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An Economic Analysis of Life Insurance Company Expenses

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  • Dan Segal

Abstract

This study provides an economic analysis of life insurance company expenses and develops a methodology for the construction of benchmark expense factors. These benchmarks can facilitate the pricing of new business, cost control within companies, and expense comparisons among companies. We derive the expense factors by estimating a cost function wherein total general expenses are modeled as a function of input prices and physical outputs, and the physical outputs are proxies for the cost drivers of the different lines of business. This methodology has two important advantages: first, the derived expense factors are independent of the methods that insurers use in allocating total expenses across lines of business. Second, the estimated cost function explicitly accounts for different degrees of economies of scale and consequently in the present value of marginal expenses across insurers. Hence, this study demonstrates that economies of scale and, in turn, size must be considered when constructing an expense table.

Suggested Citation

  • Dan Segal, 2002. "An Economic Analysis of Life Insurance Company Expenses," North American Actuarial Journal, Taylor & Francis Journals, vol. 6(4), pages 81-94.
  • Handle: RePEc:taf:uaajxx:v:6:y:2002:i:4:p:81-94
    DOI: 10.1080/10920277.2002.10596066
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    Cited by:

    1. Shan Ge, 2022. "How Do Financial Constraints Affect Product Pricing? Evidence from Weather and Life Insurance Premiums," Journal of Finance, American Finance Association, vol. 77(1), pages 449-503, February.
    2. Shi, Peng & Frees, Edward W., 2010. "Long-tail longitudinal modeling of insurance company expenses," Insurance: Mathematics and Economics, Elsevier, vol. 47(3), pages 303-314, December.
    3. Cecilia Dassatti & Rodrigo Lluberas, 2020. "The costs of annuitising: are retirees fairly charged?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(3), pages 535-557, July.
    4. William WISE, 2018. "The importance of efficiency for life insurer profit: A study of Canadian life insurance companies," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(617), W), pages 179-204, Winter.
    5. Cecilia Dassatti & Rodrigo Lluberas, 2016. "The costs of annuitizing," Documentos de trabajo 2016004, Banco Central del Uruguay.
    6. Valdez, Emiliano A. & Vadiveloo, Jeyaraj & Dias, Ushani, 2014. "Life insurance policy termination and survivorship," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 138-149.

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