Insurance Company Output and Costs

Many management decisions, especially ones of an economic nature, involve a knowledge of the firm’s output. For example, judgements on efficiency, profitability, pricing, advertising and so on cannot be made without reference to an appropriate output indicator. However in insurance, as in many other service industries, no unique measure of output is available because the service that insurers provide to their clients has many different aspects (which in turn vary in importance between the various classes of insurance business). Thus it is perhaps unrealistic to expect to derive a single figure for an insurance company’s output. Furthermore many insurance companies are part of multiproduct firms, supplying not only different types of insurance but often other financial services such as banking, housing finance, estate agency or unit trust management. It would obviously be incorrect to attempt to incorporate these other activities into one conglomerate output measure, and yet the cost advantages of diversified firms cannot be ignored. One of the purposes of this chapter will therefore be to argue that it is a serious over-simplification to utilise a single output measure in making managerial decisions.