The Effect of Financial Independence on the Performances of Life Companies: An Empirical Study

The study examines the effect of financial independence on the performance of life insurance companies in Taiwan, since the Financial Holdings Law came into effect in June 2002. Financially dependent companies are regarded as those which are owned (are part of) holding companies, independent companies are regarded as those which are still owned by themselves, have not joined such holding companies. At the time of the study there were 13 companies that were independent by this criterion (still in the evaluation phase) and 3 companies that were dependent, having joined financial holding companies. This research compares the financial performance (calculated with FA) and the non-financial performance (calculated with DEA) of the two groups of companies. Neither the improvement in the financial nor the non-financial performance of the dependant companies relative to the independent companies over the period of the study was significant (p>.05). This suggests that the performance of life insurance companies may not be improved by them joining financial holding companies. 1. Introduction Ever since the Financial Holdings Law came into effect in June 2002, Taiwan's financial market has been characterized by the 'joining together' of companies into financial holding companies. However, as far as the fife insurance market is concerned, when this study was done only three life insurance companies had joined financial holding companies with 13 not having done so, many of whom can be regarded as sitting on the fence as regards the issue. After Taiwan gains entry to the World Trade Organization (WTO), the insurance industry will be facing even more rigorous challenges. One of the motives of this research is to find out whether Taiwanese life insurance companies should join financial holding companies and whether they improve their performance after doing so. The subjects in this research are the three companies that have already become a part of financial holding companies (Shin Kong, Fubon and Cathay Life), and the other 13 companies that have not done so at the time of the investigation. The observation period was from 2001 to 2002, using a variety of financial indicators to evaluate the life insurance companies' performance within and outside financial holding companies. 52 indicators were used, with 14 frequently used ones highlighted for discussion. 16 input and output variables are used, with the 9 most frequently used being examined, including 8 from annual business reports and 1 from insurance yearbooks. 2. Definition of business performance Managers and financial analysts usually use the term business performance to evaluate the business achievement of a company. The definition of the term is rather vague. In a general sense, it refers to individual standards such as management or sales capacity, or comprehensive standards such as the overall business achievement of the company. Over recent years, Taiwan's life insurance companies have been challenged by the opening-up and liberalization of the life insurance market. With drastic changes in market structure, the basic rule has been that of survival in a highly competitive market. The most important current issues are to understand the entire life insurance industry and to appraise the finances of life insurance companies, so as to provide useful information to financial analysts and managers. This research aims to evaluate the performance of life insurance companies within and outside the financial holding companies. It examines both financial and non-financial performance: Non-Financial: Data Envelopment Analysis (DEA) was employed to measure the business performance of the companies in different situations, using input and output variables. Financial: Financial Rate Analysis (FRA) was used to measure the financial structure of the companies in different situations. DEA and FRA results were then used to investigate whether the performance of life companies was altered by them 'joining together' in holding companies or remaining independent, outside such companies. …