Measuring cost inefficiency in the UK life insurance industry

Abstract

To identify likely gainers and losers and to examine the effects of increasing competition on the structure of the UK life insurance industry, the cost inefficiency of UK life insurance companies is analysed. A flexible stochastic cost frontier is estimated for the industry using a sample of 54 companies over five years. The estimated frontier is then used to compute measures of ‘economic’, ‘scale’ and ‘total’ inefficiency for different company size groups. The results show that, on average, larger life insurance companies are less inefficient than smaller companies, but there are substantial variations in the degree of inefficiency within size groups.

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