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Single- versus Multi-Channel Distribution Strategies in the German Life Insurance Market: A Cost and Profit Efficiency Analysis

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Author Info
Lucinda Trigo Gamarra () (University of Rostock)

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Abstract

Until its liberalisation in 1994 exclusive agents dominated the distribution of products in the German life insurance industry. Since then, their importance has been declining for the benefit of both distribution via direct distribution channel and independent agents. However, the market shares of specialized direct and independent agent insurers have remained small, while multi-channel insurers increasingly incorporate direct and independent distribution channels, and represent the dominant distribution strategy. The aim of this paper is twofold: First, it analyses the performance of single and multi-channel distribution firms in the German life insurance. Thus, we are able to explain the development and the coexistence of the industries' distribution systems. Our study contributes to research on coexistence of different distribution systems in insurance industry which had been limited to the comparison of exclusive versus independent agent insurers so far. Second, our paper gives insight into cost and profit efficiency levels of German life insurance firms for the period 1997-2005, and delivers information about scale economies in the German life insurance industry. Applying an empirical framework developed by Berger et al. (1997) we estimate cost and profit efficiency for three groups of life insurance firms differing in their distribution systems: multichannel insurers, direct insurers, and independent agent insurers. Non-parametric DEA is used to estimate efficiencies for a sample of German life insurers for the years 1997-2005. Testing a set of hypothesis, we find economic evidence for the coexistence of the different distribution systems which is the absence of comparative performance advantages of specialised insurers. Further, we find evidence for scale economies in the German life insurance industry.

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File URL: http://www.wiwi.uni-rostock.de/fileadmin/Institute/VWL/VWL-Institut/RePEc/pdf/wp081thuenen.pdf
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Publisher Info
Paper provided by University of Rostock, Institute of Economics, Germany in its series Thuenen-Series of Applied Economic Theory with number 81.

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Length: 57 pages
Date of creation: 2007
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Handle: RePEc:ros:wpaper:81

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Related research
Keywords: Insurance markets; distribution systems; efficiency analysis;

Other versions of this item:

Find related papers by JEL classification:
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

This paper has been announced in the following NEP Reports:

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. Lucinda Trigo Gamarra, 2007. "Does the Product Quality Hypothesis Hold True? - Service Quality Differences between Independent and Exclusive Insurance Agents," Thuenen-Series of Applied Economic Theory 76, University of Rostock, Institute of Economics, Germany. [Downloadable!]
  2. Banker, Rajiv D., 1984. "Estimating most productive scale size using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 17(1), pages 35-44, July. [Downloadable!] (restricted)
  3. Kerstens, Kristiaan & Vanden Eeckaut, Philippe, 1999. "Estimating returns to scale using non-parametric deterministic technologies: A new method based on goodness-of-fit," European Journal of Operational Research, Elsevier, vol. 113(1), pages 206-214, February. [Downloadable!] (restricted)
    Other versions:
  4. Allen N. Berger & J. David Cummins & Mary A. Weiss, 1995. "The coexistence of multiple distribution systems for financial services: the case of property-liability insurance," Finance and Economics Discussion Series 95-22, Board of Governors of the Federal Reserve System (U.S.).
    Other versions:
  5. Paul J. M. Klumpes, 2004. "Performance Benchmarking in Financial Services: Evidence from the UK Life Insurance Industry," Journal of Business, University of Chicago Press, vol. 77(2), pages 257-274, April. [Downloadable!]
  6. DeYoung, Robert & Hasan, Iftekhar, 1998. "The performance of de novo commercial banks: A profit efficiency approach," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 565-587, May. [Downloadable!] (restricted)
  7. Fare, Rolf & Grosskopf, Shawna, 1985. " Nonparametric Cost Approach to Scale Efficiency," Scandinavian Journal of Economics, Blackwell Publishing, vol. 87(4), pages 594-604.
  8. Hancock, Diana, 1985. "The Financial Firm: Production with Monetary and Nonmonetary Goods," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 859-80, October. [Downloadable!] (restricted)
  9. J. David Cummins & Jack VanDerhei, 1979. "A Note on the Relative Efficiency of Property-Liability Insurance Distribution Systems," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 709-719, Autumn. [Downloadable!] (restricted)
  10. Andrew M. Yuengert, 1993. "The measurement of efficiency in life insurance estimates of a mixed normal-gamma error model," Research Paper 9308, Federal Reserve Bank of New York.
  11. Regan, Laureen & Tennyson, Sharon, 1996. "Agent Discretion and the Choice of Insurance Marketing System," Journal of Law & Economics, University of Chicago Press, vol. 39(2), pages 637-66, October.
  12. Mountain, Dean C. & Thomas, Hugh, 1999. "Factor price misspecification in bank cost function estimation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 163-182, April. [Downloadable!] (restricted)
  13. Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245. [Downloadable!] (restricted)
  14. Wilson, Paul W, 1993. "Detecting Outliers in Deterministic Nonparametric Frontier Models with Multiple Outputs," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 319-23, July.
  15. Berger, Allen N. & Cummins, J. David & Weiss, Mary A. & Zi, Hongmin, 2000. "Conglomeration versus Strategic Focus: Evidence from the Insurance Industry," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 323-362, October. [Downloadable!] (restricted)
    Other versions:
  16. Jaap Bikker & Michiel van Leuvensteijn, 2005. "An Exploration into Competition and Efficiency in the Dutch Life Insurance Industry," DNB Working Papers 047, Netherlands Central Bank, Research Department. [Downloadable!]
  17. J. David Cummins & Hongmin Zi, 1997. "Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry," Center for Financial Institutions Working Papers 97-03, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  18. Yuengert, Andrew M., 1993. "The measurement of efficiency in life insurance: Estimates of a mixed normal-gamma error model," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 483-496, April. [Downloadable!] (restricted)
  19. Fenn, Paul & Vencappa, Dev & Diacon, Stephen & Klumpes, Paul & O'Brien, Chris, 2008. "Market structure and the efficiency of European insurance companies: A stochastic frontier analysis," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 86-100, January. [Downloadable!] (restricted)
  20. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November. [Downloadable!] (restricted)
  21. Paul L. Joskow, 1973. "Cartels, Competition and Regulation in the Property-Liability Insurance Industry," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 375-427, Autumn. [Downloadable!] (restricted)
  22. Fare, Rolf & Grosskopf, Shawna & Lovell, C A Knox, 1983. " The Structure of Technical Efficiency," Scandinavian Journal of Economics, Blackwell Publishing, vol. 85(2), pages 181-90.
  23. Elgeti, Rolf & Maurer, Raimond, 2000. "Zur Quantifizierung der Risikoprämien deutscher Versicherungsaktien im Kontext eines Multifaktorenmodells," Sonderforschungsbereich 504 Publications 00-43, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  24. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc. [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. Eckardt, Martina & Räthke-Döppner, Solvig, 2008. "The Quality of Insurance Intermediary Services – Empirical Evidence for Germany," MPRA Paper 10703, University Library of Munich, Germany. [Downloadable!]
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