X-Efficiency in the US life insurance industry

Abstract

Using six years of data, 1985–1990, we estimate hybrid translog cost functions for 561 life insurers. We examine the resulting residuals to determine the relative efficiency of insurers in the sample. We then test the residuals to see if they are related to so-called X-efficiencies because of internal and external monitoring, or to other factors related to rent-seeking. Results show a large degree of persistent inefficiency seems to exist among sample firms, the inefficiencies relate to some internal or external monitoring, and rent-seeking may be occurring.