Culture and integration of Eurozone life insurance markets

Abstract

This paper provides the first evidence on the role of national culture in the integration of Eurozone life insurance markets. It analyzes seven markets over a sixteen-year sample period that includes the financial crisis. We focus on three cultural values, which are individualism, trust, and hierarchy. The results indicate that collectivism culture increases cost and revenue performance and integration of Eurozone life insurance markets. Trust contributes to this integration, particularly in financial crisis, and egalitarian culture facilitates it in non-crisis time. We find that these relations prevail for unaffiliated single companies, but they weaken or do not even hold for groups of insurers. Our findings are robust with tests designed to alleviate endogeneity concerns.

KEYWORDS:

• National culture
• integration
• Eurozone life insurance markets
• crisis

JEL Classifications:

• G01
• G22
• F36
• Z13

Acknowledgements

I would like to thank participants at the CEAR/MRIC Behavioral Insurance Workshop in Munich (2022) and two anonymous reviewers for valuable comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 National culture has been shown to affect several economic outcomes related to insurance firms including insurance consumption (e.g. Chui and Kwok 2008), insurers’ risk-taking (Gaganis et al. 2019) or insurers’ transaction costs (Gennaioli et al. 2022). However, we are not aware of any papers analyzing its effect on measures of insurers’ performance such as frontier efficiency, which is the case of the present analysis.

2 For instance, the creation of a single currency would contribute to the integration of EU insurance markets by removing the exchange risk for insurers in cross-border acquisitions and in the supply of cross border services.

3 As stated above, we expect these three cultural dimensions to be associated with the integration of Eurozone life insurance markets, given their potential influence on insurers’ performance. Furthermore, individualism and hierarchy have the characteristic of being the two cultural values that most quoted classifications share. In this respect, they are the only two dimensions common to the cultural value classification systems of Hofstede (1980; 2001), Schwartz (1994), Trompenaars (1993) and Fiske (1991). In addition, the cultural value of trust is particularly important for insurance markets (see e.g. Gaganis et al. 2019; Guiso 2021; Courbage and Nicolas 2021; Gennaioli et al. 2022).

4 We selected the countries that adopted the Euro in 1999 and, consequently, were in the Eurozone during all the years of the sample period. However, Finland, Ireland, Luxembourg, and Portugal – which also adopted the Euro in 1999 – were excluded due to the lack of homogeneous data to construct the relevant variables and the limited number of firms per year in some countries. The sample period started in 1999 (the year the Euro was introduced) and encompassed 16 years including the global financial crisis, being particularly suitable for our analysis because it is long enough to evaluate if culture influences financial integration as well as if the effect is heterogeneous depending on the period of time (crisis versus non-crisis).

5 See also Cummins and Rubio-Misas (2022) for a detailed description of the linear programming problems used for estimating them.

6 As a first check that the relations under research may be different in the financial crisis period, we conducted an analysis in which we added an interaction term of the financial crisis indicator and the culture indicator on the whole sample period 1999-2014 analysis for both the cost and revenue regressions. Results (available upon request) show that the coefficients of the interaction term are statistically significant in five out of six regressions, suggesting a heterogeneous impact of the analyzed culture dimensions on financial integration of Eurozone life insurance markets in the crisis period compared to the non-crisis period.

7 As a robustness test of the main results of this analysis, we ran regressions for the three sample periods and for both the cost and revenue analyses where we included all three culture indicators in each regression. Results (available upon request) show that the coefficient of the individualism variable is negative and statistically significant in all regressions; the coefficient of the trust variable is negative and statistically significant in the revenue analysis and in the cost analysis for the crisis sample period; and the coefficient of the hierarchy variable is positive and statistically significant in the non-crisis sample for both the cost and revenue analyses. Consequently, the main results hold when we include all three culture indicators in each regression.

8 We additionally check if our findings of the relationship of cultural variables and our measures of financial integration maintain when we include additional firm-level control variables in the analysis. In this respect, we calculate six additional variables: (1) the reinsurance utilization variable (premiums ceded/ direct premium plus premium assumed) as a measure of risk management; (2) premium growth as a measure of firm growth; (3) return on assets (ROA) and return on equity (ROE) as measures of an insurer’s profitability; (4) the standard deviation of an insurer’s return on assets (σROA) – by employing a three-year rolling window – as a measure of a firm’s risk; and a firm’s Z-score (which is estimated as ROA plus equity capital/σROA)) as a measure of distance to default. Then, we include these variables (one by one) in the models presented in Tables 3–5. Results (available upon request) of the analysis on firms with data on reinsurance utilization (5928 observations), premium growth (5351 observations), ROA (6259 observations), ROE (6332 observations), σROA (5388 observations) and Z-score (5374 observations) showed a negative and statistically significant relationship between the individualism indicator and financial integration in all regressions, a negative and statistically significant relationship between the trust indicator and financial integration in the revenue analysis and in the cost analysis in the crisis period and a positive and statistically significant relationship between the hierarchy indicator and financial integration in the non-crisis sample in both the cost and revenue analyses. Consequently, the main results presented in Tables 3–5 prevailed when we added these 6 firm-level control variables to the analysis.

