A New Look at the Dynamic Interrelationship between Growth and Profitability in the Chinese Property Liability Insurance Industry

Abstract

We examine the nexus between growth and profitability for the Chinese property liability insurance industry during the period 2000-2006. This study adopts a simultaneous equation framework to understand the link between growth and profit since they are competing and interdependent variables for managers. The inverse relationship between size and growth, found across different subsamples and time periods, provides a challenge to the Law of Proportionate Effects. Profit persistence in the overall sample disappears with the exclusion of the state-owned monopoly of the People`s Insurance Company of China (PICC) and within the more competitive period 2003-2006 when growth persistence is found. Abnormal profits in the previous period prompt faster growth in the next period. Thus both contemporaneous and lagged profits are important and omitting these variables results in inconsistent parameter estimates to describe the relationships.