Product Focus versus Diversification: Estimates of X-Efficiency for the US Life Insurance Industry

Joseph W. Meador and Harley E. Ryan

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: Using data for the life insurance industry during 1990-1995, we empirically test for a relationship between a firm's output choice and measures of X-efficiency. Our empirical evidence suggests that diversification across multiple insurance and investment product lines resulted in greater X-efficiency than a more focused production strategy. The analysis in this article is consistent with the proposition that managers of multiproduct firms are able to achieve greater cost efficiencies than their counterparts in more focused firms by sharing inputs and efficiently allocating resources across product lines in response to changing industry conditions. Our findings are important since they justify the existence of multiproduct firms in the absence of cost complementarities and identify product diversification as a source of efficiency in the life insurance industry that should be recognized by managers, policyholders, and regulators.

Date: 1997-02
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