An Exploration into Competition and Efficiency in the Dutch Life Insurance Industry

Abstract

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 whic h may constitute a so-called tight oligopoly, we establish the existence of scale economies and the importance of cost Xinefficiency, since severe competition would force firms to exploit available scale economies and to reduce X-inefficiencies. Both scale economies and X-inefficiencies turn out to be substantial, although more or less comparable to those found for insurers in other countries and to other financial institutions. 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 where policy measures in order to promote competition might be appropriate.

Full text

Page 1

CPB Discussion Paper
No 48
September, 2005



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


J. A. Bikker and M. van Leuvensteijn

Page 2

2

CPB Netherlands Bureau for Economic Policy Analysis
Van Stolkweg 14
P.O. Box 80510
2508 GM The Hague, the Netherlands

Telephone +31 70 338 33 80
Telefax +31 70 338 33 50
Internet www.cpb.nl





ISBN 90-5833-233-0

Page 3

3
Abstract in English
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 X-
inefficiencies 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

Key words:
Competition, Insurance, X-inefficiency, Scale economies
JEL code:L16, L80
Abstract in Dutch
Het ontbreken van beschikbare prijsinformatie bemoeilijkt het meten van concurrentie in de
Nederlandse levensverzekeringenmarkt. Om die reden gebruikt dit onderzoek verschillende
indirecte maatstaven voor concurrentie . Na een bespreking van verscheidene aanbod- en
vraagfactoren die kunnen leiden tot oligopolie, analyseren wij het bestaan van schaalvoordelen
en X-inefficiëntie. Zowel schaalvoordelen als X-inefficiënties blijken substantieel te zijn,
hoewel de niveaus van beide grootheden vergelijkbaar zijn met datgene wat we vinden in de
financiële sectoren in andere landen. Winstmarges van Nederlandse levensverzekeraars blijken
hoog te zijn in vergelijking met die van levensverzekeraars in andere landen, hoewel deze
waarneming meer een reflectie is van succesvolle productie in het verleden dan in het heden.
Verder gebruiken wij een nieuwe indicator voor concurrentie: de Boone indicator. Deze
indicator wijst ook op beperkte concurrentie. Verder onderzoek van deelmarkten zou zichtbaar
moeten maken wat de redenen zijn voor de kennelijk beperkte concurrentie

Steekwoorden: Concurrentie, verzekeringen, X-inefficiencies, Schaalvoordelen

Een uitgebreide Nederlandse samenvatting is beschikbaar via www.cpb.nl.

Page 4

4

Page 5

5
Contents

Preface 7
Summary 9
1
Introduction 11
2
The production of life insurances 15
3
3.1
3.2
3.3
The competitive structure of the Dutch life insurance market 17
17
19
21
Supply side factors
Demand side factors
Conclusions
4
Measuring scale economies 23
5
Measuring X-inefficiency 25
6
The Boone indicator of competition 29
7
Description of the data 31
8
8.1
8.2
8.3
8.4
8.5
Empirical results 33
33
35
37
40
42
Scale economies
Cost X-inefficiency
Profitability
The Boone indicator
Sensitivity analysis: the Boone indicator based on markets shares
9
Conclusions 45
References 47
APPENDIX I
Estimation results 51
Appendix II
Marginal costs adjusted for scale economies 53