Economies of Scale in UK Life Insurance Companies: An Empirical Approach

Kaye, Geraldine

doi:10.1057/gpp.1991.22

Cited by 12 publications

(7 citation statements)

References 12 publications

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“…Fecher, Perelman and Pestieau (1991) find significant scale economies for both segments of the French industry. Mahlberg and Url (2000) find significant scale economies for the German market, and Kaye (1991) finds them for the British life insurance companies.…”

mentioning

confidence: 99%

Consolidation and efficiency in the financial sector: A review of the international evidence

Amel

Barnes²,

Panetta

et al. 2004

Journal of Banking & Finance

386

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In response to fundamental changes in regulation and technology, the financial industry around the world is undergoing an unprecedented wave of consolidation. A growing body of empirical literature has attempted to measure the efficiency gains from M&As; however there is little sense of how the results might depend on the country, industry and time period analysed. In this paper we review critically works that cover the main sectors of the financial industry (commercial and investment banks, insurance and asset management companies) in the major industrialised countries over the last twenty years, searching for common patterns that transcend national and sectoral peculiarities. We find that consolidation in the financial sector is beneficial up to a relatively small size in order to reap economies of scale, but there is little evidence that mergers yield economies of scope or gains in managerial efficiency.

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mentioning

confidence: 99%

Consolidation and efficiency in the financial sector: A review of the international evidence

Amel

Barnes²,

Panetta

et al. 2004

Journal of Banking & Finance

386

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“…To test if and to what extent economies of scale exist, we follow and extend Houston and Simon (1970, pp. 856-857) and Kaye (1991, p. 306) and fit the insurer level data for Data sets 1-4 to an appropriate cost function. This is done by a log-log transformation of premiums and costs, which in scatter plots show a strong linear relationship[15].…”

Section: Hypothesis Development Data and Methodologymentioning

confidence: 99%

“…In the life insurance literature, a small strand focuses on the development of economies of scale over time. For instance, Kaye (1991) observes economies of scale in regard to total costs in the UK life market between 1980 and 1986 and shows that they are constant during this period. Pritchett (1973) analyzes changes of total expense ratios, home office expense ratios and field expense ratios for four size categories[3] of 30 US life insurers between 1961 and 1970 with mixed results between the considered cost types.…”

Section: Introductionmentioning

confidence: 99%

Economies of scale in European life insurance

Klotzki

Bohnert

Gatzert

et al. 2018

JRF

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Purpose Due to the continuing low interest rate environment as well as the increase in acquisition costs, price transparency, cost transparency and competition with banks, the cost of life insurance becomes increasingly important for customers, insurers and shareholders. Against this background, the purpose of this paper is to study the development of insurers’ economies of scale in regard to administrative costs for four of the largest European life insurance markets. Design/methodology/approach The analysis on economies of scale is based on a comprehensive set of 477 life insurers in Germany, Italy, Spain and the UK, yearly data between 2000 and 2014, and regression calculations that are based on 4,855 observations. Findings The results show that economies of scale exist for all considered markets and for most of the considered years. However, the extent of economies of scale varies considerably across countries. Originality/value Overall, the existing academic literature on costs and corresponding economies of scale in life insurance primarily deals with analyses of total costs instead of administrative costs, a single year or a single market. This paper contributes to the existing literature by conducting an analysis of recent market dynamics and economies of scale in regard to administrative costs for the period from 2000 and 2014 for four of the largest European life insurance markets for which the respective data were available (Germany, Italy, Spain and the UK) and 477 life insurers in total. This is done by means of a log-log transformation of premiums and costs and a fixed effects model based on these transformed figures for 4,855 observations. In addition, for each market, the authors analyze the development of administrative costs for a total of 477 insurers.

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“…These loss-prevention costs would be embedded in the expense component of the premium rate. For these reason and to facilitate comparison with prior work, recent studies by Fields and Murphy (1989), Eisen (1991), Kaye (1991), Fecher, Perelman, and Pesticau (1991), Sigma (4/91 pp. 1-20) and this paper use premiums as the measure of insurer output.…”

Section: Output Measurementioning

confidence: 99%

The cost structure of distribution systems in the U.S. property/liability insurance market.

Hogan¹

1996

Insurance: Mathematics and Economics

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This paper examines the relative efficiencies of the two major distribution systems for property/casualty insurance: (1) independent agents and brokers (the independent intermediary), and (2) direct writers (the captive intermediary). The cost functions of the independent and captive systems of the property/casualty insurance industry are estimated using the generalized Cox-Box multiproduct cost function model. For firms operating at their mean output level, there are diseconomies of scale in both distribution systems. However, we do find evidence of economies of scale for the direct writers operating at the independent agency firm's output level. Nor do global economies of scope appear to exist for either distribution system. Pairwise cost complementarities for the pairing of commercial liability with either commercial property or personal liability are possible for firms using the independent agent system. This might arise from the range of contracts offered through independent agents and brokers. While for direct writers only the pairing of commercial liability and commercial property or personal liability with personal property have possible cost complementarities. This is consistent with the belief that direct writers have lower marketing costs for the standardized policies, such as those found in the personal lines. These empirical results help to resolve an inconsistency of prior studies of the efficiency of the two types of distribution systems.

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Economies of Scale in UK Life Insurance Companies: An Empirical Approach

Cited by 12 publications

References 12 publications

Consolidation and efficiency in the financial sector: A review of the international evidence

Consolidation and efficiency in the financial sector: A review of the international evidence

Economies of scale in European life insurance

The cost structure of distribution systems in the U.S. property/liability insurance market.

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