An exploration into competition and efficiency in the Dutch life insurance industry

The lack of available prices in the Dutch life insurance industry makes competition an elusive concept that defies direct observation. Therefore, this paper investigates competition by analysing several factors which may affect the competitive nature of a market and various indirect measurement approaches. After discussing various supply and demand factors which may constitute a so-called tight oligopoly, we establish the existence of scale economies and the importance of cost X-inefficiency, since severe competition would force firms to exploit any available scale economies further and to reduce X-inefficiencies. Both scale economies and Xinefficiencies turn out to be substantial, although more or less comparable to those found for insurers in other countries and to other financial institutions. Profits in the Netherlands appear to be high compared to profits of foreign peers, although this probably more a reflecting of the past than of the present. Further, we apply the Boone indicator, a novel approach to measuring the effects of competition. This indicator points to limited competition in comparison to other sectors in the Netherlands. Further investigations of submarkets should reveal what is behind this seemingly limited competition.