A wide literature is available on internationalisation in the banking sector:
readers should refer to previous chapters for a complete review. At the same time, only recently has this field of research focused specifically on the insurance sector.
Mergers and acquisitions, in general, aim to increase value for shareholders through the achievement of synergies between entities (Berger et al., 1999):
economies of scale and scope, product or geographical diversification are also the most recurrent factors for insurance companies (Cummins et al., 1999; Amel et al., 2004; Group of Ten, 2001). But this process can be explained by other reasons: an increase in market power to reduce competition, defensive acquisitions but also agency issues between share- holders and managers (Floreani and Rigamonti, 2001). The evidence relat- ing to the efficiency gains of mergers and acquisitions is controversial, underlining the existence of potential diseconomies of scale and other issues of integration (Group of Ten, 2001; Cummins and Weiss, 2004), as well as the debated presence of value discounts in diversified mergers and acquisitions (Berger and Ofek, 1995; Van Lelyveld and Knot, 2008). The risk level of groups could be higher or lower than individual entities, depending on reputational and contagion effects as opposed to diversification gains (Gruson, 2004; Darlap and Mayr, 2006; Laeven and Levine, 2007). Other studies, however, underline that cross-border mergers and acquisitions are value-neutral for acquirers but value-creating for targets (Cummins and Weiss, 2004).
Another field of research focused on the drivers of intra-industry trade in the insurance sector. The Organisation for Economic Co-operation and Development (OECD, 1999) provided a comprehensive identification and analysis of conditions and obstacles to the establishment of branches
and Carr, 2000). Despite these obstacles, international insurance companies are able to increase the volume of insurance services, providing product dif- ferentiation and consumer welfare (Li et al., 2003).
The pace of these phenomena is not constant across time. In the period 1994–9, for instance, European mergers and acquisitions accounted for more than half of the total acquired life premiums, with one-third attribut- able to cross-border operations. Five years later these shares had decreased to almost one-third and 16 per cent, respectively (Swiss Re, 2000).
The path followed by entities in establishing cross-border operations is influenced by market structure (competitive markets are preferred), the presence of trade barriers, the strength of demand for insurance, profit- ability and ‘follow the client’ considerations (Ma and Pope, 2003). At the same time, location-specific factors (human capital, cultural affinity, geo- graphical proximity) are also significant drivers for internationalisation (Outreville, 2008), as well as internal and external governance (Boubakri et al., 2006).
Integration is strategic for insurance companies as well as banks, but the former are less likely to be affected by taxation and demography and more likely to expand towards countries with lower stock market capitali- sation, higher ‘market contestability’ and G10 countries, at the same time experiencing lower entry barriers (Focarelli and Pozzolo, 2008). However, despite the achieved level of integration and internationalisation, insurance remains a local business (Schoenmaker et al., 2007).
All of these considerations discussed above have important influences on regulatory and supervisory issues (Van den Berghe et al., 1999; Group of Ten, 2001).
Consolidation itself might threaten financial stability, as the least efficient firms increase their risk in order to achieve greater expected returns: even diversification gains show mixed evidence, whereas riskier portfolios or increased operational and managerial issues might arise. Moreover, a more integrated environment might increase systemic risks and their transmission to the real economy. Increased complexities could reduce market discipline, when not balanced by increased transparency, but also improve capital markets. Regarding competition, consolidation might increase the market power of some entities, leading to greater prices and lower volume than in a competitive environment (Group of Ten, 2001).
Among the main conclusions achieved, crisis prevention and manage- ment should be improved, especially through a more effective risk-based supervision (Group of Ten, 2001): double gearing of capital, excessive lev- erage, intra-group transactions, convergence across sectors/countries and contagion risks are the main challenges (see, among others, Joint Forum, 1999a).
The path to international convergence on insurance supervision has been greatly influenced by the work of the International Association of Insurance Supervisors (IAIS).
Several principles and standards deal with insurance groups. The main ref- erence for IAIS contributions is represented by the Insurance Core Principle 17, which calls for group-wide supervision, complementary to solo super- vision: affiliation to a group is capable of altering risk profiles, financial positions, the role of management and business strategies (IAIS, 2003).
Therefore, group-wide supervision should encompass financial requirements as well as the structure of management, fit and proper testing and legal issues, assessing that proper information systems are in place to support this activity. At the same time, group-wide supervision calls for proper coopera- tion and coordination among supervisors (IAIS, 2000): powers, responsibili- ties and mutual recognition of supervisory frameworks are essential.
Group supervision should at least involve governance, capital adequacy, the double gearing of capital, intra-group transactions, internal controls and risk management, reinsurance and risk concentration. But this should follow a specific identification of each group’s borders: through particular control structures regulatory limitations could be exploited to avoid the construction of a comprehensive picture of the group. For example, a par- ent company can provide a loan to a non-regulated subsidiary, that could afterwards downstream this capital to an insurance subsidiary: if the non- regulated entity falls outside group-wide supervision, it is possible to gener- ate the double gearing of capital. Finally, coordination of supervisors across countries and sectors involves appropriate protocols on the exchange of prudential information and on protection of confidentiality and secrecy of collected data.
These principles have been further detailed (IAIS, 1999, 2002b), especially on the prerequisites of supervisory coordination, such as the information needs of home and host supervisors, their exchange and confidentiality.
More recently, group-wide supervision emerged as a specific topic (IAIS, 2008a), involving areas such as capital adequacy and assessment method- ologies (aggregation, consolidation and legal entity methods), governance, risk management, supervision and supervisory approach. Moreover, this was complemented by guidance on the identification of a group-wide supervisor, the definition of its responsibilities and functions, its powers and authorities and the coordination activity with other supervisors (IAIS, 2008b).
No further guidance is currently provided on specific issues, such as group solvency assessment (a specific contribution is expected in 2009).
Supervision at the group level is required if risk profiles of individual entities might be influenced by this affiliation, especially when intra-group transactions or the double gearing of capital for solvency purposes are
market conduct, to identify if and when an issue for the protection of cus- tomers might arise. Despite these considerations, the IAIS underlines that group-wide supervision is among the least developed of its core principles (IAIS, 2008a).
Such conclusions call for the intervention of a group supervisor that is granted powers and responsibilities to promote the coordination and cooperation of supervision at the solo level. However, this task is far from being simple as long as a global standard on insurance supervision is not in place: overlaps and deficiencies might arise whenever cooperation and exchange of information across supervisors show some imperfections.
Therefore, supervision at the solo level can not be replaced by group-wide supervision.
These overarching principles are not able to provide more insights on issues such as the opportunistic behaviour of national supervisors, for exam- ple in case of a financial crisis, that could lead to supervisory actions aiming at protecting domestic branches compared to foreign parent companies or other subsidiaries. Without illustrating such contributions in greater detail, as a general remark we note that only recently European regulation showed greater convergence towards this international supervisory benchmark, as discussed in the following two sections.