Fiegenbaum and Thomas (1990) applied the concept of strategic groups to insurance firms for the period 1970 to 1984 where insurer diversification was assessed based on the nature of business pursued: focused-life, focused-personal lines, or a hybrid structure combining life and personal lines.
In the last decade, four other studies have analyzed the phenomenon of insurer diversification using more recent data (i.
The key issue under investigation is the relationship shared by an insurer's product diversification and its financial performance.
Product diversification is the key explanatory variable of interest in our analyses and, as noted above, we use two different measures to assess a firm's level of product diversification.
The Entropy Measure allows us to quantify the level of product diversification within property-liability lines of business as well as those that diversify across the property-liability and life-health segments.
Conversely, the risk-reduction benefits associated with product diversification cited earlier should be equally applicable to geographic diversification, implying higher levels of financial performance.
Given the role of product and geographic diversification as management strategies, we also include an interaction term linking the product (PDIV) and geographic diversification (GEODIV) variables to test the shared relationship with firm performance.
Given the data structure, we employ a one-way fixed-effect model to test the relationship between the insurer's level of diversification and financial performance.
In all, 18 different naive diversification portfolios were considered and their mean/standard deviation ratio as well as effectiveness of diversification compared with the efficient portfolios.
In addition, portfolio efficiencies are viewed in terms of their effectiveness of diversification measure.
The higher the ratio, the higher the efficiency of diversification.
1) Diversification by manager (wherein property purchase is not given consideration) and where investments were either solely in one manager (3 portfolios) or in equal allocations to each of the three managers (1 portfolio).
2) Diversification of managers and property types wherein property purchases are considered.
Residential Diversification by Manager (Efficient Portfolios)
The results of diversification by manager are shown in Table 3.