Changes in the Life Insurance Industry: Efficiency, Technology, and Risk Management

Article excerpt

Changes in the Life Insurance Industry: Efficiency, Technology, and Risk Management, edited by J. David Cummins and Anthony M. Santomero, Series on Innovations in Financial Markets and Institutions (IFMI), 1999, Kluwer Academic Publishers, 369 pages.

This volume is organized in 10 independent but related chapters devoted to enhance our understanding of the challenges facing life insurers in their quest for a successful strategy. A total of 13 authors wrote or coauthored the chapters, including the leading researchers engaged in two major projects coordinated by the Wharton Financial Institutions Center (WFIC) during the second half portion of the 1990s. One project was a major survey of the industry sponsored by the Sloan Foundation, with a special focus on key drivers of performance, namely technology and labor. The other was a field-based investigation of the financial risk management practices of life insurers.

The book's writing style clearly signals that it is targeting a hybrid audience of academics and practitioners. The price to pay is that the more technical material is kept to a minimum. This can possibly be unsatisfactory to specialized readers. Nevertheless, there are many nice features in this book, including the charts, tables, and illustrations that help to understand the material.

Chapter 1, "Life Insurance: The State of the Industry" by Anthony M. Santomero, reviews the changing landscape of the financial services industry, in general, and of the U.S. life insurance sector, in particular. Its discussion of the threats and opportunities faced by life insurers leads to the identification of the determinants of success or failure in this line of business. It ends with a nice outline of the remaining chapters.

Chapter 2, "The Industry Speaks: Results of the WFIC Insurance Survey" by James F. Moore and Anthony M. Santomero, reports survey results on numerous topics including (1) threat and opportunities as seen by participants, (2) product offerings, (3) distribution channels, (4) strategic choices, (5) use of technology, (6) human resource (HR) practices, and (7) performance measures and standards. Their main conclusion is that not all life insurers are alike.

Chapter 3, "Efficiency in the U.S. Life Insurance Industry: Are Insurers Minimizing Costs and Maximizing Revenues" by J. David Cummins, relies on the frontier approach to analyze the performance of specific life insurance firms by comparing them to efficient frontiers consisting of best practice firms in the industry. Data envelopment analysis (DEA) is applied to estimate efficiency frontiers based on a yearly sample of about 750 firms for which financial data on outputs, inputs, output prices, and input prices were available, over the period from 1988 through 1995. The author measures life insurance outputs through variables that correlate highly with the value added by life insurers in their supply of services. Yearly average efficiencies and interfirm performance are discussed. Cummins also looks at the characteristics of the industry's efficiency leaders, the issue of economies of scale, and whether there appears to be a link between distribution and efficiency. Several conclusions emerge from Cummins' analysis of the U.S. life insurance sector. In particular, he finds that efficiency scores are relatively low and widely dispersed among life insurance firms in comparison with other financial industries.

Chapter 4, "Efficiency and Competitiveness in the U.S. Life Insurance Industry: Corporate, Product, and Distribution Strategies" by Roderick M. Carr, J. David Cummins, and Laureen Regan, aims at increasing our understanding of the best practices associated with life insurer efficiency. It focuses on the relationships between business strategies and efficiency by correlating insurer efficiency DEA scores (cost and revenue) with the business practices of life insurers who participated in the 1995-1996 WFIC survey. …