Structure of Life Insurance Industry

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The Industrial Organization of the U.S. Life Insurance Industry: Issues and Analysis in the Structure of the Industry

Martin F. Grace (mgrace@gsu.edu ) Robert W. Klein (rwklein@gsu.edu )

Center for Risk Management and Insurance Research Robinson College of Business Georgia State University PO Box 4036 Atlanta, GA 30302-4036 404-651-4250 Please do not attribute or quote without permission.

The Industrial Organization of the U.S. Life Insurance Industry: Issues and Analysis in the Structure of the Industry I. Introduction

The literature on the industrial organization and regulation of the life insurance industry is sparse relative to the property-casualty literature (see e.g., Dionne and Harrington (1992)). While a number of articles examine certain aspects of life insurance markets, there is no foundation literature that establishes a set of critical springboard questions regarding the organization and regulation of the U.S. life industry.1 This paper is the start of a multiple paper project that will examine the industrial organization of the life insurance industry and how it is evolving in response to changes in the economy and competitive threats from other financial institutions. Our work will begin with applying the standard conduct-structure-performance (CSP) paradigm to the life insurance industry. Although quite useful, CSP does not necessarily cover all of the potential issues in the industrial organization of the industry. We will attempt to bring in issues from the new industrial organization literature on contestability and transactions costs where appropriate to supplement or complement the CSP paradigm. The paper is organized as follows. First, we briefly examine data regarding the consumption of life insurance and associated products. Second, we will focus on one structural aspect of the life insurance industry: Entry and, its complement, Exit. Entry and Exit are interesting to examine given the financial services legal reforms that will ultimately occur. Thus, this paper will provide some background and preliminary analysis regarding entry and exit in the life insurance industry and the related financial services industries.

II

The Life Insurance Consumer Market: Basic Conditions

Before getting to the entry and exist aspect of the structure of the life insurance industry, we need to focus on the conditions the market faces. These are environmental demand and supply conditions. Who Buys Life Insurance?

The consumer base for the life insurance industry is those who desire to provide their beneficiaries income replacement due to premature death (Yarri (1965), Pissarides (1980), those who desire to insure for bequest related reasons, (Lewis 1989) and those

1

Joskow (1973) provided such a foundation for the property-casualty insurance industry that led to a number of subsequent articles on the industry’s structure, performance and regulation. Recent articles in this vein include Cummins and Weiss (1992) and Klein (1995).

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who might use life insurance for its tax reduction characteristics (Black and Skipper (1995) and IRC § 101(a)1). Recent statistics show that the average amount of life insurance coverage per insured household was $165,800 which equals about 34 months of disposable personal income for the average insured household (ACLI, 1998). If we look at the number of policies, the majority of purchases (58 percent) were made by those with incomes between $10,000 and $40,000. However, this group purchased (in terms of face amounts) 34 percent of the insurance sold. Only 13 percent of life insurance purchasers had incomes over $75,000. However, this group purchased 37 percent of the insurance in terms of face amount. (ACLI, 1998). In terms of gender, males purchase 65 percent of the face amount but only 44 percent of the policies. Females have increased both the percent of policies purchased and the percent of the fact amount over the last ten years. In terms of age, most...
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