Estimates of Scale and Scope Economies in the New Zealand Life Insurance Industry

M. Khaled, M. B. Adams and M. Pickford

Manchester School, 2001, vol. 69, issue 3, 327-349

Abstract: Recent multi‐product statistical studies of production in life insurance industries in North America and the UK have produced mixed findings with regard to economies of scale and scope. This study presents results for the life insurance industry in New Zealand, which has a small economy where the industry is comparatively unregulated. A total of 135 pooled observations for the population of non‐bank life insurance companies for the period 1988–92 are used in a two‐input two‐output generalized translog model. Product‐specific economies of scale are measured in a variety of ways including two new ones, using what we have called ‘quasi average incremental cost’ and ‘partial average cost’. We find that while small companies could benefit from economies of scale, the optimum firm size is modest, and that medium‐ and large‐sized companies experience approximately constant returns to scale. In contrast, small‐ and medium‐sized companies experience diseconomies of scope, while the large‐sized companies have neither economies nor diseconomies of scope.

Date: 2001
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