Foreign Ownership and Non‐Life Insurer Efficiency in the Japanese Marketplace

• DOI: http://doi.org/10.1111/j.1540-6296.2011.01202.x
• Date: 01 March 2012
• Published date: 01 March 2012

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2012, Vol.15, No. 1, 57-88

DOI: 10.1111/j.1540-6296.2011.01202.x

FOREIGN OWNERSHIP AND NON-LIFE INSURER

EFFICIENCY IN THE JAPANESE MARKETPLACE

Li-Ying Huang

Yu- Lu en M a

Nat Pope

ABSTRACT

Traditionalshareholding patterns in Japan have experienced significant change

beginning in the early 1990s. Since that time, foreign institutional shareholding

has increased significantly largely at the expense of domestic financial insti-

tution ownership. This article examines whether these changes in ownership

patterns share a relationship with insurer performance in the non-life insur-

ance market. Using data from 1992 to 2005, we assess performance in terms of

efficiency measures using data envelopment analyses (DEA) techniques. Our

results show that higher levels of domestic financial institution ownership in

Japan are associated with insurer inefficiency. Relative to that relationship, the

foreign ownership–insurer efficiency relationship is found to be positive. Ad-

ditionally, we find that the disparity between those relationships has become

more acute since 2001 when the Japanese non-life insurance market experienced

significant consolidation.

INTRODUCTION

Foreign investment in the Japanese economy has increased dramatically since the 1990s,

growing from about 5 percent to over 20 percent by 2005. These increases have come

largely at the expense of the Japanese financial institutions who have historically served

as the central reservoir of capital for funding corporate Japan. This trend has been even

more pronounced in the non-life insurance industry where industry foreign ownership

stood at 34 percent in 2005. Given Japan’s historical resistance to external influences,

this increase represents an acute change in the traditional Japanese governance model—

a model that has not changed appreciably in over half a century. The implications

associated with these changes are yet to be fully understood.

Li-Ying Huang is an Assistant Professor at Overseas Chinese University, Taiwan. Yu-Luen Ma

is a Professor at Illinois State University. Nat Pope is an Associate Professor at Illinois State

University, Normal, IL 61790-5480; phone: (309) 438-3316; e-mail: npope@ilstu.edu. The authors

wish to thank two anonymous reviewers for their insightful comments and expertise. The authors

also wish to acknowledge Professor Gene Lai for his support and guidance in the development

of the paper. This article was subject to double-blind peer review.

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58 RISK MANAGEMENT AND INSURANCE REVIEW

This article examines the relationship that governance structure shares with insurer

performance in the Japanese non-life insurance marketplace. The Japanese insurance

market is a unique subject due to the diverse set of shareholder expectations possessed

by the two dominant ownership blocks, domestic financial institutions and foreign

investors. Given their central role as the coordinator of corporate network activities,

domestic financial institutions, for example,banks, have traditionally focused on the

broader goals of the network to which they belong. In contrast, foreign shareholders

tend to focus on the share-value maximization of the firms in which they invest,

a traditional motivation for investing in the Anglo-American business model. The

recent precipitous increase in foreign ownership, concurrent with the decline in the

ownership position of domestic financial institutions, demands close attention as this

shift sets up a potential clash of shareholding cultures. We extend the current agency

theory literature that focuses on the relationship institutional ownership shares with

managerial performance. Whether the shift in ownership structure has any impact on

insurer performance is the question this study seeks to address. Using data from 1992 to

2005, we employ a two-stage analysis where we first assess insurer performance using

cost efficiency measures derived from nonparametric data envelopment analysis (DEA)

and subsequently estimate the truncated regression models using efficiency scores

as our dependent variables. Because of a significant consolidation in the insurance

marketplace beginning in 2001, we also perform parallel analyses on the pre-2001

(encompasses 1992–2000) and post-2000 (encompasses 2001–2005) periods. The fact that

some insurers involved in these consolidations have crossed long-standing traditional

barriers related to keiretsu affiliation may imply that the historical importance of such

affiliation has begun to weaken, an issue that is also addressed in this analysis.

In the next section, we present background information on the Japanese non-life in-

surance marketplace and its ownership structure. A review of the pertinent theoretical

literature is then presented, followed by a discussion of the data and empirical method-

ologies. A summary of the findings and our conclusions close the article.

