Scale economies in the Australian general insurance industry

Abstract

This work examines the measurement of economies of scale in financial institutions with particular emphasis on the workings of the non-life insurance industry. The first part of the work considers the theoretical conditions under which it is possible to measure scale economies and also at areas of operation in the industry that are possible sources of economies. Of particular importance in the first part of the work is the discussion of possible output variables in the insurance industry, claims and premium being the main contenders. On the balance of the arguments presented in the thesis it appears that claims is the preferred output proxy. The second part of the work is an empirical study of scale economies in the Australian general insurance industry. The study has a two fold purpose, firstly to try and determine the size of any economies of scale in the industry and secondly to test the hypothesis that using premium as the output variable consistently underestimates the extent of scale economies. The results suggest that significant scale economies are present and they also support the hypothesis that ecomomies of scale estimates are less significant when using premium as the measurement of output vis a vis claims. The final section of empirical work examines how robust the results are to different subsamples of the data.