Changes in Life Insurer Operating Expenses during Inflation

Abstract

This study examines how the efficiency of an important group of mutual life insurers changed in relation to inflation and insurer size between the mid-sixties and mid-seventies. Actual-to-standard ratios are the measure of efficiency for the ordinary line of business; other lines of business are not investigated. Expense ratios for the life insurers increased far less than the Consumer Price Index, wage indices, and other measures of inflation. Life insurers, like other economic organizations in the United States, have had to cope with unusually high inflation rates in recent years. During the period covered by this study, annual changes in the Consumer Price Index (CPI) varied from 1.7 in 1965 to 11.0 percent in 1974. Life insurers are labor-intense organizations; wages and salaries for insurers of all types increased 71 percent during the period of this study [14, p. 52]. The importance of control is indicated not only by the rate of inflation, but also by the ratio of expenses' to premium income; the typical insurer in this study incurs expenses equal to approximately 25 percent of its premium income from the ordinary line of business. This study has a twofold purpose. First, the study addresses the question: How do changes in efficiency compare with wage and consumer price changes between the base period of 1965 through 1967 and the ending period of 1974 and 1975? The second question is: What implications, if any, can be drawn about economies of size from the rates of change in ratios for four size categories of life insurers? S. Travis Pritchett, D.B.A., is Professor of Finance and Insurance at the University of South Carolina. He is President Elect of ARIA and a communications editor for the JRI. He has published extensively in scholarly journals. Phyllis Schiller Myers, a Fellow of the Life Management Institute, is a doctoral candidate in Finance and Insurance at the University of South Carolina. She has been affiliated with Aetna Life & Casualty for the past 13 years. The authors have benefited from comments by H. Kent McMath, E. J. Moorhead, and two anonymous JRI referees. Thanks go to Benjamin Y. Brewster, Jr., for collection of the 1974-75 data. I The term operating expense as used in this study includes general insurance expenses and commissions for the ordinary line of business. Taxes, investment expenses, and benefit payments are excluded.