Profitability, Growth and Efficiency in the US Life Insurance Industry

This study explores the relationship between operational efficiencyand profitability and growth in the US life Insurance industry, and provides a frameworkfor linking operating performance and financial success.Earnings and growth have particular importance to life insurance companies;earnings and capital determine the viability of the insurer, while growth is paramount tothe insurance operation. Since the life insurance industry is mature and highlycompetitive, cost efficiency may be the main driver of profitability and growth.We derived cost efficiency indices using the stochastic frontier method under twoassumptions about the distribution of inefficiency. Our estimation of the cost efficiencymeasures takes into account the underlying accounting concepts that generate the dataand, consequently, the product mix (long-duration policies vs. short-duration policies) toavoid distorted estimates.Our results suggest that operational inefficiency in the life insurance industry is substantial relative to earnings, and that inefficiency is negatively associated withprofitability measures such as the return on equity (ROE) and growth. Similarly, we findthat relatively efficient firms have higher ROE, growth, and other profitability measures. We also find that stock (shareholder-owned) companies are more efficient and profitable and grow faster than mutual (policyholder-owned) companies.