Efficiency: Mutual vs. Stock P-L Insurers

Abstract

This paper reviews evidence from the U.S. property-liability insurance industry that examines technical efficiency between mutual and stock organizational forms. I exploit a modified slacks-based measure data envelopment analysis methodology to estimate technical efficiency of a property-liability insurer relative to a reference set consisting of all such insurers with the same organizational form. Then, I distinguish relative technical efficiency between insurers’ capacity to maximize social capital (reputational efficiency) and to maximize investment returns (investment efficiency). I document statistically significant evidence that mutual insurers outperform stock insurers in terms of reputational and investment efficiencies. My findings thus reflect a newer appreciation of organizational forms in insurance and illuminate how households make key insurance decisions.