Strategic choices, firm efficacy and competitiveness in the United States life insurance industry

Product range, product mix, market share, growth, distribution strategy and the technological intensity of policy production are found to be significant predictors of relative efficiency among a sample of 54 US life insurers. In a study of strategic choice, firm efficiency, and competitiveness, an extensive range of business practices were analyzed in order to determine the drivers of firm performance. Performance is measured by Data Envelopment Analysis efficiency scores, based on 1993-1995 pooled time series data for 754 US life insurers. The study provides support for theories founded on transaction cost economics and agency theory in finding higher efficiency among firms using exclusive agency distributors relative to non exclusive distribution channels. Non exclusive distribution, although less efficient, is found to be associated with higher levels of statutory return on equity. The study failed to find support for the expense preference hypothesis or the benefits of adopting one of Porter's three generic strategies--cost leadership, differentiation, or focus. The apparent efficiency gains from size in life insurers can principally be attributed to market power, the wider choice of distribution strategies, broader product range and slower growth rates associated with larger companies.