US Life Insurance Research Articles

From insurance to investments: financialisation and the supply side of life insurance and annuities in the USA (1970-2006)

The paper describes the supply side of the annuity products and hybrid investment/life insurance policies that were developed and sold by US life insurers from the 1970s onward, including some of the investments that financed them, including commercial mortgages and commercial mortgage-backed securities. Links to different understandings of financialisation are made, as is an argument for embracing the multiple meanings of the term. This approach enables researchers to understand how different forms of financialisation are linked. In the case of life insurers, it shows how their corporate strategy shifted out of necessity, even when those changes were likely to be less profitable. Copyright 2013, Oxford University Press.

"Life…in the midst of death": Notes on the Relationship Between Slave Insurance, Life Insurance and Disability

This article examines the way post-bellum genres of disability, race, and credit-debt shaped the emergence of US slave insurance and life insurance industries. After all, the same period which witnessed the demise of formal enslavement saw the debut of structures that protected the privilege of people whose wealth and power threatened to come undone: this would include sharecropping and convict leasing. Despite a similar emphasis on institutionalizing credit-debt relations, insurance appears benign by comparison. Even though insurance agencies assign differential value to human lives, the birth of insurance is seen, along with the triumph of capitalism and democracy, as part of the birth of freedom. In what follows, I explore a discourse on debility that was likewise a discourse on debt—one with enduring resonance for social movement politics.Keywords: disability, civil rights, social movement politics, slavery, capitalism

Regulatory competition and forbearance: Evidence from the life insurance industry

Regulatory separation theory indicates that a system with multiple regulators leads to less forbearance and limits producer gains while a model of banking regulation developed by Dell’Ariccia and Marquez (2006) predicts the opposite. Fragmented regulation of the US life insurance industry provides an especially rich environment for testing the effects of regulatory competition. We find positive relations between regulatory competition and profitability measures for this industry, which is consistent with the Dell’Ariccia and Marquez model. Our results have practical implications for the debate over federal versus state regulation of insurance and financial services in the US.

The Market Value of Life Insurance Liabilities Under a Regime Switching Process

This paper studies the values of the equity and liabilities of life insurance companies in the presence of regime switching in the economy. Following the contingent claim work of Grosen and Jorgensen (2002), where the equity and liability of a life insurance company are evaluated as a barrier option framework, this paper proposes a model where the dynamic evolution of the assets follows a geometric Brownian motion with parameters switching according to a continuous-time Markov chain process with discrete state values. After deriving valuation formulas, numerical implementation is illustrated using US life insurance data, providing strong evidence of switching behavior on the market affecting the contingent claim valuation.

The Effects of an Optional Federal Charter on Competition in the Life Insurance Industry

In this report we examine the likely effects of an Optional Federal Charter (OFC) regulatory system on competition in the life insurance and annuities industry and related markets. Increasingly, many US insurers advocate the creation of an OFC and the associated regulatory framework for several reasons. Primarily, they believe that the adoption of an OFC would reduce the costs and impediments imposed by the current state-based regulatory system. Further, they believe that the adoption of an OFC structure will facilitate interstate operations and enhance the industry's competitiveness relative to other financial service providers and international insurers. The proposal of an OFC system has generated an intensive debate on a number of issues, including its implications for market competition and the associated effects on consumers. Based on our analysis, we conclude that the life insurance industry is structurally competitive based on its inherent characteristics but that many insurers have not fully achieved maximum efficiency due, at least in part, to the barriers and costs caused by state regulation. Our analysis further leads us to the opinion that the creation of an OFC, properly structured and implemented, would likely increase competition in the US life insurance industry, the broader market for financial services, and international insurance markets.

The value relevance of ‘realistic reporting’: evidence from UK life insurers

Even under the International Financial Reporting Standard 4 (IFRS 4), the current accounting regime for UK life insurance companies is oriented towards delaying the recognition and distribution of profit, and still remains largely rooted in traditional requirements for statutory solvency reporting. This paper tests empirically the value relevance of the alternative ‘realistic reporting regime’ of voluntary embedded value (EV) disclosures that has been generally adopted by leading UK and Continental European insurers. In recent years, EVs have also been used internally (but not disclosed) by many US life insurers. The results found here are consistent with value relevance and some implications for standard-setters are explored.

