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

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  • Jaap Bikker
  • Michiel van Leuvensteijn

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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Bibliographic Info

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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Web page: http://www.dnb.nl/en/
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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.;

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References

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  1. F. Fecher & D. Kessler & S. Perelman & P. Pestieau, 1993. "Productive performance of the French insurance industry," Journal of Productivity Analysis, Springer, vol. 4(1), pages 77-93, June.
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  6. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
  7. Boone, J., 2004. "A New Way to Measure Competition," Discussion Paper 2004-004, Tilburg University, Tilburg Law and Economic Center.
  8. George E. Battese & Greg S. Corra, 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 21(3), pages 169-179, December.
  9. 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.
  10. 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.
  11. 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.
  12. Ana Lozano-Vivas, 1998. "Efficiency and technical change for Spanish banks," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 289-300.
  13. 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.
  14. 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?," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1555-1592, July.
  15. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
  16. Boone, Jan, 2001. "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 705-726, April.
  17. Resti, Andrea, 1997. "Evaluating the cost-efficiency of the Italian Banking System: What can be learned from the joint application of parametric and non-parametric techniques," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 221-250, February.
  18. 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.
  19. Michiel Bijlsma & Machiel van Dijk & Marc Pomp & Cora Zonderland, 2005. "Competition in markets for life insurance," CPB Document 96, CPB Netherlands Bureau for Economic Policy Analysis.
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Citations

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Cited by:
  1. Jacob 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.
  2. Harold Creusen & Bert Minne & Henry van der Wiel, 2006. "Measuring competition in the Netherlands," CPB Memorandum 163, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Michiel Bijlsma & Machiel van Dijk & Marc Pomp & Cora Zonderland, 2005. "Competition in markets for life insurance," CPB Document 96, CPB Netherlands Bureau for Economic Policy Analysis.
  4. 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.

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