Economies of Scale in Australian Life Insurance: An Empirical Note*

Returns to Scale in the Australian Life Insurance Industry*

“…For the UK, Colenutt (1977) studies economies of scale for a sample of 49 ordinary life assurance companies in 1968 using the Houston and Simon approach and found some evidence to support their existence. Using the same approach, and using premium income as a measure of output, Rutledge and Tuckwell (1974), in their study of 41 Australian insurance companies, found no evidence of economies of scale.…”

“…In Australia in 1975, as mentioned above, prices were not felt to be so important. Rutledge and Tuckwell (1974) used log, reciprocal, log-reciprocal and Cobb-Douglas functional forms and five independent variables other than premium income and found no evidence of economies of scale. Their sample selection is a problem as they exclude 5 of 46 firms because they were recent entrants or had issued few policies but their paper does not say which were omitted.…”

Economies of scale in the New Zealand life insurance industry∗

“…Praetz [1980] estimated the average cost relationship for 90 life insurers in 1976 and found very strong evidence of economies of scale using premium income and other explanatory variables. For the United Kingdom, Colenutt [1977] sought economies of scale for a sample of 49 ordinary life assurance companies in 1968 using the Houston and Simon approach and found some evidence to support its existence. For Australia, Rutledge and Tuckwell [1974] also used the Houston and Simon approach in their study of 41 Australian companies from the 1970 Annual Report of the Life Insurance Commissioner but found no evidence for the existence of economies of scale. Praetz [1981] showed that errors in data, economics and econometric method was probably the cause.…”

Economies of scale in the management of occupational superannuation schemes

“…Previous studies of the cost functions of life insurance offices (for instance Houston and Simon (1970), Rutledge and Tuckwell (1974), Praetz (1978) and Praetz (1981)) considered that premiums received were the most appropriate measure of output. In all cases except Praetz (1978) additional variables were added to the model to allow for the non-homogeneity of the output from different life offices.…”

“…This is the major problem of the earlier Australian studies which bear upon this subject as they have been restricted to life offices. For instance, Praetz (1978) estimated cost curves for the superannuation business of Australian life offices while Rutledge and Tuckwell (1974) and Praetz (1981) studied economies of scale within the life office industry. These studies have not considered the overall cost structure of individual superannuation 337 338 Economies of Scale in the Management of scheme management but rather the cost structure for life offices.…”