Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry

The objective of this paper is to provide new information on the performance of efficiency estimation methods by applying a wide range of econometric and mathematical programming techniques to a sample of U.S. life insurers. Average efficiencies differ significantly across methods. The efficiency rankings are well-preserved among the econometric methods; but the rankings are less consistent between the econometric and mathematical programming methods and between the data envelopment analysis and free disposal hull techniques. Thus, the choice of estimation method can have a significant effect on the conclusions of an efficiency study. Most of the insurers in the sample display either increasing or decreasing returns to scale, and stock and mutual insurers are found to be equally efficient after controlling for firm size. Key words: Efficiency estimation, stochastic frontiers, data envelopment analysis, free disposal hull, life insurance industry, organizational form.

A Comparative Analysis of 30 Bonus-Malus Systems

The automobile third party insurance merit-rating systems of 22 countries are simulated and compared, using as main tools the stationary average premium level, the variability of the policyholders\u27 payments, their elasticity with respect to the claim frequency, and the magnitude of the hunger for bonus. Principal components analysis is used to define an “Index of Toughness” for all systems

Organizational Form and Efficiency: An Analysis of Stock and Mutual Property-Liability Insurers

This paper analyzes the efficiency of stock and mutual organizational forms in the property-liability insurance industry using nonparametric frontier efficiency methods. We test the managerial discretion hypothesis, which predicts that the market will sort organizational forms into market segments where they have comparative advantages in minimizing the costs of production, including agency costs. Both production and cost frontiers are estimated. The results indicate that stocks and mutuals are operating on separate production and cost frontiers and thus represent distinct technologies. The stock technology dominates the mutual technology for producing stock output vectors and the mutual technology dominates the stock technology for producing mutual output vectors. However, the stock cost frontier dominates the mutual cost frontier for the majority of both stock and mutual firms. Thus, the mutuals' technological advantage is eroded because they are less successful than stocks in choosing cost-minimizing combinations of inputs. The finding of separate frontiers and organization specific technological advantages is consistent with the managerial discretion hypothesis, but we also find evidence that stocks are more successful than mutuals in minimizing costs.

Conglomeration Versus Strategic Focus: Evidence from the Insurance Industry

We provide evidence on the validity of the conglomeration hypothesis versus the strategic focus hypothesis for financial institutions using data on U.S. insurance companies. We distinguish between the hypotheses using profit scope economies, which measures the relative efficiency of joint versus specialized production, taking both costs and revenues into account. The results suggest that the conglomeration hypothesis dominates for some types of financial service providers and the strategic focus hypothesis dominates for other types. This may explain the empirical puzzle of why joint producers and specialists both appear to be competitively viable in the long run.

Measuring economic efficiency of United States life insurance industry: Econometric and methematical programming approaches

Despite their contribution to financial markets and major role in promoting the national welfare, the question of how efficiently life insurance firms have operated in the United States has been unresolved. The main purpose of this dissertation is to enrich the efficiency literature in this important industry. To gauge the economic or X-efficiency of individual firms as well as the whole industry, this study employs two different approaches: the econometric approach and the mathematical programming approach. Within each general approach, a variety of methodologies are applied to the efficiency estimation, encompassing almost all of the models developed in the efficiency literature. This study also tries to overcome the shortcomings of previous studies with new input and output measurement for the insurance industry. The results reveal that the life insurance industry operated at a significantly low level of efficiency for the period 1988-1992. The results also show that there is noticeable dissimilarity in the levels of efficiency for individual firms between these general approaches. On the other hand, the patterns of efficiency rankings of individual firms are well preserved within each approach. The study suggests the expense preference behavior hypothesis is not supported in the life insurance industry. Other interesting findings are that medium size firms operated less efficiently than small and large size firms for the period, and that small firms exhibit increasing returns-to-scale while large size firms display decreasing returns-to-scale. The usual half normal and exponential assumptions for the inefficiency term are not inconsistent with the sample used in this dissertation

The economic crisis and efficiency change: evidence from the Korean construction industry

This article gauges and analyses different types of efficiency in the Korean construction industry for the period 1996 to 2000, which includes the country's economic crisis. We also identify several important factors of the efficiency change and provide some managerial implications for the reason why most Korean construction firms had failed to maintain or enhance efficiency during this period. The results show that efficiency measures decreased significantly during the sample period and that there are large differences over the period before and after the economic crisis. Unlike many other industries, the low level of cost efficiency of the construction industry is mainly due to allocative inefficiency (inappropriate mix of input factors) rather than technical inefficiency. The low level of allocative efficiency, together with the strong relationship between institutional investors and efficiency, implies that the agency problem between managers and owners had prevailed in the Korean construction industry, and that construction firms could increase efficiency by minimizing agency costs. The study also implies that firms having failed in decreasing the leverage ratio, disposing unproductive assets and increasing the receivables overdue turnover could not avoid the efficiency decrease.