Financial Intermediary Versus Production Approach to Efficiency of Marketing Distribution Systems and Organizational Structure of Insurance Companies

20 Pages Posted: 31 Aug 2005

See all articles by Patrick L. Brockett

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management

William W. Cooper

University of Texas at Austin - McCombs School of Business

Linda L. Golden

University of Texas at Austin - Red McCombs School of Business

John J. Rousseau

University of Texas at Austin - Department of Information, Risk and Operations Management

Yuying Wang

American Airlines - Department of Information Technology

Abstract

An examination of the efficiency of the marketing distribution channel and organizational structure for insurance companies is presented from a framework that views the insurer as a financial intermediary rather than as a "production entity" which produces "value added" through loss payments. Within this financial intermediary approach, solvency can be a primary concern for regulators of insurance companies, claims-paying ability can be a primary concern for policyholders, and return on investment can be a primary concern for investors. These three variables (solvency, financial return, and claims-paying ability) are considered as outputs of the insurance firm. The financial intermediary approach acknowledges that interests potentially conflict, and the strategic decision makers for the firm must balance one concern versus another when managing the insurance company. Accordingly, we investigate the efficiency of insurance companies using data envelopment analysis (DEA) having as insurer output an appropriately selected (for the firm under investigation) combination of solvency, claims-paying ability, and return on investment as outputs. These efficiency evaluations are further examined to study stock versus mutual form of organizational structure and agency versus direct marketing arrangements, which are examined separately and in combination. Comparisons with the "value-added" or "production" approach to insurer efficiency are presented. A new DEA approach and interpretation is also presented.

Suggested Citation

Brockett, Patrick L. and Cooper, William W. and Golden, Linda L. and Rousseau, John J. and Wang, Yuying, Financial Intermediary Versus Production Approach to Efficiency of Marketing Distribution Systems and Organizational Structure of Insurance Companies. Journal of Risk and Insurance, Vol. 72, No. 3, pp. 393-412, September 2005, Available at SSRN: https://ssrn.com/abstract=782996

Patrick L. Brockett (Contact Author)

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States

William W. Cooper

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Linda L. Golden

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

John J. Rousseau

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-232-2447 (Phone)

HOME PAGE: http://www.mccombs.utexas.edu/programs/bhp/prof/rousseau.asp

Yuying Wang

American Airlines - Department of Information Technology ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
15
Abstract Views
1,723
PlumX Metrics