<scp>Determinants of Corporate Diversification: Evidence From the Property–Liability Insurance Industry</scp>

TLDR

The article investigates how property‑liability insurers vary in line‑of‑business diversification status and extent. The authors distinguish between related and unrelated diversification, using a measure of unrelated diversification. Diversification is driven by internal capital markets and market‑size or concentration barriers rather than risk pooling, and mutual insurers are less diversified in unrelated lines than stock insurers, supporting the managerial discretion hypothesis.

Abstract

Abstract This article analyzes variations in line‐of‐business diversification status and extent among property–liability insurers. Our results show that the extent of diversification is not driven by risk pooling considerations; insurers operating in more volatile business lines do not diversify more. Diversification can rather be explained by the benefits of internal capital markets and barriers to business growth like market size and concentration. In our analysis, we distinguish between related and unrelated diversification. Using a measure of unrelated line‐of‐business diversification we find the first support for the diversification prediction of the managerial discretion hypothesis that mutual insurers should be less diversified than stock insurers. While mutual insurers tend to exhibit higher levels of total diversification, they engage in significantly less unrelated diversification than do stock insurers.