An Intercompany Expense Comparison for Thirty Life Insurers

Abstract

This article explains the nature of a reasonably reliable measure of overall operating efficiency for the line of the life insurance business, shows the results of applying the expense measurement technique to annual statement data for thirty life insurers, develops summary data for four size categories of insurers, and discusses some implications of the variation among the expense ratios. The major conclusions are that marked differences exist among life insurers even when grouped by size and that the extent of variation in ratios supports the suggestion that some insurers might profit from an investigation of the causes of their relatively high expense ratios and the initiation of effective cost control programs. Annual statements of life insurers devote considerable space to the reporting of expenses incurred in operating the insurance mechanism. But the statements convey little meaningful information which would in itself facilitate the comparison of operating efficiency among companies.' Trade publications attempt to make intercompany comparisons feasible by relating expenses to one or more of such variables as the amount of insurance in force, premiums received, and/or total income. It is generally agreed that such ratios are of very limited value as ordinal measures of operating efficiency because they fail to consider many of the important variables that influence operating expenses. Actuarial literature does, however, disS. Travis Pritchett, D.B.A., C.L.U., is Assistant Professor and Coordinator of Insurance at Virginia Commonwealth University. At the time the first draft of this article was prepared he was Assistant Professor of Business Administration at the University of Richmond. The preparation of this article was facilitated by a Faculty Research Grant from the University of Richmond. This article was submitted in December, 1970. 1 Possible exceptions to the above statement are the reports made in compliance with the expense limitation laws of New York and Wisconsin. cuss an actual to standard (A/S) expense ratio that is considered to be reasonably reliable for intercompany comparisons of overall operating expenses. The purposes of this article are to give a general description of the A/S method and to demonstrate some of its feasible uses by analyzing expense data for the ordinary2 line of business of thirty life insurers. Reliable measures of operating efficiency3 would appear to be useful to insurance executives interested in the efficient operation of their organizations, as well as to regulatory officials and others interested in financial and economic as2 The word ordinary when used in this study refers to one line of business. It excludes industrial, group, and accident and health lines of business. For a description of these lines of business and their accounting procedures, see E. C. Wightman, Life Insurance Statements and Accounts (New York: Life Office Management Association as reprinted in August 1962 by Society of Actuaries, 1952), pp. 247-376; and, Joseph Noback, Life Insurance Accounting (Homewood, Ill.: Richard D. Irwin, Inc., 1969), pp. 77-78, 216. 3 Efficiency is defined in this article as success in minimizing operating expenses for the line of business. It does not consider profitability, low prices to policyholders, or the extent to which other management objectives are realized.