Regulation, Capital, and the Evolution of Organizational Form in US Life Insurance

This paper studies the association between regulation and the organizational form of new life insurers between 1900 and 1949. The mutual form was popular in states with low initial capital requirements for mutual companies and differentially higher requirements for stock companies, but was rarely used elsewhere. This suggests that entrepreneurs took a “path of least resistance” when choosing organizational form and that the mutual's disadvantage in raising capital contributed to its decline–a decline that accelerated as states raised requirements and eliminated the aforementioned differentials. Contrary to previous analysis, the paper finds little evidence connecting other regulations to mutual decline. (JEL G21, L51, N21, N22)

Convergence and risk-return linkages across financial service firms

We examine the risk and return linkages across US commercial banks, securities firms, and life insurance companies during the 1991–2001 period. After controlling for changes in the broader stock market, interest rates, and foreign currency values, we find that return and risk interdependencies across these financial firms are significant and size-varying; larger institutions display stronger volatility transmission linkages, while smaller ones exhibit more prominent return-related linkages. The tighter link in risk among large financial institutions (FIs) suggests stronger convergence, employment of common models of risk measurement and risk management, and more intense inter-industry competition, particularly between large banks and large securities firms, compared to smaller institutions. Lack of risk spillover among smaller FIs confirms the intuition that they typically assume more localized and idiosyncratic risk. The co-movement of stock returns among smaller FIs has been helped by the effects of locally based factors, such as economic conditions and state regulations, on all such institutions, and a less diversified product set. Differences in spillover patterns between large and smaller institutions have implications on investment choices and mergers and acquisitions in the industry. Introduction of the Gramm-Leach-Bliley Act (1999) has had dissimilar effects on the riskiness of large versus smaller life insurance and securities firms, and an insignificant effect on commercial banks.

The Value Relevance of 'Realistic Reporting': Evidence from UK Life Insurers

Following IFRS 4, the current accounting regime for UK life insurance companies is oriented towards delaying the recognition and distribution of profit, and is still largely rooted in requirements for statutory solvency reporting. This paper tests empirically the value relevance of the alternative 'realistic reporting regime' of voluntary embedded value (EV) disclosures that has been generally adopted by leading UK and Continental European insurers. In recent years EVs have also been used internally, but not disclosed, by many US life insurers. The results found here are consistent with value relevance and some implications for standard setters are explored.

Co‐investing in mortgage loans: a portfolio strategy

AbstractThe latter half of the 1990s witnessed a significant increase in co‐lending among US life insurance companies and other portfolio lenders. This paper will examine why co‐lending is attractive to portfolio lenders, detail the factors that have contributed to the growth in co‐lending, and will provide advice on selecting an appropriate co‐lender with which to invest and best practice guidelines on how to structure the deal. Copyright © 2003 Henry Stewart Publications

Consolidation and efficiency in the US life insurance industry

This paper examines the relationship between mergers and acquisitions, efficiency, and scale economies in the US life insurance industry. We estimate cost and revenue efficiency over the period 1988–1995 using data envelopment analysis (DEA). The Malmquist methodology is used to measure changes in efficiency over time. We find that acquired firms achieve greater efficiency gains than firms that have not been involved in mergers or acquisitions. Firms operating with non-decreasing returns to scale (NDRS) and financially vulnerable firms are more likely to be acquisition targets. Overall, mergers and acquisitions in the life insurance industry have had a beneficial effect on efficiency.

Aligning IT investments and workforce composition: the impact of diversification in life insurance companies

This paper investigates the impact on productivity of combined changes in information technology (IT) investments and workforce composition of life insurance companies. Workforce composition is defined in terms of three broad classes: clerical, managerial and professional. Hypotheses on the combined impact of changes in IT investments and workforce composition on productivity are proposed and empirically tested on a sample of companies from the US life insurance industry. Companies are clustered based on two main strategy alternatives, focus on a market niche vs diversification. In niche companies, higher IT investments accompanied by a decrease in the clerical and managerial components of the workforce are found to have a positive contribution to productivity. On the contrary, higher IT investments in conjunction with a decrease of the professional component show a negative effect. In diversified companies, increasing IT investments show a positive contribution to productivity when accompanied by a decrease of the professional component and a growth in the clerical and managerial component of the workforce. Findings are discussed in the light of fundamental competitive goals in the industry.

Aligning IT investments and workforce composition: the impact of diversification in life insurance companies

This paper investigates the impact on productivity of combined changes in information technology (IT) investments and workforce composition of life insurance companies. Workforce composition is defined in terms of three broad classes: clerical, managerial and professional. Hypotheses on the combined impact of changes in IT investments and workforce composition on productivity are proposed and empirically tested on a sample of companies from the US life insurance industry. Companies are clustered based on two main strategy alternatives, focus on a market niche vs diversification. In niche companies, higher IT investments accompanied by a decrease in the clerical and managerial components of the workforce are found to have a positive contribution to productivity. On the contrary, higher IT investments in conjunction with a decrease of the professional component show a negative effect. In diversified companies, increasing IT investments show a positive contribution to productivity when accompanied by a decrease of the professional component and a growth in the clerical and managerial component of the workforce. Findings are discussed in the light of fundamental competitive goals in the industry.

X-Efficiency in the US life insurance industry

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.

Ownership Structure across Lines of Property-Casualty Insurance

Ownership Structure across Lines of Property-Casualty Insurance

THE USE OF INFORMATION TECHNOLOGY IN INSURANCE MARKETING

The growth in usage of marketing information systems (MIS) within insurance companies is examined. It is based on a series of in‐depth personal interviews with marketing executives and data processing specialists in a selection of UK, US and Canadian life insurance companies.