects of consolidation using modern frontier efficiency analysis to estimate cost, technical, and allocative efficiency, as well as using Malmquist analysis to measure total factor productivity change. The results show that many small, inefficient, and financially under-performing firms were eliminated from the market due to insolvency or liquidation and that acquirers in the mergers and acquisitions market prefer relatively efficient target firms. As a result, the market experienced significant growth in total factor productivity over the sample period. Consolidation reduced the number of firms operating with increasing returns to scale but also increased the number operating with decreasing returns to scale. Hence, many large firms should focus on improving efficiency rather than on further growth.

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 02-01.

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Date of creation: Nov 2001
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Handle: RePEc:wop:pennin:02-01

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," Journal of Business, University of Chicago Press, vol. 66(3), pages 437-62, July. [Downloadable!] (restricted)
  2. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Bernhard Mahlberg & Thomas Url, . "The Transition to the Single Market in the German Insurance Industry," WIFO Working Papers 131, WIFO. [Downloadable!]
  4. Cummins, J. David & Weiss, Mary A., 1993. "Measuring cost efficiency in the property-liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 463-481, April. [Downloadable!] (restricted)
  5. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February. [Downloadable!] (restricted)
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  6. Berger, Allen N & Cummins, J David & Weiss, Mary A, 1997. "The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property-Liability Insurance," Journal of Business, University of Chicago Press, vol. 70(4), pages 515-46, October. [Downloadable!] (restricted)
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  7. Kumbhakar, Subal C, et al, 2001. "The Effects of Deregulation on the Performance of Financial Institutions: The Case of Spanish Savings Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 101-20, February.
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  8. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law & Economics, University of Chicago Press, vol. 26(2), pages 327-49, June.
  9. Fare, Rolf & Shawna Grosskopf & Mary Norris & Zhongyang Zhang, 1994. "Productivity Growth, Technical Progress, and Efficiency Change in Industrialized Countries," American Economic Review, American Economic Association, vol. 84(1), pages 66-83, March. [Downloadable!] (restricted)
  10. J. David Cummins & Mary A. Weiss & Hongmin Zi, 1998. "Organizational Form and Efficiency: An Analysis of Stock and Mutual Property-Liability Insurers," Center for Financial Institutions Working Papers 97-02, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  11. J. David Cummins & Hongmin Zi, 1997. "Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry," Center for Financial Institutions Working Papers 97-03, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  12. James R. Barth & R. Dan Brumbaugh Jr. & James A. Wilcox, 2000. "Policy Watch: The Repeal of Glass-Steagall and the Advent of Broad Banking," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 191-204, Spring. [Downloadable!] (restricted)
  13. Dekle, Robert, 1998. "The Japanese "Big Bang" financial reforms and market implications," Journal of Asian Economics, Elsevier, vol. 9(2), pages 237-249. [Downloadable!] (restricted)
  14. Bernhard Mahlberg & Thomas Url, . "Effects of the Single Market on the Austrian Insurance Industry," WIFO Working Papers 97, WIFO. [Downloadable!]
  15. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring. [Downloadable!] (restricted)
  16. Allen N. Berger, 2000. "The integration of the financial services industry: where are the efficiencies?," Finance and Economics Discussion Series 2000-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  17. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
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  18. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc. [Downloadable!]
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  1. Jacob Bikker & Janko Gorter, 2008. "Performance of the Dutch non-life insurance industry: competition, efficiency and focus," DNB Working Papers 164, Netherlands Central Bank, Research Department. [Downloadable!]
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