Profitability, growth and efficiency in the US life insurance industry: A multi-product analysis

The first part of this study presents a number of structural tests of the production technology of life insurance companies in the U.S. using multi-product cost function. The sample firms exhibit overall and product specific economies of scale, as well as, pair wise cost complementaries between the life insurance and annuities lines of businesses and between the life insurance and accident and health lines of businesses.; This second part of this study explores the association of operational efficiency with product mix, profitability and growth. Earnings and growth have particular importance to life insurance companies; earnings and capital determine the viability of the insurer, while growth is paramount to the insurance operation, which requires considerable economies of scale. Since the life insurance industry is mature and highly competitive, cost efficiency may be the main driver of profitability and growth. The estimation of cost efficiency, however, requires consideration of the underlying accounting concepts that generate the data, and consequently of the product mix (long-duration policies vs. short-duration policies) to estimate efficiency in an unbiased manner.; Our results indicate that operational inefficiency has material effects on earning and that inefficiency is negatively associated with profitability measures such as the Return on Equity (ROE) and growth. Similarly, we show that firms with higher ROE, growth and other profitability measures are relatively more efficient. We also find that stock (shareholder-owned) companies are more efficient and profitable, and grow faster than mutual (policyholder-owned) companies.