Zealand Life Insurance Industry Research Articles

Estimates of Scale and Scope Economies in the New Zealand Life Insurance Industry

Recent multi‐product statistical studies of production in life insurance industries in North America and the UK have produced mixed findings with regard to economies of scale and scope. This study presents results for the life insurance industry in New Zealand, which has a small economy where the industry is comparatively unregulated. A total of 135 pooled observations for the population of non‐bank life insurance companies for the period 1988–92 are used in a two‐input two‐output generalized translog model. Product‐specific economies of scale are measured in a variety of ways including two new ones, using what we have called ‘quasi average incremental cost’ and ‘partial average cost’. We find that while small companies could benefit from economies of scale, the optimum firm size is modest, and that medium‐ and large‐sized companies experience approximately constant returns to scale. In contrast, small‐ and medium‐sized companies experience diseconomies of scope, while the large‐sized companies have neither economies nor diseconomies of scope.

Determinants of participatory rights insurance: evidence from the New Zealand life insurance industry

Drawing a framework from the financial economics literature, this study examines the determinants of participatory rights policies in the New Zealand (NZ) life insurance industry. Using data for the period 1988–1993, a fixed-effects regression model was estimated. Consistent with expectations, the empirical results indicate that participatory rights life insurance are associated with mutuals, large and lowly leveraged life insurance companies, and entities with less underwriting risk. A sensitivity test also indicated that participatory rights insurance was related to the age of life insurance firms. The predictions of contracting theory thus receive empirical support.

Managerial discretion and voluntary disclosure: Empirical evidence from the New Zealand life insurance industry

The managerial discretion hypothesis holds that variations in the degree of autonomy afforded to managers in insurance companies can be explained by corporate-specific factors such as organizational form and firm size ( Mayers and Smith, 1988, pp. 351–378; Mayers and Smith, 1994, pp. 638–655). To the extent that the public disclosure decisions of life insurance companies are likely to be linked to managerial discretion, valuable insights could be gained from applying the managerial discretion hypothesis to explain differences in the level of information voluntarily disclosed by life insurance companies in their annual reports. The relation between voluntary disclosure and eight explanatory variables representing the major constructs of the managerial discretion hypothesis is thus specified in the form a fixed-effects regression model using 1988–1993 data drawn from New Zealand's (NZ) life insurance industry. The results indicate that organizational form, firm size, product diversity and distribution system, are positively related to the level of voluntary disclosure as implied by the managerial discretion hypothesis. In contrast, assets-in-place and localization of operations are not significant variables. Two independent variables – non-executive directors and reinsurance – are statistically significant, but in the opposite direction to that predicted.

Ritualism, opportunism and corporate disclosure in the New Zealand life insurance industry: field evidence

Drawing a framework from Gibbins et al. (1990), uses information collected from field interviews to isolate those factors which influence the voluntary disclosure practices of New Zealand life insurance companies. Interview evidence suggests that voluntary disclosure is a multi‐dimensional phenomenon that is influenced by both firm‐specific antecedents such as company culture and environmental conditions, for example, the state of market competition. Gibbins et al. (1990) refer to these organizational and environmental determinants of corporate disclosure as ritualism and opportunism. The results of this study thus provide important insights into the voluntary disclosure practices of life insurance companies. Also concludes that field‐based research carried out within a sound conceptual framework could make a valuable contribution to the accounting literature and complement the results obtained in studies utilizing more conventional statistical techniques.

The Determinants of External Audit Costs in the New Zealand Life Insurance Industry

The contracting theory literature suggests that auditors’ pricing decisions reflect the efficacy of contracting arrangements in firms. Drawing a framework from this literature, we test empirically the simultaneous effect of six firm‐specific variables on external audit costs using 1988–1993 data drawn from New Zealand’s (NZ) life insurance industry. These variables are: assets‐in‐place, reinsurance, internal governance, firm size, product‐mix and organizational form. Consistent with expectations, our results indicate that audit fees are influenced by product‐mix and firm size. However, the other variables are found not to be statistically significant. The empirical results thus provide mixed support for contracting theory.

Determinants of audit committee formation in the life insurance industry: New Zealand evidence

This study examines empirically the determinants of audit committee formation in life insurance firms. The study tests six hypotheses, namely whether the existence of audit committees is related to organizational form, firm size, leverage, assets-in-place, reinsurance, and total monitoring costs, using pooled 1991–1993 data gathered from New Zealand's life insurance industry (100 firm/year observations), parameter estimates were derived using fixed-effects regression. The model X 2 is found to be reasonably consistent with that reported in prior studies. The empirical results indicate that consistent with expectations, audit committees appear to be positively associated with large entities, companies with high leverage, and firms with high total monitoring expenditures. However, the variables organizational form, assets-in-place, and reinsurance were not statistically significant. The study thus provides mixed empirical results.

The determinants of actuarial costs in the New Zealand life insurance industry

The financial economics literature suggests that the extent to which surrogate monitors such as actuaries are employed by owners of the firm depends upon organizationspecific factors such as size and ownership structure. Using 1991–1993 data drawn from New Zealand's life insurance industry, an empirical examination is conducted to see whether the demand for actuarial services is distinguished by the characteristics of life insurance firms. The empirical results indicate that, consistent with expectations, expenditure on actuarial services was positively associated with large and multiproduct firms and those with high underwriting risk. However, organizational form and the substitutive effects of auditing on actuarial costs, were found not to be statistically significant.

