Competition and Risk-Taking Behaviour in the Non-Life Insurance Market in South Africa

This study examines the non-linear effect of competition on risk-taking behaviour in an emerging insurance market. The paper utilises annual firm-level data on 79 non-life insurance firms to estimate the Lerner index as the proxy for competition, while the z-score and standard deviation of loss ratio are employed as proxies for risk-taking behaviour. Using the seemingly unrelated regression, quantile regression and system generalised method of moments techniques, we find evidence in support of the Martinez-Miera and Repullo hypothesis which suggests a non-linear inverted U-shaped relationship between competition and insurance solvency. We also document evidence to suggest that the competition-fragility effect is stronger for weaker insurers, indicating that competition has a greater destabilising effect on weaker insurers. Other significant predictors of solvency in the insurance market are identified as firm size, capitalisation, reinsurance, business line diversification and foreign ownership. Policy recommendations for improving industry stability are discussed.