Industry Concentration and Performance: Case of Life Insurance Industry

Industry concentration is traditionally used as a measure of the competition in the industry. If the concentration of the industry increases then small number of firms can dominate the industry, which could on the one hand increase the prices for customers. But it is not necessarily a negative situation as with the increase in firm size they may be able to benefit from economies of scale. Therefore, higher concentrated market may cause higher prices as well as higher profits and performance. This is likely to occur in industries with high fixed costs and scope for specialization as life insurance industry. Based on this assumption, we decided to reveal the presence of a link between the changes in the industry concentration and market performance. For the purpose of the analysis, we use life insurance industry data from the Slovak Republic during the period 1993–2012. During analyzed period, this industry has developed from monopolistic market with one dominant insurance company and few very small ones to competitive market with 19 insurance companies offering life insurance products in 2012. Our model proved that decreasing life insurance industry concentration increases profit and performance of the industry.