Measuring Cost Efficiency in the U.S. Life Insurance Industry: Econometric and Mathematical Programming Approaches
WFIC Working Paper 97-03
Posted: 19 Mar 1997
Date Written: December 1996
This paper presents a comparative analysis of frontier cost efficiency methodologies by applying a wide range of econometric and mathematical programming techniques to a data set consisting of 445 life insurers over the period 1988-1992. The primary objective is to provide new information on the effects of choice of methodology on efficiency estimates. We also investigate some classic industrial organization issues in the life insurance industry. The alternative methodologies give significantly different estimates of efficiency for the insurers in our sample. The efficiency rankings are quite well-preserved among the econometric methodologies, but the rank correlations are lower between the econometric and mathematical programming categories and between alternative mathematical programming methodologies. Thus, the choice of methodology can have a significant effect on the results. Most of the insurers in the sample display either increasing or decreasing returns to scale, and stock and mutual insurers are found to be equally efficient after controlling for firm size.
JEL Classification: G22, D61
Suggested Citation: Suggested Citation