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Profitability and Efficiency in the U.S. Life Insurance Industry

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Listed author(s):
  • William Greene

    ()

  • Dan Segal

    ()

Abstract

This study explores the relationship between cost inefficiency and profitability in the U.S. life insurance industry. Earnings have particular importance to life insurance companies because earnings and capital determine the viability of the insurer. Since the life insurance industry is mature and highly competitive, cost efficiency may be the main driver of profitability. We derive cost efficiency using the stochastic frontier (SF) method allowing the mean inefficiency to vary with organizational form and the outputs. In addition, the estimation of the cost efficiency measure takes into account the underlying accounting concepts that generate the data and, consequently, the product mix (long-duration policies vs. short-duration policies) to avoid distorted estimates. Our results suggest that cost inefficiency in the life insurance industry is substantial relative to earnings, and that inefficiency is negatively associated with profitability measures such as the return on equity. The analysis of inefficiency and organizational form suggest that stock (shareholder-owned) companies are as efficient and profitable as mutual (policyholder-owned) companies. Copyright Kluwer Academic Publishers 2004

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File URL: http://hdl.handle.net/10.1023/B:PROD.0000022092.70204.fa
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Article provided by Springer in its journal Journal of Productivity Analysis.

Volume (Year): 21 (2004)
Issue (Month): 3 (May)
Pages: 229-247

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Handle: RePEc:kap:jproda:v:21:y:2004:i:3:p:229-247
DOI: 10.1023/B:PROD.0000022092.70204.fa
Contact details of provider: Web page: http://www.springer.com

Order Information: Web: http://www.springer.com/economics/microeconomics/journal/11123/PS2

Keywords: stochastic frontier; cost inefficiency; profitability; life insurance; organizational form;

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  1. 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.
  2. Reifschneider, David & Stevenson, Rodney, 1991. "Systematic Departures from the Frontier: A Framework for the Analysis of Firm Inefficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 715-723, August.
  3. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
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  5. Stevenson, Rodney E., 1980. "Likelihood functions for generalized stochastic frontier estimation," Journal of Econometrics, Elsevier, vol. 13(1), pages 57-66, May.
  6. 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.
  7. Mayers, David & Smith, Clifford W, Jr, 1988. "Ownership Structure across Lines of Property-Casualty Insurance," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 351-378, October.
  8. 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.
  9. Gardner, Lisa A. & Grace, Martin F., 1993. "X-Efficiency in the US life insurance industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 497-510, April.
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Cited by:

  1. Biener, Christian & Eling, Martin & Jia, Ruo, 2017. "The structure of the global reinsurance market: An analysis of efficiency, scale, and scope," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 213-229.
  2. Lee, Chien-Chiang & Lin, Chun-Wei, 2016. "Globalization, political institutions, financial liberalization, and performance of the insurance industry," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 244-266.
  3. Fiordelisi, Franco & Molyneux, Phil, 2010. "Total factor productivity and shareholder returns in banking," Omega, Elsevier, vol. 38(5), pages 241-253, October.
  4. Shuji Yao & Zhongwei Han & Dan Luo, 2010. "Performance of the Chinese Insurance Industry under Economic Reforms," Books, Edward Elgar Publishing, number 12788, April.
  5. Biener, Christian & Eling, Martin & Jia, Ruo, 2016. "The Structure of the Global Reinsurance Market: An Analysis of Efficiency, Scale, and Scope," Working Papers on Finance 1603, University of St. Gallen, School of Finance.
  6. Chakraborty Kalyan & Dutta Anirban & Sengupta Partha Pratim, 2012. "Efficiency and Productivity of Indian Life Insurance Industry," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 7(1), pages 1-28, December.
  7. Vladimir Njegomir & Boris Marović & Rado Maksimović, 2010. "The Economic Crisis And The Insurance Industry: The Evidence From The Ex-Yugoslavia Region," Economic Annals, Faculty of Economics, University of Belgrade, vol. 55(185), pages 129-162, April - J.
  8. Biener, Christian & Eling, Martin & Jia, Ruo, 2016. "The Roles of Industry Idiosyncrasy, Cost Efficiency, and Risk in Internationalization: Evidence from the Insurance Industry," Working Papers on Finance 1602, University of St. Gallen, School of Finance.
  9. Biener, Christian & Eling, Martin & Wirfs, Jan Hendrik, 2016. "The determinants of efficiency and productivity in the Swiss insurance industry," European Journal of Operational Research, Elsevier, vol. 248(2), pages 703-714.
  10. Mei-Ying Huang & Tsu-Tan Fu, 2013. "An examination of the cost efficiency of banks in Taiwan and China using the metafrontier cost function," Journal of Productivity Analysis, Springer, vol. 40(3), pages 387-406, December.
  11. Chrysovalantis Gaganis & Iftekhar Hasan & Fotios Pasiouras, 2013. "Efficiency and stock returns: evidence from the insurance industry," Journal of Productivity Analysis, Springer, vol. 40(3), pages 429-442, December.
  12. Lampe, Hannes W. & Hilgers, Dennis, 2015. "Trajectories of efficiency measurement: A bibliometric analysis of DEA and SFA," European Journal of Operational Research, Elsevier, vol. 240(1), pages 1-21.
  13. Jarraya, Bilel & Bouri, Abdelfettah, 2012. "Efficiency concept and investigations in insurance industry: A survey," MPRA Paper 53544, University Library of Munich, Germany, revised 2013.
  14. White, James M. & Boland, Michael A., 2016. "Close Cousins of Cooperatives: An Overview of Fraternal Benefit Societies," Journal of Cooperatives, NCERA-210, vol. 31.
  15. Huang, Wei & Eling, Martin, 2013. "An efficiency comparison of the non-life insurance industry in the BRIC countries," European Journal of Operational Research, Elsevier, vol. 226(3), pages 577-591.
  16. J. Cummins & Xiaoying Xie, 2013. "Efficiency, productivity, and scale economies in the U.S. property-liability insurance industry," Journal of Productivity Analysis, Springer, vol. 39(2), pages 141-164, April.
  17. Khan, Atiquzzafar & Noreen, Uzma, 2014. "Efficiency Measure of Insurance v/s Tak ful Firms Using DEA Approach: A Case of Pakistan," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 22, pages 139-158.
  18. 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.
  19. White, James M. & Boland, Michael A., 2014. "Survivorship of Minnesota Township Mutual Fire Insurance Companies," Journal of Cooperatives, NCERA-210, vol. 29.

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