Efficiency, Scale Economies and Consolidation in the U.S. Life Insurance Industry

WFIC Working Paper No. 98-08

Posted: 3 Aug 1998

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Sharon L. Tennyson

Cornell University - Department of Policy Analysis & Management (PAM)

Mary A. Weiss

Temple University

Date Written: March 1998

Abstract

This paper examines the relationship between mergers and acquisitions, efficiency, and scale economies in the U.S. life insurance industry. We estimate cost and revenue efficiency for life insurers representing 80 percent of industry assets over the period 1988-1995 using data envelopment analysis (DEA) and decompose cost efficiency into pure technical, scale, and allocative efficiency. The Malmquist index methodology is used to measure changes in efficiency and productivity over time. The results support the hypothesis that acquired firms achieve greater efficiency gains than firms that have not engaged in merger or acquisition activity. We also find evidence that firms operating with non-decreasing returns to scale are more likely to be acquisition targets than firms operating with decreasing returns to scale. Firms with higher revenue efficiency are more likely to be acquired than firms with lower revenue efficiency, but we find no relationship between other types of efficiency and the probability that a firm is acquired. Financially vulnerable firms are more likely to be acquired than stronger firms. The overall conclusion is that mergers and acquisitions in the life insurance industry appear to be driven for the most part by economically sound objectives and have had a beneficial effect on efficiency in the industry.

JEL Classification: G22, L84

Suggested Citation

Cummins, J. David and Tennyson, Sharon L. and Weiss, Mary A., Efficiency, Scale Economies and Consolidation in the U.S. Life Insurance Industry (March 1998). WFIC Working Paper No. 98-08. Available at SSRN: https://ssrn.com/abstract=111968

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Sharon L. Tennyson

Cornell University - Department of Policy Analysis & Management (PAM) ( email )

252 MVR Hall
Ithaca, NY 14853
United States
607-255-2619 (Phone)
607-255-4071 (Fax)

Mary A. Weiss

Temple University ( email )

Fox School of Business and Management
1801 Liacouras Walk
Philadelphia, PA 19122
United States
215-204-1916 (Phone)

HOME PAGE: http://www.sbm.temple.edu/~rmidept/weiss.html

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