Bancassurance in the Italian life insurance industry. An analysis of scale economies, concentration and risk profile

This dissertation is composed by three separated articles and carries out an analysis of the effects of bancassurance ties in the Italian life insurance industry from several perspectives. Departing from an analysis of the relevant literature, two separated empirical econometric analyses are developed focusing on the effects of bancassurance respectively on scale economies and on insurers’ asset risk profile. We consider the Italian market due to the importance of bancassurance ventures, its diversified life insurance sector, its recent volatility and its compliance with European and country-specific regulation. Our analyses focus on responses to regulatory and macroeconomic changes looking at competition (of which scale economies can be considered an indicator), concentration and investments’ choices (asset risk profile). The general literature on bancassurance has analyzed the optimal way to enter the insurance market mainly from the bank point of view. Less attention has been paid to insurers’ standpoint. In the first part of the dissertation we critically discuss the main issues on bancassurance studied so far and we highlight existing gaps. In particular we suggest to study the cooperative agreements between banks and insurers by using. In our view this approach, which has already been applied to the analysis of the co- existence of several distribution channels, is also appropriate to explain the co – existence of different degree of integration between banks and insurance companies. The second part of the dissertation investigates the existence of scale economies into the life insurance industry in Italy, looking for differences in the level of optimal scale across bancassurance groups. The originality of this study lies in fastening together two separated strand of literature: the general literature on financial conglomeration, in particular on bancassurance ventures, and the studies concerning the existence of scale economies in the life insurance market. In general, relying on the financial conglomeration literature, we expect that bancassurance groups are better able to exploit scale economies. We considered the span 1998 – 2012 dividing the panel into three groups based on ownership linkages with banks. Relying on a micro - econometric procedure, two cost functions are estimated dividing the span into pre crisis and post crisis periods. Results show that, before the crisis hit, insurers independent from banks operated on their optimal scale while bancassurers operated at decreasing return to scale, thus no further conglomeration was needed within the sector, in particular with respect to bancassurance groups. After the crisis results indicate overall increasing return to scale although the industry has undergone substantial consolidation. Taking into consideration the enhancement of managerial and supervisory actions on risk-taking activities of financial firms after the crisis, in the third part we analyse changes in Italian life insurers’ asset risk profile in the span 2005 – 2011, accounting for the importance of effects of bancassurance ventures. Through a pooled OLS panel data analysis we test the finite risk hypothesis which predicts a negative correlation between asset risk and other firm-specific factors determining the level of risk exposure such as bancassurance ventures, product mix, size and product diversification. In particular we contribute to the extant literature by considering the effects of the adoption of specific bancassurance models on the level of asset risk. The hypothesis is developed relying on two strands of literature: the general literature that investigates the relationship between asset risk and capital and on the specific studies dealing with risk exposure determined by bancassurance ventures. Finally we test for the effects of external macroeconomic shocks (such as the last financial crisis and changes in regulation). Our results show that Italian life insurers present a relatively prudent level of exposure, which is negatively correlated with firm factors influencing the overall risk profile. Stronger bancassurance models confirm this relationship. Finally, asset risk exposure did not decrease significantly as a result of the financial crisis, pointing at the effectiveness of regulatory restrictions on investments or a contingent search for yields.