Economies of Scale in Financial Institutions: A Study in Life Insurance
About: This article is published in Econometrica.The article was published on 1970-11-01. It has received 82 citations till now. The article focuses on the topics: Financial regulation & Life insurance.
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TL;DR: In this article, the authors investigated whether there existed a significant and systematic relationship between firm performance and information technology investment intensity in the home office operation of 40 systems technology leaders in the life insurance industry, 1983-1986.
Abstract: In this paper, we consider whether there existed a significant and systematic relationship between firm performance and information technology investment intensity in the home office operation of 40 systems technology leaders in the life insurance industry, 1983-1986. It is hypothesized that in top performance insurance firms 1 information technology costs as a proportion of total operating costs were higher, and 2 information technology costs as a proportion of premium income were lower, than in weak performance firms. Evidence is presented that indicates that firm performance was linked to the level of information technology investment intensity.
258 citations
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TL;DR: In this paper, the authors present estimates of a mixed error cost frontier in which the variances of both the normal and gamma distributions can vary with firm size, and extend the literature on life insurance scale and product mix economies by incorporating and measuring X-inefficiency.
Abstract: This paper make three contributions to the literature on efficiency in financial services. First, it presents estimates of a mixed error cost frontier in which the variances of both the normal and gamma distributions can vary with firm size. Second, it extends the literature on life insurance scale and product mix economies by incorporating and measuring X-inefficiency. Estimates of X-inefficiency range from 35 to 50%; ray scale economies exist up to $15 billion in assets. Third, comparisons of normal-gamma estimates with other methods /3- thick frontier, weighted least squares, half-normal distributions /3- demonstrate some of their pitfalls.
238 citations
TL;DR: In this paper, the authors present estimates of a mixed error cost frontier in which the variances of both the normal and gamma distributions can vary with firm size, and extend the literature on life insurance scale and product mix economies by incorporating and measuring X-inefficiency.
Abstract: This paper make three contributions to the literature on efficiency in financial services. First, it presents estimates of a mixed error cost frontier in which the variances of both the normal and gamma distributions can vary with firm size. Second, it extends the literature on life insurance scale and product mix economies by incorporating and measuring X-inefficiency. Estimates of X-inefficiency range from 35 to 50%; ray scale economies exist up to $15 billion in assets. Third, comparisons of normal-gamma estimates with other methods /3- thick frontier, weighted least squares, half-normal distributions /3- demonstrate some of their pitfalls.
222 citations
TL;DR: In fact, mutual life insurance companies account for almost half of all life insurance in force and one quarter of all property and liability insurance as mentioned in this paper. But no well-accepted theory to explain the remarkable prominence of the cooperative form in this industry has been discussed.
Abstract: Mutuals account for almost half of all life insurance in force and one quarter of all property and liability insurance. There are few other industries in which consumer cooperatives-of which mutuals are an example-account for such a large share of the market. In fact, the annual volume of business done by mutual life insurance companies far outweighs the volume of business done by consumer cooperatives in any other line of business. And it is not just in comparison with other cooperatives that the mutual insurance companies appear large; the assets of the largest of the mutuals, Prudential, exceed those of any industrial corporation (Fortune, 1983a: 228; 1983b: 166). At present, however, we have no well-accepted theory to explain the remarkable prominence of the cooperative form in this industry. Indeed, the subject has hardly been discussed.' In this article I seek to offer an explanation. The question is of interest not just as a matter of positive economics, but also for law and public policy. The
164 citations
TL;DR: In this paper, the authors found that the independent agent system is less efficient than the exclusive agent system and that the efficiency differential did not change significantly during the period 1968 through 1976, when they used the total rather than the underwriting costs to measure expenses.
Abstract: Property-liability insurance is distributed through two major marketing channels—the independent and the exclusive agency systems. Independent agents place business with several companies, while exclusive agents write insurance for only one company. We find that the independent agency system is less efficient than the exclusive agency system. The efficiency differential did not change significantly during the period 1968 through 1976. When we used the total rather than the underwriting costs to measure expenses, we found that the relative but not the absolute expense differential was reduced. This suggests that the inefficiencies of the independent agency companies stem from marketing and administrative rather than loss adjustment procedures. The findings imply that regulators should play a more active role in the dissemination of information on property-liability insurance prices.
149 citations