City Research Online

Abstract

In order to examine cost economies in the UK life assurance industry, this thesis develops two models: the underwriting model and the intermediation model. The underwriting model focuses on the underwriting function whose outputs are premium income. The outputs are aggregated into four broad kinds of products: life assurance, general annuities, pensions and permanent health. The main theoretical novelty in this model is that we take into account the riskiness of contracts. In the intermediation model, a life company can be regarded as an intermediary whose role is to collect premiums, invest the funds and distribute bonuses to policyholders. The output of the intermediation function is bonuses and the source for the intermediation activity is premium income generated from the underwriting activity and investment income generated from the investment activity.

To model the production technology, we employ a revised form of the Hybrid Translog Cost (HTC) function. The HTC function using the traditional Box-Cox transformation has a limitation that hinders the estimation of the asymptotic covariance matrix of the parameters. We develop the Revised Box-Cox Transformation (RBCT) and then employ the Revised Hybrid Translog Cost (RHTC) function to overcome the limitation. The parameter estimates of the two models are used to estimate the degree of scale and scope economies. We also compare the cost structure for various groups such as: composite and non-composite companies, bancassurance and non-bancassurance companies. We also examine the cost structure by distribution channels and size.

The findings of this thesis are as follows: Firstly, we find significant overall scale economies and weak scope economies in the underwriting activity. However, weak diseconomies of scale are observed in the intermediation activity. Secondly, composite companies provide larger bonuses than non-composite companies. Thirdly, bancassurance companies exhibit lower scale and scope economies than non-bancassurance companies in the underwriting model and they also show higher diseconomies of scale in the intermediation activity. Fourthly, with regard to distribution, independent financial agents and the mixed channel with direct marketing show higher scale economies in the underwriting model. Company agents with direct marketing are not desirable for scale economies in both models, but this channel displays higher scope economies in the underwriting model. Finally, there are cost savings in expanding the level of output in the underwriting model. Small companies can realise greater cost savings than both large and medium-sized companies in terms of scale economies. Large and medium companies are favourable for scope economies in the underwriting model. Unlike the underwriting model, small companies are favourable for scale economies in the intermediation model.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HJ Public Finance Q Science > QA Mathematics
Departments:	Bayes Business School > Actuarial Science & Insurance Bayes Business School > Bayes Business School Doctoral Theses Bayes Business School

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