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An Exploration into Competition and Efficiency in the Dutch Life Insurance Industry

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Author Info
Jaap Bikker
Michiel van Leuvensteijn

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Abstract

The lack of available prices in the Dutch life insurance industry makes competition an elusive concept that defies direct observation. Therefore, this paper investigates competition by analysing several factors which may affect the competitive nature of a market and various indirect measurement approaches. After discussing various supply and demand factors whic h may constitute a so-called tight oligopoly, we establish the existence of scale economies and the importance of cost Xinefficiency, since severe competition would force firms to exploit available scale economies and to reduce X-inefficiencies. Both scale economies and X-inefficiencies turn out to be substantial, although more or less comparable to those found for insurers in other countries and to other financial institutions. Further, we apply the Boone indicator, a novel approach to measuring the effects of competition. This indicator points to limited competition in comparison to other sectors in the Netherlands. Further investigations of submarkets should reveal where policy measures in order to promote competition might be appropriate.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 047.

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Date of creation: Jul 2005
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Handle: RePEc:dnb:dnbwpp:047

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Related research
Keywords: Life insurance; market structure; concentration; competition; scale economies; X-inefficiency; profit margins; Boone indicator; translog cost functions; stochastic cost frontier approach.;

Other versions of this item:

Find related papers by JEL classification:
D4 - Microeconomics - - Market Structure and Pricing
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Boone, J., 2004. "A new way to measure competition," Discussion Paper 31, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  2. Allen N. Berger & Loretta J. Mester, 1997. "Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?," Center for Financial Institutions Working Papers 97-04, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  3. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. Claessens, Stijn & Laeven, Luc, 2004. "What Drives Bank Competition? Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 563-83, June.
    Other versions:
  5. Lozano-Vivas, Ana, 1998. "Efficiency and Technical Change for Spanish Banks," Applied Financial Economics, Taylor and Francis Journals, vol. 8(3), pages 289-300, June. [Downloadable!] (restricted)
  6. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
  7. Battese, George E. & Corra, Greg. S., 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(03), December. [Downloadable!]
  8. Boone, Jan, 2001. "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 705-726, April. [Downloadable!] (restricted)
  9. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July. [Downloadable!] (restricted)
  10. Hirshhorn, Ron & Geehan, Randall, 1977. "Measuring the Real Output of the Life Insurance Industry," The Review of Economics and Statistics, MIT Press, vol. 59(2), pages 211-19, May. [Downloadable!] (restricted)
  11. J.A. Bikker & K. Haaf, 2000. "Measures of competition and concentration in the banking industry: a review of the literature," Research Series Supervision (discontinued) 27, Netherlands Central Bank, Directorate Supervision. [Downloadable!]
  12. Jaap W. B. Bos & James W. Kolari, 2005. "Large Bank Efficiency in Europe and the United States: Are There Economic Motivations for Geographic Expansion in Financial Services?," Journal of Business, University of Chicago Press, vol. 78(4), pages 1555-1592, July. [Downloadable!]
    Other versions:
  13. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
  14. Marc Pomp & M. Bijlsma & Machiel van Dijk & Michiel van Leuvensteijn & C. Zonderland, 2005. "Competition in markets for life insurance," CPB Documents 96, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jacob A. Bikker & Jan de Dreu, 2006. "Pension fund efficiency: the impact of scale, governance and plan design," DNB Working Papers 109, Netherlands Central Bank, Research Department. [Downloadable!]
  2. Lucinda Trigo Gamarra, 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, Germany. [Downloadable!]
  3. Marc Pomp & M. Bijlsma & Machiel van Dijk & Michiel van Leuvensteijn & C. Zonderland, 2005. "Competition in markets for life insurance," CPB Documents 96, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  4. Harold Creusen & Bert Minne & Henry van der Wiel, 2006. "Measuring competition in the Netherlands A comparison of indicators over the period 1993-2001," CPB Memoranda 163, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
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