An empirical investigation of market structure, efficiency, and performance in property-liability insurance

This study examines the relationships among market structure and performance in property-liability insurers over the period 1992-1998 using data at the company and group levels. Three specific hypotheses are tested: traditional structure-conduct-performance, relative market power, and efficient structure (ES). The results provide support for the ES hypothesis. The ES hypothesis posits that more efficient firms can charge lower prices than competitors, enabling them to capture larger market shares and economic rents, leading to increased concentration. Both revenue and cost efficiency are used in the analysis, and this is the first study to use revenue efficiency in this type of analysis. The results for the sample period as a whole and by year are consistent. The overall results suggest that cost-efficient firms charge lower prices and earn higher profits, in conformance with the ES hypothesis. On the other hand, prices and profits are found to be higher for revenue-efficient firms. Revenue X-efficiency is derived from activities such as cross-selling and may rely heavily on the use of detailed information from customer databases to identify potential customers. The implications of this research are that regulators should be more concerned with efficiency (both cost and revenue) rather than the market power that arises from the consolidation activity taking place in insurance.