Organizational Form and Efficiency: An Analysis of Stock and Mutual Property-Liability Insurers

WFIC 97-02

53 Pages Posted: 24 Jun 1997

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Mary A. Weiss

Temple University

Hongmin Zi

Hong-Ik University

Date Written: December 1996

Abstract

This paper analyzes the efficiency of stock and mutual organizational forms in the property-liability insurance industry using nonparametric frontier efficiency methods. We test the managerial discretion hypothesis, which predicts that the market will sort organizational forms into market segments where they have comparative advantages in minimizing the costs of production, including agency costs. Both production and cost frontiers are estimated. The results indicate that stocks and mutuals are operating on separate production and cost frontiers and thus represent distinct technologies. The stock technology dominates the mutual technology for producing stock output vectors and the mutual technology dominates the stock technology for producing mutual output vectors. However, the stock cost frontier dominates the mutual cost frontier for the majority of both stock and mutual firms. Thus, the mutuals' technological advantage is eroded because they are less successful than stocks in choosing cost minimizing combinations of inputs. The finding of separate frontiers and organization specific technological advantages is consistent with the managerial discretion hypothesis, but we also find evidence that stocks are more successful than mutuals in minimizing costs.

JEL Classification: G32, G22

Suggested Citation

Cummins, J. David and Weiss, Mary A. and Zi, Hongmin, Organizational Form and Efficiency: An Analysis of Stock and Mutual Property-Liability Insurers (December 1996). WFIC 97-02. Available at SSRN: https://ssrn.com/abstract=2098 or http://dx.doi.org/10.2139/ssrn.2098

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

Hongmin Zi

Hong-Ik University ( email )

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

Register to save articles to
your library

Register

Paper statistics

Downloads
425
Abstract Views
3,639
rank
66,715
PlumX Metrics