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Scale and Scope Economies in the Canadian Property and Casualty Insurance Industry

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  • Jean Marc Suret

Abstract

This study investigates scale and scope economies in the Canadian property/casualty insurance. Use of the translog cost function allows the estimation of a U-shaped cost curve and of cost elasticities that vary with the size of the insurance company. The model is estimated on a sample of 180 companies over the period 1986 to 1988, and considers four outputs: property, automobile, civil liability, and other types of insurance. The factors of production are labour, rentals, and capital, but the cost of the latter is taken as a constant.Using data for the years 1986 to 1988, we show that there exists significant economies of scale for insurance companies with assets between $ 40 and $ 100 million. However, the evidence in favour of the existence of economies of scale for smaller and larger firms are limited to one year in each case.We do not observe systematic evidence of significant cost complementarities between insurance products, nor do we note significant economies of scope. No cost complementarities exist between the two main product lines of property/casualty and automobile. Furthermore, there is some evidence of diseconomies of scope. Diversification economies can only be obtained with liability and other product lines.Our evidence of slight economies of scale and no economies of scope is compatible with observation that many insurance companies in Canada are small and undiversified.

Suggested Citation

  • Jean Marc Suret, 1991. "Scale and Scope Economies in the Canadian Property and Casualty Insurance Industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 16(2), pages 236-256, April.
  • Handle: RePEc:pal:gpprii:v:16:y:1991:i:2:p:236-256
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    Citations

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    Cited by:

    1. J.A. Bikker & J. Gorter, 2008. "Performance of the Dutch non-life insurance industry: competition, efficiency and focus," Working Papers 08-01, Utrecht School of Economics.
    2. Toivanen, Otto, 1997. "Economies of scale and scope in the Finnish non-life insurance industry," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 759-779, June.
    3. Hanweck, Gerald A. & Hogan, Arthur M. B., 1996. "The structure of the property/casualty insurance industry," Journal of Economics and Business, Elsevier, vol. 48(2), pages 141-155, May.
    4. J. David Cummins & Mary A. Weiss, 1998. "Analyzing Firm Performance in the Insurance Industry Using Frontier Efficiency Methods," Center for Financial Institutions Working Papers 98-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. G. Russo & W.H.J. Hassink, 2005. "The Part-Time Wage Penalty: a Career Perspective," Working Papers 01-01, Utrecht School of Economics.
    6. Mr. Jong-Kun Lee & Mr. Biaggio Bossone, 2002. "In Finance, Size Matters," IMF Working Papers 2002/113, International Monetary Fund.

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