Choice of Distribution System in the New Zealand Life Insurance Industry

Using 1988–93 panel data drawn from the New Zealand life insurance industry, this paper examines empirically the notion that the choice of distribution system is an efficient contracting solution to incentive conflicts between owners, managers and sales agents in life insurance firms. Consistent with what was hypothesised, the empirical results suggest that choice of distribution system is distinguished by organisational form, firm size, and sales commission. However, contrary to expectations, the variables representing product diversity and asset specificity were found not to be statistically significant. The empirical results thus lend mixed support for prior predictions.

THE REINSURANCE DECISION IN LIFE INSURANCE FIRMS: AN EMPIRICAL TEST OF THE RISK‐BEARING HYPOTHESIS

AbstractSeveral explanations have been advanced in the financial economics literature to explain the reinsurance decision in insurance firms. Prominent amongst these is the risk‐bearing hypothesis which holds that reinsurance is motivated by the ability of residual claimants to effectively hedge against operational risk. Since the efficiency of risk‐bearing is influenced by organisational factors, such as ownership structure and firm size, the amount of reinsurance should also vary according to the characteristics of insurance firms. This study tests empirically the hypothesis that reinsurance is related to firm‐specific factors. Using 1988–1993 data gathered from New Zealand's life insurance industry, a fixed‐effects covariance regression model is estimated. Consistent with expectations, the results indicate that reinsurance is associated with smaller and more highly leveraged life insurance entities, and companies with greater underwriting risk. However, contrary to predictions, it also appears that it is stocks and companies with diversified production that tend to reinsure. The risk‐bearing hypothesis thus receives only partial support.

Choice of organizational form in the life insurance industry: New Zealand evidence

Two forms of ownership structure characterize the insurance industry—the stock company owned by shareholders and the mutual form which is owned by its policyholders. The academic literature suggests that ownership structure is dependent upon the efficiency of the endogenous contracting mechanisms and governance structures in firms. Mutuals are predicted to exist and successfully compete with stock companies in insurance markets because they merge the ownership-customer functions and introduceex-ante contracting mechanisms andex-post modes of governance which restrict managerial discretion. Drawing a framework from transaction cost theory, this study tests empirically the proposition that choice of ownership structure in the life insurance industry is related to contracting mechanisms and governance structures in the firm. Individual cross-sectional logistic regression models are estimated using 1991–1993 data gathered from New Zealand's life insurance industry. Consistent with expectations our results suggest that mutuals are more likely to have higher asset specificity than stock companies. By contrast, stocks appear to be more reinsured and incur higher governance expenditures than mutual companies. Furthermore, contrary to what was hypothesized, our findings indicate that mutuals may be bigger than stock companies. Therefore, overall the empirical evidence does not support the predictions drawn from transaction cost theory.

072110 (E61, B10) Some thoughts on the development and structure of the New Zealand life insurance industry : Adams M.B., Massey University, New Zealand, Journal of the Institute of Actuaries, Vol. 121, Part III, 1994, pp. 573–588

072110 (E61, B10) Some thoughts on the development and structure of the New Zealand life insurance industry : Adams M.B., Massey University, New Zealand, Journal of the Institute of Actuaries, Vol. 121, Part III, 1994, pp. 573–588

Some thoughts on the development and structure of the New Zealand life insurance industry

AbstractThis paper seeks to explain key characteristics of the New Zealand life insurance industry, in particular the important role played by overseas-controlled mutual companies, and the dearth of regulation relative to other countries. It proposes that the dominance of mutual companies reflects the historical development of the New Zealand life insurance market. It also examines how agency theory may help to explain how the market has come to be dominated by mutual companies, and suggests that the unregulated nature of the life insurance industry may reflect the New Zealand government's historical role of direct intervention in the market through the Government Life Office. Further light on this issue is shed by the economic theory of regulation. This theory suggests that cartelisation and reinsurance may help to explain the existence of the unregulated insurance market in New Zealand. The paper concludes that many socio-economic and historical reasons may account for the distinctive features of the New Zealand life insurance industry. The possibilities are presented in this paper as a stimulus for further insurance markets-based research.

Organization Form, Residual Claimants, and Corporate Control

EUGENE FAMA and Michael Jensen's treatment of the "Separation of Ownership and Control" is both insightful and informative. It deepens our understanding of corporate control, and the analysis of residual claimants usefully extends the economics of internal organization to include partnerships, mutuals, nonprofits, and the like. The basic argument is this: specialized governance structures arise in response to the efficiency needs of each type of organization. This is an important argument and one with which I broadly concur. They couple this, however, with a strong suggestion that these structures have reached a high degree of refinement-on which account there is not now, if indeed there ever has been, an organization control problem with which scholars and others are legitimately concerned. On this point I have grave doubts. My discussion of the paper addresses three issues: What is the relation, if any, of the hierarchical organization of the firm to economic performance? What relation, if any, does residual claimant status have to the composition and character of the board of directors? And is there now or has there ever been a corporate control problem? I deal with each of these issues in order.

Economies of scale in the New Zealand life insurance industry∗

Economies of scale in the New Zealand life insurance industry∗