Conglomeration versus strategic focus: evidence from the insurance industry

Berger, Allen N.; Cummins, J. David; Weiss, Mary A.; Zi, Hongmin

Working Paper

Conglomeration versus strategic focus: evidence from the insurance industry

Abstract: We use data on U.S. insurance companies to examine the validity of the conglomeration hypothesis versus the strategic focus hypothesis for financial institutions. We distinguish between the hypotheses using profit scope economies, which measures the relative efficiency of joint versus specialized production, taking both costs and revenues into account. The results suggest that the conglomeration hypothesis dominates for some types of financial service providers and the strategic focus hypothesis dominates for other types. This may explain the empirical puzzle of why joint producers and specialists both appear to be competitively viable in the long run.

Keywords: Insurance industry; Financial services industry; Consolidation and merger of corporations;