Content area
Full text
Abstract: This paper explores the question of whether stock and mutual life insurers differ with respect to firm-level efficiency. It is the first study to compare directly the efficiency of stock and mutual life insurers, and the first study to compare activity choices and insurer characteristics of stock and mutual life insurers using consolidated, group-level data. It also extends the work of Cummins, Weiss, and Zi (1999) on cross-frontier efficiency of property-liability insurers to life insurers, and additionally investigates revenue and allocative efficiency. Because mutual and stock insurers differ in their owners, each ownership form is characterized by differing incentive conflicts; the owner-policyholder conflict is likely to be greater in stock firms while the owner-manager conflict is likely to be greater in mutual firms. These differences have given rise to three main hypotheses: the managerial discretion hypothesis, the maturity hypothesis, and the expense preference hypothesis. Consistent with the managerial discretion and maturity hypotheses, our analysis indicates that mutual and stock life insurers are indeed operating on separate efficient frontiers, and therefore appear to utilize distinct technologies. However, we find no evidence in support of the expense preference hypothesis. [Key words: organizational form, efficiency, life insurance.]
(ProQuest: ... denotes formulae omitted.)
INTRODUCTION
The different ownership forms in the insurance industry have been of enduring interest to academic researchers. The coexistence of these two types of life insurers for over a century suggests that neither form is dominant, but rather that each ownership form has different costs and benefits or different comparative advantages in certain business lines or activities. Prior insurance research provides some insights into mutual versus stock life insurer differences, with mixed results. Erhemjamts and Leverty (2010) investigate life insurer demutualizations and find that converting firms experience an increase in efficiency.4 Cummins et al. (2010) examine scope economies and find that mutual life insurers are significantly less revenue-efficient than stock life insurers, but do not find significant differences for cost efficiency. However, these papers do not answer the question of whether stock and mutual life insurers differ with respect to efficiency and do not present a comprehensive study of all types of efficiencies.5
In this study, we explore the question of whether stock and mutual life insurers differ with respect to technical, allocative,...