Competition in markets for life insurance

Abstract

This report presents an empirical analysis of competition in the market for life insurance. In this market, financial advisors play a large role. Therefore, the report devotes considerable attention to the functioning of the market for financial advice. The main findings are as follows. Empirical indicators of competition find only weak competition in the market for life insurance. There are substantial economies of scale, large X-inefficiencies, and limited competition as measured by the Boone-indicator compared to other services sectors. Also, the higher profitability of Dutch life insurers compared to their foreign peers suggests weak competition, although it should be pointed out that this indicator mainly reflects the situation in the past. Better functioning of financial advisors offers a key towards improving competition. Consumers who purchased annuities through advisors are found to achieve lower pay-outs than consumers who purchased directly from life insurers. This finding underlines the importance of more transparency of life insurance products and of independent advice.