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Financial Intermediary Versus Production Approach to Efficiency of Marketing Distribution Systems and Organizational Structure of Insurance Companies

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  • Patrick L. Brockett
  • William W. Cooper
  • Linda L. Golden
  • John J. Rousseau
  • Yuying Wang
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    Abstract

    An examination of the efficiency of the marketing distribution channel and organizational structure for insurance companies is presented from a framework that views the insurer as a financial intermediary rather than as a "production entity" which produces "value added" through loss payments. Within this financial intermediary approach, solvency can be a primary concern for regulators of insurance companies, claims-paying ability can be a primary concern for policyholders, and return on investment can be a primary concern for investors. These three variables (solvency, financial return, and claims-paying ability) are considered as outputs of the insurance firm. The financial intermediary approach acknowledges that interests potentially conflict, and the strategic decision makers for the firm must balance one concern versus another when managing the insurance company. Accordingly, we investigate the efficiency of insurance companies using data envelopment analysis (DEA) having as insurer output an appropriately selected (for the firm under investigation) combination of solvency, claims-paying ability, and return on investment as outputs. These efficiency evaluations are further examined to study stock versus mutual form of organizational structure and agency versus direct marketing arrangements, which are examined separately and in combination. Comparisons with the "value-added" or "production" approach to insurer efficiency are presented. A new DEA approach and interpretation is also presented. Copyright The Journal of Risk and Insurance.

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    Bibliographic Info

    Article provided by The American Risk and Insurance Association in its journal The Journal of Risk and Insurance.

    Volume (Year): 72 (2005)
    Issue (Month): 3 ()
    Pages: 393-412

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    Handle: RePEc:bla:jrinsu:v:72:y:2005:i:3:p:393-412

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    Cited by:
    1. Gaganis , Chrysovalantis & Hasan, Iftekhar & Pasiouras , Fotios, 2013. "Efficiency and stock returns: Evidence from the insurance industry," Research Discussion Papers 14/2013, Bank of Finland.
    2. Gary Simpson, 2007. "A cautionary note on methods of comparing programmatic efficiency between two or more groups of DMUs in data envelopment analysis," Journal of Productivity Analysis, Springer, vol. 28(1), pages 141-147, October.
    3. Norashikin Ismail & Prof. Dr. Datuk Syed Othman Alhabshi & Prof. Obiyathulla Bacha, 2011. "Organizational Form And Efficiency: The Coexistence Of Family Takaful And Life Insurance In Malaysia," Journal of Global Business and Economics, Global Research Agency, vol. 3(1), pages 122-137, July.
    4. Botti, Laurent & Briec, Walter & Cliquet, GĂ©rard, 2009. "Plural forms versus franchise and company-owned systems: A DEA approach of hotel chain performance," Omega, Elsevier, vol. 37(3), pages 566-578, June.
    5. Saowaros Yaisawarng & Preecha Asavadachanukorn & Suthathip Yaisawarng, 2014. "Efficiency and productivity in the Thai non-life insurance industry," Journal of Productivity Analysis, Springer, vol. 41(2), pages 291-306, April.
    6. Ward, Damian Robert, 2009. "Product differentiation and consumption efficiency in mortgage markets," Journal of Business Research, Elsevier, vol. 62(8), pages 805-809, August.
    7. Trigo Gamarra, Lucinda, 2007. "Single- versus multi-channel distribution strategies in the German life insurance market: A cost and profit efficiency analysis," Thuenen-Series of Applied Economic Theory 81, University of Rostock, Institute of Economics.
    8. Leverty, J. Tyler & Grace, Martin F., 2010. "The robustness of output measures in property-liability insurance efficiency studies," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1510-1524, July.
    9. Hela Miniaoui & Anissa Chaibi, 2014. "Technical Efficiency of Takaful Industry- A Comparative Study of Malaysia and GCC Countries," Working Papers 2014-055, Department of Research, Ipag Business School.
    10. Biener, Christian & Eling, Martin, 2012. "Organization and efficiency in the international insurance industry: A cross-frontier analysis," European Journal of Operational Research, Elsevier, vol. 221(2), pages 454-468.
    11. Eling, Martin & Luhnen, Michael, 2010. "Efficiency in the international insurance industry: A cross-country comparison," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1497-1509, July.

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