OWNERSHIP STRUCTURE IN THE JAPANESE INSURANCE MARKET

The modern-day Japanese governance model that emerged in the wake of World War II

was heavily influenced by Japan’s cultural traditions and the newly established centrally

planned economy.1That model has been described as a stakeholder system, as opposed

to a shareholder system, such as the one developed in the United States (Hall and Soskice,

2001). Stakeholder systems are characterized by concentrated institutional shareholding,

debt financing, and networks among firms, trading partners, and financial institutions—

all hallmarks of the Japanese system.2Alternatively, shareholder systems, such as the

Anglo-American model, are predicated on the interests of firm ownership and are

characterized by dispersed shareholding and equity-based financing. Participants in a

1For a deeper discussion on the subject of the planned economic and industrial development of

post WW II, please see “The Japanese Industrial System,” by McMillan (1985).

2Much has been written on each of these topics as they relate to Japan—some suggested sources

for more detailed information include “The Emerging Power of Japanese Money,” by Viner

(1988); “Japan, Disincorporated,” by Hollerman (1988); “Alliance Capitalism,” by Gerlach (1992);

and “Japan’s Network Economy,” by Lincoln and Gerlach (2004).

FOREIGN OWNERSHIP AND JAPANESE INSURERS 59

stakeholder system are more likely to pursue the broader goals of the system/group,

sometimes to the detriment of specific given member-firms. In contrast, the shareholder

system traditionally emphasizes individual firm-value maximization as a key goal.3

The preeminent importance of the group, as opposed to the individual, is a cultural

phenomenon that is powerfully reflected both at the individual and corporate levels.

Evidence at the corporate level is revealed in the existence of numerous corporate

networks of varying degrees of cohesion, the most formal of which are referred to

as keiretsu (Miyashita and Russell, 1994; Ostrom, 2000).4,5Two broad classifications of

keiretsu exist: horizontal and vertical. Members of horizontal keiretsu (also known as

financial keiretsu) are identified by their close association with major main banks and are

the subject of this discussion.6These main banks fulfill four important responsibilities

within their respective groups: (1) ensure smooth access to capital for group members;

(2) perform the key monitoring function of group’s operations; (3) serve as a provider of

financial assistance to member firms that are in financial distress, for example,buying

shares in the open market to propup firm value; and (4) assume a key role in the corporate

governance of member firms (Scher,2001; Schaede, 2006). By law, the ownership position

of any given bank in a single firm is limited to 10 percent. However, other affiliated

financial institutions, such as regional banks, life insurers, and so on, often assume

significant ownership positions, as well. This results in a concentration of ownership

in the hands of a small group of affiliated domestic financial institutions. Collectively,

these financial institutions have traditionally held over 40 percent of the equity in the

insurance industry with the main banks assuming dominant positions within their

respective networks.7,8

3For deeper discussion and comparison of these business system classifications please see, for

example, Albert (1993), Hall and Soskice (2001), and Streeck and Yamamura (2001).

4Further discussion of these cultural anthropological topics can be found in Nakane (1972) and

Benedict (1974).

5While many corporate networks exist, only nine are sufficiently formalized as to be recognized

as keiretsu and only six of those are organized around a dominant commercialbank: Mitsubishi,

Mitsui, Sumitomo, Dai-Ichi Kangyo, Sanwa, and Fuji. These keiretsu comprise the so-called

“Big Six” and represent the most formalized networks within the Japanese stakeholder system.

Thus, of the roughly 20–30 domestic non-life insurers in the Japanese marketplace, only six

are historically identified as being keiretsu-affiliated insurers: Mitsui Marine, Tokio Marine,

Sumitomo Marine, YasudaMarine, Nissan Fire, and Taisei Fire. Other insurers may be affiliated

with their own network, albeit on a less formal basis. Much literature on the subject has been

published—for deeper discussions, see for example, Gerlach (1992), Miyashita and Russell

(1994), Lai (1999), Lincoln and Gelrach (2004), and Shaede (2006).

6In contrast, vertical keiretsu are organized around industrial relationships, for example, key

manufacturers and supporting supply firms. All further mention of keiretsu in this paper refers

solely to the horizontal keiretsu.

7For deeper discussions related to the role of banks in the operations of keiretsu, please see, for

example, Miyashita and Russell (1994), Lai (1999), and Ostrom (2000).

8Prior to 2000, statutes placed limits on the ownership position a bank was allowed to take

in any given firm as well as imposing a cap on the aggregate ownership position allowed

by financial institutions in any given firm (40 percent). These limitations were rendered moot

in 2000 when regulations limiting intermarket competition among financial institutions were

repealed, thereafter allowing for competition in each others’ marketplace through subsidiaries.