Does Gibrat’s Law Hold in the Insurance Industry of China? A Test with Sequential Panel Selection Method

Abstract

This study applies the Sequential Panel Selection Method to investigate whether the growth rate of total insurance premium is independent of their size, as postulated by Robert Gibrat’s (1931) Law of Proportionate Effects. Time-series data for the total insurance premium of 35 insurance companies in China during the December 2005 to May 2011 period are used. Since other panel-based unit root tests are joint tests of a unit root for all members of a panel and are incapable of determining the mix of I(0) and I(1) series in a panel setting, the SPSM, proposed by Georgios Chortareas and George Kapetanios (2009), classifies a whole panel into a group of stationary series and a group of non-stationary series. In doing so, we can clearly identify how many and which series in the panel are stationary processes. The empirical results from the SPSM tests unequivocally indicate that Gibrat’s Law is only valid for one of these 35 companies studied here. Our study has important policy implications for insurance regulation, insurance market construction, and policyholder protection.

Key words: Gibrat’s law, Sequential panel selection method, Insurance, China.
JEL: C22, C23.