An Economic Analysis of Life Insurance Company Expenses

Publication Type

Journal Article

Version

Preprint

Publication Date

2002

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.

Keywords

Life insurance companies, company expenses, benchmarks, expense factors, cost function, economies of scale

Discipline

Accounting | Corporate Finance | Insurance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

North American Actuarial Journal

Volume

6

Issue

2

First Page

81

Last Page

94

ISSN

1092-0277

Identifier

10.1080/10920277.2002.10596066

Publisher

Taylor and Francis

Link to Full Text

Share

COinS