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

Wharton Financial Institutions Center Working Paper No. 02-01

52 Pages Posted: 17 Feb 2002

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

María Rubio-Misas

University of Malaga - Finance & Accounting

Date Written: November 2001

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.

Suggested Citation

Cummins, J. David and Rubio-Misas, María, Deregulation, Consolidation, and Efficiency: Evidence from the Spanish Insurance Industry (November 2001). Wharton Financial Institutions Center Working Paper No. 02-01, Available at SSRN: https://ssrn.com/abstract=294687 or http://dx.doi.org/10.2139/ssrn.294687

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

María Rubio-Misas

University of Malaga - Finance & Accounting ( email )

Spain
+34 952131236 (Phone)

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