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Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry

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  • J. David Cummins
  • Hongmin Zi

Abstract

The objective of this paper is to provide new information on the performance of efficiency estimation methods by applying a wide range of econometric and mathematical programming techniques to a sample of U.S. life insurers. Average efficiencies differ significantly across methods. The efficiency rankings are well-preserved among the econometric methods; but the rankings are less consistent between the econometric and mathematical programming methods and between the data envelopment analysis and free disposal hull techniques. Thus, the choice of estimation method can have a significant effect on the conclusions of an efficiency study. Most of the insurers in the sample display either increasing or decreasing returns to scale, and stock and mutual insurers are found to be equally efficient after controlling for firm size. Key words: Efficiency estimation, stochastic frontiers, data envelopment analysis, free disposal hull, life insurance industry, organizational form.

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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 97-03.

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Date of creation: Jul 1997
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Handle: RePEc:wop:pennin:97-03

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Citations

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Cited by:
  1. J. Cummins & Georges Dionne & Robert Gagné & A. Nouira, 2009. "Efficiency of insurance firms with endogenous risk management and financial intermediation activities," Journal of Productivity Analysis, Springer, vol. 32(2), pages 145-159, October.
  2. Geys, Benny & Moesen, Wim, 2008. "Measuring local government technical (in)efficiency: An application and comparison of FDH, DEA and econometric approaches," Discussion Papers, Research Unit: Market Processes and Governance SP II 2008-21, Social Science Research Center Berlin (WZB).
  3. Dean Amel & Colleen Barnes & Fabio Panetta & Carmelo Salleo, 2002. "Consolidation and efficiency in the financial sector: a review of the international evidence," Temi di discussione (Economic working papers) 464, Bank of Italy, Economic Research and International Relations Area.
  4. repec:ise:isegwp:wp182007 is not listed on IDEAS
  5. Andrew C. Worthington & Emily V. Hurley, 2000. "Technical, allocative and cost efficiency in the Australian general insurance industry," School of Economics and Finance Discussion Papers and Working Papers Series 074, School of Economics and Finance, Queensland University of Technology.
  6. J. David Cummins & Sharon Tennyson & Mary A. Weiss, 1998. "Consolidation and efficiency in the U.S. life insurance industry," Working Papers 98-18, Federal Reserve Bank of Philadelphia.
  7. Francesca Cracolici & Piet Rietveld & Peter Nijkamp, 2006. "Assessment of Tourist Competitiveness by analysing Destination Efficiency," Tinbergen Institute Discussion Papers 06-097/3, Tinbergen Institute.
  8. Dean Amel & Colleen Barnes & Fabio Panetta & Carmelo Salleo, 2002. "Consolidation and efficiency in the financial sector: a review of the international evidence," Finance and Economics Discussion Series 2002-47, Board of Governors of the Federal Reserve System (U.S.).
  9. Karim, M.Z.A. & Jhantasana, Ch., 2005. "Efficiency and Profitability in Thailand’s Life Insurance Industry: A Cost Frontier Function and Hausman test, 1997-2002," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(4), pages 19-36.
  10. Allen N. Berger, 2000. "The integration of the financial services industry: where are the efficiencies?," Finance and Economics Discussion Series 2000-36, Board of Governors of the Federal Reserve System (U.S.).
  11. Rubio-Misas, María, 2009. "Productividad y eficiencia de las Mutualidades de Previsión Social/Productivity and Efficiency of Social Benefit Institutions," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 27, pages 571 (30 Pá, Agosto.
  12. J. David Cummins & Maria Rubio-Misas, 2001. "Deregulation, Consolidation, and Efficiency: Evidence From the Spanish Insurance Industry," Center for Financial Institutions Working Papers 02-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  13. Steven Pottier, 2011. "Life insurer efficiency and state regulation: evidence of optimal firm behavior," Journal of Regulatory Economics, Springer, vol. 39(2), pages 169-193, April.

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