Essays in the economics of property-liability insurance and life insurance markets

Abstract

The first part of the dissertation investigates cost experience in the US life and health insurance industry over the period 1998-2012. We generally test the difference in expenses among different distribution systems, which mainly consists of independent agency, broker, career agency, exclusive agency, and direct writing. We check to see if cost, revenue and profit efficiency differences are associated with different distribution methods. Cost, revenue, and profit efficiencies are estimated by Data Envelopment Analysis. Unlike the results in the property and liability insurance industry, the cost difference is insignificant among distribution systems. Results on cost efficiency and revenue efficiency support the market imperfection hypothesis, which says that the market imperfections such as entry barriers, price regulation, or search costs cause the coexistence of different distribution systems. The second part of the dissertation examines the relationship between mergers and acquisitions (M&As), and underwriting cycles in the P-L insurance industry. In a soft market, capital is relatively high. This leads to an increase in the number of M&A transactions and the probability that managers conduct non-value-increasing M&As. We test this proposition by analyzing the associations between volumes of M&A deals, and returns associated with M&As and underwriting cycle. The results show that the numbers of M&As are negatively related with the premium rate changes and positively related with changes in the combined ratio. We also find that the cumulative abnormal returns around the announcement date of M&As are smaller for the shareholders of insurer acquirers in a soft market. Even more, we find that the market reaction of M&As is less sensitive to agency problems in a hard market than in a soft market.