The insurance distribution systems and efficiency in the property‐casualty insurance industry

Abstract

Purpose

The purpose of this paper is to investigate coexistence of multiple distribution systems in property‐casualty (P/C) insurance industry in the USA.

Design/methodology/approach

Stochastic frontier analysis is used to measure cost and revenue efficiencies of P/C insurance companies utilizing different distribution systems.

Findings

Independent agent insurers are found to be cost inefficient compared to insurers with other distribution systems, but the independent agent insurers have better revenue efficiency compared to their long counterpart, the exclusive agent insurers. This study also documents that the direct writing system provides higher cost and revenue efficiencies than other distribution systems, although their efficiencies have been deteriorating during the same time period.

Research limitations/implications

Future research could examine whether the findings change by measuring efficiencies with a non‐parametric method, i.e. data envelopment analysis.

Practical implications

A start‐up insurer should consider a direct writing system, which is most cost and revenue efficient.

Originality/value

This paper investigates efficiencies of insurers by four different distribution systems and tracks efficiency changes of insurers over 12‐year periods.

Citation

Park, J., Lee, S. and Bin Kang, H. (2009), "The insurance distribution systems and efficiency in the property‐casualty insurance industry", Managerial Finance, Vol. 35 No. 8, pp. 670-681. https://doi.org/10.1108/03074350910967213