Efficiency in the UK life insurance industry: Mutual firms versus proprietary firms
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Stephen Letza holds the chair in Corporate Governance at Leeds Metropolitan University. His research interests are in corporate governance and performance measurement in financial institutions. He has directed several large research studies in these areas.
Philip Hardwick holds the Chair of Financial Services at Bournemouth University. His main research interests focus on the econometric estimation of cost and production functions in financial services, and on the analysis of economies of scale and scope and cost efficiency. He has led a number of major research and consultancy projects, including a recent study of the international competitiveness of the UK insurance industry (sponsored by the Association of British Insurers).
Tadeusz Kowalski is Director of the MBA programme at the University of Economics, Poznan, Poland. His main research interests relate to economics and finance with an emphasis on emerging Central European countries. He has acted as adviser and consultant to many financial institutions.
Abstract The paper discusses the main tenets of stakeholder theory and agency theory and goes on to analyse the relative performance of a sample of 100 mutual and proprietary life insurance companies in the UK during the period 1992–1996. The paper concludes that there is weak evidence to support the contention that mutual life insurers are relatively more cost efficient than proprietary insurers. Mutual companies in the sample perform well relative to proprietary companies in terms of annual surpluses and expenses ratios. There is also evidence that fund managers in mutual companies perform at least as well on average as those in proprietary companies. Keywords Cost efficiency, life insurance, mutual, ownership structure, proprietary, stakeholding
INTRODUCTION
Steve Letza Centre for Director Education, Leeds Business School, Leeds Metropolitan University, Bronte Hall, Beckett Park, Leeds LS6 3QS, UK. Tel: +44 (0)113 283 1744; Fax: +44 (0)113 283 7551; e-mail: [email protected]
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The structure of the UK life insurance industry is characterised by two main forms of ownership, that is proprietary, commonly referred to as ‘stocks’, and mutual companies. Stocks are companies owned by shareholders, usually but not always quoted on a stock exchange, and are, therefore, constrained by the requirement, applicable to all shareholder owned companies, of maximising
Journal of Financial Services Marketing
Vol. 6, 1, 40–49
shareholder wealth. Mutual companies are owned by the fundholders, the customers of the company. The debate on efficiency in the life insurance industry must, therefore, be conducted in the context of an understanding of the relative stakeholdings and ownership underpinning both types of companies. The paper will present the findings of an exploratory empirical study that compares the relative performance of the two organisational forms. While the paper is
# Henry Stewart Publications 1363-0539 (2001)
Efficiency in the UK life insurance industry: Mutual firms versus proprietary firms
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