Economies of Scope in Financial Services: A DEA Efficiency Analysis of the US Insurance Industry

43 Pages Posted: 2 Apr 2010

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Mary A. Weiss

Temple University

Xiaoying Xie

California State University, Fullerton

Hongmin Zi

Hong-Ik University

Date Written: February 15, 2010

Abstract

This paper investigates economies of scope in the US insurance industry over the period 1993-2006. We test the conglomeration hypothesis, which holds that firms can optimize by operating a diversity of businesses, versus the strategic focus hypothesis, which holds that firms can best add value by focusing on core competencies. We analyze whether it is advantageous for firms to diversify by offering both life-health and property-liability insurance or to specialize in one major industry segment. We estimate technical, cost, revenue, and profit efficiency utilizing data envelopment analysis (DEA) and test for scope economies by regressing efficiency scores on an indicator variable for strategic focus and control variables. Property-liability insurers realize cost scope economies, but they are more than offset by revenue scope diseconomies. Life-health insurers realize both cost and revenue scope diseconomies. Hence, strategic focus is superior to conglomeration in the insurance industry.

Keywords: Scope economies, Conglomeration, Strategic Focus, Insurance, Efficiency, Data Envelopment Analysis

JEL Classification: G22, G32, L25

Suggested Citation

Cummins, J. David and Weiss, Mary A. and Xie, Xiaoying and Zi, Hongmin, Economies of Scope in Financial Services: A DEA Efficiency Analysis of the US Insurance Industry (February 15, 2010). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1583459

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)

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

Xiaoying Xie

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

Hongmin Zi

Hong-Ik University ( email )

72-1 Sangsu-dong
Mapo-gu Seoul, Korea
Seoul 121-791
Korea

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