Does Gibrat’s Law Hold in the Insurance Industry of China
A Test with Sequential Panel Selection Method
Guochen Pan, Sen-Sung Chen, Tsangyao Chang
Summary: This study applies the Sequential Panel Selection Method (SPSM) to investigate whether the growth rate of total insurance premium of insurance companies in China is independent of their size, as postulated by Robert Gibrat’s (1931) Law of Proportionate Effects. Time-series data for the total insurance premium of 35 insurance companies in China during the December 2005 to May 2011 period are used. Since other panel-based unit root tests are joint tests of a unit root for all members of a panel and are incapable of determining the mix of I(0) and I(1) series in a panel setting, the SPSM, proposed by Georgios Chortareas and George Kapetanios (2009), classifies a whole panel into a group of stationary series and a group of non-stationary series. In doing so, we can clearly identify how many and which series in the panel are stationary processes. The empirical results from the SPSM tests unequivocally indicate that Gibrat’s Law is only valid for one of these 35 companies studied here.
Our findings are very different from previous tests conducted for insurance markets in the US and the UK in which Gibrat’s Law was generally supported for insurance companies. However, our empirical results are well justified if we take a quick survey on the development of insurance market in China during the period under study. From 2005 to 2011, the insurance market has gone through radical changes. The number of insurance companies in the insurance market of China increased from 35 to more than 100, with 52 for non-life insurance sectors and 55 for life insurance sectors. The market structure changed dramatically. Life insurance industry generally gained a high growth rate than non-life. The concentration ratio for both life and non-life insurance markets decreased significantly, a lot of small companies and new entrants, either domestic or foreign, grew at a higher growth rate than state-owned big companies on average, with a few exceptions. At the same time, unfair competition and illegal operation were common to see too. In all, the insurance market of China is still immature, most insurance companies in it failed to grow regularly, thus the hypothesis of Gibrat (1931) of which each company has the same growth rate disregarding the original size does not hold true.
Besides, the unbalanced growth among different companies makes it full of risk for specific companies and the whole industry as well. The results of this study have important policy implication for policymakers. In light of the new insight gained here into the relationship between firm growth rate and firm size, policymakers are suggested to consider following strategies. First, though deregulation is a global trend in insurance sector, regulation on the operation risk of insurance company to prevent the policyholders from suffering losses due to failure of insurance companies in such an unstable market should be strengthened. Second, market order should be well maintained and even enhanced when more companies are encouraged to enter the market to promote the competition. Third, policyholder protection should be realized as the priority during the process of insurance market expansion, especially at the elementary state.
Key words: Gibrat’s law, Sequential panel selection method, Insurance, China
（原文载于SSCI期刊《Panoeconomicus》,2012(3)）
