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Organizational Structure and Performance: Evidence From the Nonlife Insurance Industry in Japan


  • Gene C. Lai,

  • Piman Limpaphayom

  • Gene C. Lai is SAFECO Distinguished Professor of Insurance in Department of Finance, Insurance, and Real Estate, Washington State University. Piman Limpaphayom is at Sasin Graduate Institute of Business Administration, Chulalongkorn University. The authors thank two anonymous referees for their valuable comments. The authors are indebted to Yoshiki Amamoto of the Marine and Fire Insurance Association of Japan, Inc., Masaki Shiroyama of the Nikko Research Center, Ltd., and Masahiro Yoshikawa of the Japan Securities Research Institute for the data and pertinent information. They are also grateful to Shaw K. Chen, Mark Flannery, Kenneth A. Kim, James Opaluch, Sirapat Polwitoon, S. Ghon Rhee, Timothy Tyrrell, and participants at the 1996 American Risk and Insurance Association Meeting, the 1997 FMA Doctoral Seminar and the 2001 Asia-Pacific Finance Association Meeting for comments and suggestions on earlier drafts of this article. Special thanks are due to Gloria Bourdeux-Bartels, Frank Budnick, and Manas-Pimpa-Julanita Limpaphayom for support during the early stage of the project and to William K. Yap for technical assistance. Vivian Jeng provided excellent research assistance. Support from the Sandra-Ann Morsilli Pacific-Basin Capital Market (PACAP) Research Center at the University of Rhode Island is gratefully acknowledged.


This study examines the impact of organizational structure on firm performance, incentive problems, and financial decisions in the Japanese nonlife (property-casualty) insurance industry. Stock companies that belong to one of six horizontal keiretsu groups have lower expenses and lower levels of free cash flow than independent stock and mutual insurance companies. Keiretsu insurers also have higher profitability and higher loss ratios than independent insurers. With a limited sample size, there is some evidence that mutual insurers have higher levels of free cash flows, higher investment incomes, and lower financial leverage than their stock counterparts. Overall, empirical evidence suggests that each structure has its own comparative advantage.

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