Profitability and Efficiency in the U.S. Life Insurance Industry

William Greene and Dan Segal ()

Journal of Productivity Analysis, 2004, vol. 21, issue 3, 229-247

Abstract: This study explores the relationship between cost inefficiency and profitability in the U.S. life insurance industry. Earnings have particular importance to life insurance companies because earnings and capital determine the viability of the insurer. Since the life insurance industry is mature and highly competitive, cost efficiency may be the main driver of profitability. We derive cost efficiency using the stochastic frontier (SF) method allowing the mean inefficiency to vary with organizational form and the outputs. In addition, the estimation of the cost efficiency measure takes into account the underlying accounting concepts that generate the data and, consequently, the product mix (long-duration policies vs. short-duration policies) to avoid distorted estimates. Our results suggest that cost inefficiency in the life insurance industry is substantial relative to earnings, and that inefficiency is negatively associated with profitability measures such as the return on equity. The analysis of inefficiency and organizational form suggest that stock (shareholder-owned) companies are as efficient and profitable as mutual (policyholder-owned) companies. Copyright Kluwer Academic Publishers 2004

Keywords: stochastic frontier; cost inefficiency; profitability; life insurance; organizational form (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (66)

Downloads: (external link)
http://hdl.handle.net/10.1023/B:PROD.0000022092.70204.fa (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jproda:v:21:y:2004:i:3:p:229-247

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11123/PS2

DOI: 10.1023/B:PROD.0000022092.70204.fa

Access Statistics for this article

Journal of Productivity Analysis is currently edited by William Greene, Chris O'Donnell and Victor Podinovski

More articles in Journal of Productivity Analysis from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().