Corporate Governance and Performance of Non-Life Insurance Companies: A Three-Layer Efficiency Analysis Using System GMM

Abstract

Purpose: The purpose of this study is to investigate the influence of board size, board independence, ownership concentration, gender diversity, and meeting frequency on the financial performance of non-life insurance companies in three distinct efficiency dimensions. In addition, it investigates the influence of the composite corporate governance index, constructed using principal component analysis, on different dimensions of firm performance.

Design/methodology/approach: In this study, balanced panel data have been collected from nineteen non-life insurance companies over seven years, resulting in 133 firm-year observations. Then, the researchers applied a two-step system GMM estimator with Windmeijer (2005) finite-sample standard error corrections. Here, two separate models are estimated to examine the effects of individual governance variables and the composite governance index to compare the impact of individual governance mechanisms and the overall governance structure on three layers of efficiency, namely operational, underwriting, and overall profitability, respectively.

Findings: Board size has a different impact on different performance layers. It improves operational efficiency and underwriting margin but reduces the profit margin and return on assets. Independent boards worsen the two operational ratios and reduce the profit margin and ROA while improving the underwriting margin. Even though increasing ownership concentration improves the operational ratio, it reduces the firm's value by reducing ROA. Gender diversity improves the profit margin but also increases the loss ratio. Results show that frequent meetings hamper the operational and underwriting margin efficiency but improve the profit margin. The Composite Governance Index improves all five performance indicators simultaneously, supporting the concept of governance bundling complementarity.

Practical implications: Regulators should design frameworks for specific efficiency layers, also give priority to gender diversity to boost underwriting performance, and carefully consider the operational cost of governance complexity. 

Originality/value: This study integrates a three-layer insurance efficiency framework with GMM and PCA-based governance index. This produces two novel contributions: coherent governance efficiency and the multilayer investigation.