Financial Intermediary Versus Production Approach to Efficiency of Marketing Distribution Systems and Organizational Structure of Insurance Companies |
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| Authors: | Patrick L. Brockett William W. Cooper Linda L. Golden John J. Rousseau Yuying Wang |
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| Affiliation: | Patrick L. Brockett, William W. Cooper, Linda L. Golden, and John J. Rousseau are at the University of Texas at Austin. The authors can be contacted via e-mail: , , , . Yuying Wang is at the Department of Information Technology, American Airlines Headquarters. The author can be contacted via e-mail: . Support for this research by the IC2 Institute and the Program for Risk Management and Insurance at the University of Texas at Austin is gratefully acknowledged. We thank Dr. Honghui Deng for performing the RAM model computations concerning the production approach to efficiency. |
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| Abstract: | An examination of the efficiency of the marketing distribution channel and organizational structure for insurance companies is presented from a framework that views the insurer as a financial intermediary rather than as a “production entity” which produces “value added” through loss payments. Within this financial intermediary approach, solvency can be a primary concern for regulators of insurance companies, claims‐paying ability can be a primary concern for policyholders, and return on investment can be a primary concern for investors. These three variables (solvency, financial return, and claims‐paying ability) are considered as outputs of the insurance firm. The financial intermediary approach acknowledges that interests potentially conflict, and the strategic decision makers for the firm must balance one concern versus another when managing the insurance company. Accordingly, we investigate the efficiency of insurance companies using data envelopment analysis (DEA) having as insurer output an appropriately selected (for the firm under investigation) combination of solvency, claims‐paying ability, and return on investment as outputs. These efficiency evaluations are further examined to study stock versus mutual form of organizational structure and agency versus direct marketing arrangements, which are examined separately and in combination. Comparisons with the “value‐added” or “production” approach to insurer efficiency are presented. A new DEA approach and interpretation is also presented. |
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