Changes in the Life Insurance Industry

by Cummins, J. David; Santomero, Anthony M.

• ISBN13: 9780792385356
• ISBN10: 0792385357
• Format: Hardcover
• Copyright: 1999-11-01
• Publisher: Kluwer Academic Pub

Summary

Major challenges for life insurance companies have been posed by an unprecedented wave of mergers and acquisitions in the insurance industry and the emergence of non-traditional competitors such as banks, mutual fund companies and investment advisory firms. This is the first book to analyze the determinants of firm performance in the life insurance industry by identifying the 'best practices' employed by leading insurers to succeed in this dynamic business environment. The book draws upon data from insurer financial statements as well as upon an extensive survey of life insurer management practices and strategic choices in distribution systems, information technology, mergers and acquisitions, human resources and financial strategies. Generic strategies such as cost leadership, customer focus, and product differentiation are analyzed as well as strategic practices specific to the insurance industry. Best practices are identified by measuring the economic efficiency of insurers and by comparing firms across the industry. Both cost and revenue efficiency are measured relative to best practice efficient frontiers consisting of the industry's dominant life insurance firms. Economies of scale and the effects of mergers and acquisitions on efficiency are also analyzed. Financial strategies are examined with specific reference to pricing policy, valuation of assets and liabilities, and the current state of firm-level risk management systems. The benchmarks established are the result of extensive fieldwork that identifies key financial risks and methodologies to both measure and manage them at the firm level. The results discussed in the book indicate that firm performance is significantly correlated with management practices and strategic choices. Thus, life insurers can improve profitability by adopting optimal combinations of strategies. The book contains important new material on the effects of strategic choices in product distribution systems, information technology, mergers and acquisitions, human resources, and financial risk management policies. In the area of efficiency, the methodology provides a new approach for identifying peer groups of insurers and measuring the performance of individual insurers relative to their peer group. On the topics of risk and pricing, new insights are offered relative to current methodologies and in regard to areas where improvement is clearly warranted. The book concludes with an analysis of the future opportunities and challenges in the life insurance industry facing managers, and the strategic options available to them to cope with these changes.

Author Biography

David F. Babbel is professor of insurance and finance at the Wharton School Peter Cappelli is a professor of management at the Wharton School and director of the Center for Human Resources, University of Pennsylvania Roderick M. Carr has been the deputy governor of the Reserve Bank of New Zealand since July 1998 J. David Cummins is the Harry J. Loman Professor of Insurance and Risk Management at the Wharton School of the University of Pennsylvania and Executive Director of the S.S. Huebner Foundation for Insurance Education Lorin M. Hitt is assistant professor of operations and information management at the Wharton School, University of Pennsylvania. Craig Merrill is an assistant professor of finance and the Grant Taggart Fellow of Insurance and Risk management at the Marriott School of Management at Brigham Young University. James F. Moore is a senior research fellow with the Wharton Financial Institutions Center Laureen Regan is an assistant professor in the department of risk management and insurance at the Fox School of Business in Temple University Anthony M. Santomero is the Richard K. Mellon professor of finance and the director of the Financial Institutions Center at the Wharton School of the University of Pennsylvania Sharon Tennyson is associate professor of policy analysis and management at Cornell University Michael R. Tuohy is managing director of Tillinghast Towers-Perrin.

Table of Contents

Contributing Authors	vii
Life Insurance: The State of the Industry	1	(18)
Anthony M. Santomero
The Industry Speaks: Results of the WFIC Insurance Survey	19	(56)
James F. Moore
Anthony M. Santomero
Efficiency in the U.S. Life Insurance Industry: Are Insurers Minimizing Costs and Maximizing Revenues?	75	(42)
J. David Cummins
Efficiency and Competitiveness in the U.S. Life Insurance Industry: Corporate, Product, and Distribution Strategies	117	(42)
Roderick M. Carr
J. David Cummins
Laureen Regan
Life Insurance Mergers and Acquisitions	159	(28)
J. David Cummins
Sharon Tennyson Mary A. Weiss
Strategy, Human Resource Management, and the Performance of Life Insurance Firms	187	(24)
Clint Chadwick
Peter Cappelli
The Impact of the Information Technology Management Practices on the Performance of Life Insurance Companies	211	(34)
Lorin M. Hitt
Toward a Unified Valuation Model for Life Insurers	245	(34)
David F. Babbel
Craig Merrill
An Analysis of the Financial Risk Management Process Used by Life Insurers	279	(48)
David F. Babbel
Anthony M. Santomero
Challenges and Issues for Growth in the Life Industry	327	(32)
Michael R. Tuohy
Index	359