nr 047 - An Exploration into Competition and Efficiency in the Dutch Life Insurance Industry

DNB Working Papers
Date 22 July 2005

The lack of available prices in the Dutch life insurance industry makes competition an elusive concept that defies direct observation. Therefore, this paper investigates competition by analysing several factors which may affect the competitive nature of a market and various indirect measurement approaches. After discussing various supply and demand factors whic h may constitute a so-called tight oligopoly, we establish the existence of scale economies and the importance of cost Xinefficiency, since severe competition would force firms to exploit available scale economies and to reduce X-inefficiencies. Both scale economies and X-inefficiencies turn out to be substantial, although more or less comparable to those found for insurers in other countries and to other financial institutions. Further, we apply the Boone indicator, a novel approach to measuring the effects of competition. This indicator points to limited competition in comparison to other sectors in the Netherlands. Further investigations of submarkets should reveal where policy measures in order to promote competition might be appropriate. JEL Classification: D4, D61, G22, L1. Key words: Life insurance, market structure, concentration, competition, scale economies, X-inefficiency, profit margins, Boone indicator, translog cost functions, stochastic cost frontier approach.