Insurer Growth Strategies

• Author: Ivonne A. Liebenberg,Andre P. Liebenberg,Stephen G. Fier
• Published date: 01 December 2017
• Date: 01 December 2017
• DOI: http://doi.org/10.1111/rmir.12088

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2017, Vol.20, No. 3, 309-337

DOI: 10.1111/rmir.12088

FEATURE ARTICLE

INSURER GROWTH STRATEGIES

Stephen G. Fier

Andre P. Liebenberg

Ivonne A. Liebenberg

ABSTRACT

We study corporate growth strategy within the U.S. property–casualty insur-

ance industry—where firms are required to report uniquely detailed operating

information. Wepresent and test two hypotheses related to the manner in which

firms choose to grow: the pecking order hypothesis and the managerial discre-

tion hypothesis. Our results imply that insurers follow a general pecking order

of growth strategies, where they tend to grow first by entering new states, then

by adding new lines of business, and finally through acquisitions. This order is

consistent with firms initially choosing to grow in the least costly and complex

manner and subsequently choosing more costly and complex methods. Wealso

find evidence in support of the managerial discretion hypothesis as mutual in-

surers are less likely to choose to grow and, when they do, they tend to select

less complex growth methods.

INTRODUCTION

The corporate diversification decision has been a topic of increased theoretical and em-

pirical interest in the fields of finance and economics for the past two decades. Typically,

this research aims to determine why firms make the decision to diversify (e.g., Hyland

and Diltz, 2002; Berry-Stolzle et al., 2012) and to identify the effect of diversification

on firm value (e.g., Lang and Stulz, 1994; Berger and Ofek, 1995; Campa and Kedia,

2002; Graham et al., 2002; Villalonga, 2004; Elango et al., 2008; Liebenberg and Sommer,

2008). While the prior literature has emphasized the impact of diversification on the

firm, we contend that an important topic associated with the concept of diversification

has largely been ignored. Specifically, existing research does not examine the importance

of the firm’s decision to grow and the conditional nature of its growth choices.

Stephen G. Fier works at School of Business Administration, The University of Mississippi, Hol-

man Hall 338, University, MS 38677, phone: 662-915-1353; email: sfier@bus.olemiss.edu. Andre

P. Liebenberg works at School of Business Administration, The University of Mississippi, Hol-

man Hall 335, University, MS 38677, phone: 662-915-5475; email: aliebenberg@bus.olemiss.edu.

Ivonne A. Liebenberg works at School of Business Administration, The University of Mississippi,

University,MS 38677, phone: 662-915-6765; email: iliebenberg@bus.olemiss.edu.

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310 RISK MANAGEMENT AND INSURANCE REVIEW

When firms make the decision to grow, the growth can occur in a number of different

ways.1Management may choose a growth strategy that could be classified as internal

growth or external growth. Internal growth consists of growth opportunities that exist

within the current organization, while external growth requires the firm to go outside

the organization to expand. Each of the internal and external growth methods differs

in terms of the cost, complexity, availability, risk, and speed at which growth occurs. In

this study, we directly model the expansion decision while accounting for the methods

used by firms to grow, focusing specifically on growth via geographic expansion, prod-

uct expansion, and acquisition. Our approach differs from the prior literature that has

focused on a single expansion option, as we explicitly account for (1) the conditional

nature of each expansion option and (2) the decision to select one option over another.

An empirical investigation of the corporate growth decision can be limited by the un-

availability of detailed data on internal and external operating decisions. However, by

focusing on the U.S. property–casualty (P/C) insurance industry, we are able to avoid

some of the common data limitations that exist in other sectors of the economy. By

evaluating the growth decision in the insurance industry, which is subject to uniquely

detailed reporting requirements, we are able to explicitly identify instances in which a

firm makes the decision to grow by way of product expansion, geographic expansion,

and acquisition. Additionally, our focus on the insurance industry allows us to test cor-

porate growth decisions in a highly regulated industry. As noted by Weiss (1990), U.S.

P/C insurers are regulated at the state level and regulations often vary across states and

lines of business. For instance, the degree to which rates are regulated across states can

vary substantially as can whether or not states regulate rates of return.2Furthermore,

states and lines of business may differ with regard to catastrophe exposure, litigious-

ness, barriers to entry, and other factors that could impact overall performance and

operational viability. Some of these additional restrictions may not be present in other

industries and each likely influences decisions regarding growth methods.

In this study,we test two hypotheses—the pecking order hypothesis and the managerial

discretion hypothesis. The pecking order hypothesis proposes that firms choose specific

growth strategies based on their relative cost and complexity. Thus, firms are likely to

first choose the least costly and complex strategy (geographic expansion), followed by

more complex and costly strategies (product expansion and acquisition). The managerial

discretion hypothesis predicts that mutual insurers will engage in less complex activities

than stock insurers due to the lower degree of discretion afforded to mutual managers.

In terms of this hypothesis, we predict that mutual insurers will be less likely to choose

to grow, and when they do they will tend to select the least complex strategy.

We use several approaches to test our hypotheses. First, we model the growth decision

in terms of firm-specific factors suggested by the prior literature. We then model the

1We follow Cyree et al. (2000), and focus on instances where management makes observable

decisions to grow the firm. Thus, we define growth firms as those that grow by entering new

lines, states, or via acquisitions.

2As one example of how states can differ dramatically, the National Association of Insurance

Commissioners (NAIC) (2011) reports that approximately half of the states in the United States

have prior approval rate requirements while the other half use other approaches to rate regula-

tion.