9 Furthermore, other national cultural dimensions might play a role in the integration of Eurozone life insurance markets. For instance, nationalism (in the sense of patriotism) might drive local residents to choosing insurance products of local providers and consequently slow down integration. To evaluate this potential effect, we measure nationalism by using the European Value Survey (EVS 2016) and tracking the responses to the following survey question: “How proud are you to be a (country) citizen? 1. Very Proud; 2. Quite proud; 2. Not very proud; 4. Not at all proud”. Lower values of this variable would indicate more nationalism and, consequently, we, a priory, expect a positive relationship between this variable and our measures of integration. Results (available upon request) from this analysis on the whole sample period confirm this positive and statistically significant (at 1% level) relationship. Furthermore, we run regressions in which we added an interaction term of the financial crisis indicator and the nationalism indicator. Results show that the coefficients of the interaction terms are negative and statistically significant (at 1% level) for both the cost and revenue regressions, suggesting a heterogeneous impact of the nationalism dimension on financial integration of Eurozone life insurance markets in the crisis period compared to the non-crisis period. We thank an anonymous reviewer for suggesting this analysis that offers avenues for future research on the role that other cultural dimensions might play on the integration of Eurozone life insurance markets.

10 We have only included the results on cultural variables in Table 8 to save space.

[11] We also explore if the impact of culture on financial integration differs between big and small firms. In this respect, we conducted an additional analysis where we split insurers into two subsamples of large versus small insurers (using the log of total assets as a measure of size) and replicated the main analysis. Differently to the main results, we find (results of this additional analysis are available upon request) that the coefficient of the individualism variable is not statistically significant in the non-crisis sample period in the cost analysis of large firms. We observe that the effect of trust on performance and integration differs between large and small firms. In terms of cost efficiency, trust only affects performance and integration of big insurers. However, in terms of revenues, trust affects performance and integration of small insurers (for the three time periods under assessment) and of big insurers only in crisis time. Furthermore, we observe that the collectivism value positively affects performance and integration for both big and small insurers in non-crisis time (consistent with the main results). However, in crisis time, while small insurers perform better in hierarchical societies (both in terms of costs and revenues), big insurers perform better in such societies only in terms of costs. Therefore, we found that some heterogeneity exists between the big and small insurers of our sample with respect to the effect of cultural values on performance and integration of Eurozone life insurance markets. These findings are in line with Li et al. (2013) who found that the impact of culture in corporate risk-taking is influenced by firm size, as well as with Boubakri et al. (2023), who showed that the effect of individualism on bank liquidity creation is stronger for larger banks.

11 We also explore if the impact of culture on financial integration differs between big and small firms. In this respect, we conducted an additional analysis where we split insurers into two subsamples of large versus small insurers (using the log of total assets as a measure of size) and replicated the main analysis. Differently to the main results, we find (results of this additional analysis are available upon request) that the coefficient of the individualism variable is not statistically significant in the non-crisis sample period in the cost analysis of large firms. We observe that the effect of trust on performance and integration differs between large and small firms. In terms of cost efficiency, trust only affects performance and integration of big insurers. However, in terms of revenues, trust affects performance and integration of small insurers (for the three time periods under assessment) and of big insurers only in crisis time. Furthermore, we observe that the collectivism value positively affects performance and integration for both big and small insurers in non-crisis time (consistent with the main results). However, in crisis time, while small insurers perform better in hierarchical societies (both in terms of costs and revenues), big insurers perform better in such societies only in terms of costs. Therefore, we found that some heterogeneity exists between the big and small insurers of our sample with respect to the effect of cultural values on performance and integration of Eurozone life insurance markets. These findings are in line with Li et al. 2013 who found that the impact of culture in corporate risk-taking is influenced by firm size, as well as with Boubakri et al. 2023, who showed that the effect of individualism on bank liquidity creation is stronger for larger banks.

Additional information

Funding

The author gratefully acknowledges financial support from the Spanish Ministry of Science and Innovation (Project PID2021-127736NB-I00).

Notes on contributors

María Rubio-Misas

María Rubio-Misas is an Associate Professor of Financial Economics and Accounting at the Finance and Accounting Department of the University of Malaga (Spain). Her main research field is in insurance firms, where she studies issues of corporate finance and industrial economics.