Scale and Scope Economies in the Canadian Property and Casualty Insurance Industry

This study investigates scale and scope economies in the Canadian property/casualty insurance. Use of the translog cost function allows the estimation of a U-shaped cost curve and of cost elasticities that vary with the size of the insurance company. The model is estimated on a sample of 180 companies over the period 1986 to 1988, and considers four outputs: property, automobile, civil liability, and other types of insurance. The factors of production are labour, rentals, and capital, but the cost of the latter is taken as a constant.Using data for the years 1986 to 1988, we show that there exists significant economies of scale for insurance companies with assets between $ 40 and $ 100 million. However, the evidence in favour of the existence of economies of scale for smaller and larger firms are limited to one year in each case.We do not observe systematic evidence of significant cost complementarities between insurance products, nor do we note significant economies of scope. No cost complementarities exist between the two main product lines of property/casualty and automobile. Furthermore, there is some evidence of diseconomies of scope. Diversification economies can only be obtained with liability and other product lines.Our evidence of slight economies of scale and no economies of scope is compatible with observation that many insurance companies in Canada are small and undiversified.