An Examination of Cost Economies in the United States Life Insurance Industry

By Grace, Martin F.; Timme, Stephen G. | Journal of Risk and Insurance, March 1992 | Go to article overview

An Examination of Cost Economies in the United States Life Insurance Industry


Grace, Martin F., Timme, Stephen G., Journal of Risk and Insurance


Using an industry sample of 423 U.S. life insurers, this study reports estimates of overall and product specific scale economies, as well as, pair-wise cost complementarities for a wide variety of products. Estimates of these cost characteristics are provided for numerous output vectors since theory suggest that the magnitude of scale economies and cost complementarities may vary with the scale and mix of outputs. In contrast, previous studies only provide a single point estimate of industry cost characteristics using the sample mean output vector. This study, therefore, provides a more complete representation of the industry's cost characteristic and, in turn, new insights into decisions related to the optimal scale and mix of outputs.

Potential cost savings arising from economies of scale and scope in the life insurance industry are important to both firm managers and regulators. The potential for economies of scale and scope affects managerial decisions regarding the scale and mix of outputs. Substantial cost economies may result in a highly concentrated industry that would facilitate collusive pricing behavior. In a multiproduct industry, however, a concentrated market structure may only be one of many possible equilibria. Another equilibrium may entail a large number of firms producing only a small range and scale of outputs. In either case, regulators would be interested in the existence of cost economies and their effects on market structure.(1)

Early studies of the life insurance industry limit their analysis to the estimation of single-product scale economies (e.g., see Geehan, 1986, for a review of studies using a single output measure). These studies' methodologies do not explicitly incorporate the multiproduct nature of most life insurance firms, and estimates of scale economies are provided for only the sample mean level of output. More recent studies (e.g., Fields, 1988, Fields and Murphy, 1989, and Kellner and Mathewson, 1983) use a multiproduct methodology to derive estimates of economies of scaled and scope for the industry sample mean vector of outputs. Economic theory, however, suggests that the magnitude of cost economies varies with the scale and mix of outputs. Hence, previous studies' estimates of cost economies which are derived solely from the sample mean vector of outputs provide only limited insights into the cost characteristics of firms away from the sample mean firm. A thorough analysis of the cost structure of the life insurance industry, therefore, requires estimates of cost economies for firms varying in both the scale and mix of outputs. Such an analysis is essential to the study of the life insurance industry since the industry is comprised of many firms exhibiting substantial variation in the scale of outputs and the range of product offerings.

Using a multiproduct cost function and an industry sample of 423 U.S. life insurers this study reports e estimates of overall and product-specific scale economies as well as pair-wise cost complementarities for a wide variety of products. Estimate of these cost characteristics are provided for a number of output vectors varying in the scale and mix of outputs, organizational form (stock versus mutual), and production/distribution structure (agency versus non-agency). This study, therefore, provides a more complete representation of the industry's cost structure than previous studies.

The results show increasing overall scale economies for all but the largest agency firms which display approximately constant returns to scale. Significant increasing product specific scale economies are found for accident and health and investments products for all companies, and ordinary life for agency companies. The results do not support the hypothesis of cost complementarities being the raison d'etre for multi-product production among life insurers. Regarding the effects of organizational form, mutuals are not shown to incur higher costs than stock companies for a given scale and mix of outputs. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

An Examination of Cost Economies in the United States Life Insurance Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.