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The Effect of Product Diversification on Profitability of Korean Insurers

남윤미 1 Hae Won Byun 2

1한국은행 경제연구원
2보험연구원

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ABSTRACT

While business diversification can have a positive effect on the performance of a firm through economies of scopes and distributing uncertainty or risk over the different business lines, it can also have a negative impact on the efficiency and on the profitability of a firm through possible costs from business expansion, or inefficient subsidies to unproductive sectors inside the firm. Therefore, it would be an empirical question whether business diversification is beneficial or harmful to a firm. This paper analyzes how insurers' product diversification strategies affect their profitability and its volatility, using data on Korean life insurance companies from FY2003 to FY2012. Our estimation results suggest that product diversification of an insurer has a negative effect on its profitability, evaluated through ROA. However, after considering the volatility of its profitability, product diversification and profitability measured by RAROA have a nonlinear relationship, where either low or high level of diversification results in higher profitability than moderate level.

Citation status

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