Comparison of Ordinary Life Operating Expense Ratios for Agency and Nonagency Insurers

Abstract

This study compares actual to standard expense ratios for 74 life insurers that sell through agents paid by commissions with expense ratios for nine life insurers that market their products without commissioned agents. All of the insurers are licensed in New York. The study is confined to the ordinary line of business. The major limitation of the study is the small size of the nonagency sample. Expense ratios for the two groups have means and ranges that are nearly identical. No evidence suggests that insurers without agents operate more efficiently than do those with agents. The literature of life insurance is replete with statements implying that direct marketing methods are less expensive than the agency system to the insurer, and that they are ultimately less expensive to the consumer. But the claim that elimination of the life insurance agent decreases operating expenses is not supported by this study. Unanimously agreed upon is the fact that marketing expenses of all types are an important part of total expenses. Home offices usually have a great many people gathered together in substantial buildings, which gives the impression that here is the location where most of the company's expense money is spent.... The fact is that, for a typical [agencytype I life insurance company, about 70 percent of the total operating expenses of the company will be spent for field expenses, including field compensation 117, p.751[6, p. 4461. Some, though not all, insurance textbooks either hypothesize or explicitly state that expense savings are associated with nonagency marketing methods. Two examples follow: Expenses of insurers employing no agents should be expected to be lower than those of companies with large agency plants. However, there are relatively few life insurers who operate without agents . . . 19, p. 133 1. The distinctive feature of savings bank life insurance is that it is transacted on an over-the-counter basis or by mail, and without the use of soliciting agents. This S. Travis Pritchett, D.B.A., C.L.U., C.P.C.U., is professor and program director for banking, finance, insurance, and real estate at the University of South Carolina. He is vice-president of ARIA and coeditor of this journal's Communications and Notes section. His work on this study was financed by the New York State Association of Life Underwriters. Benjamin Y. Brewster. Jr., C.L.U., is executive vice-president of the New York State Association of Life Underwriters. He is a graduate of the United States Naval Academy.