TITLE
"Scale and Scope Economies for Direct Writers in the Property-Liability
Insurance Industry," Journal
of Insurance Issues, Chong G. Lee, Iskander S.
Hamwi, and Farhang Niroomand. Fall 1995, Vol. XVIII, No. 2, pp.
80-97.
ABSTRACT
This paper investigates the effect of the distribution system employed by direct writers
on their cost effectiveness and market share in the property-liability insurance industry.
A generalized translog multi-product cost function is estimated in order to test for
economies of scale and economies of scope. The regression results indicate that direct
writers experience increasing returns to scale as they expand their level of output at the
mean. There is also evidence of diseconomies of scope in their auto and all other lines
combined (excluding auto and homeowners insurance). A structural test indicated that the
generalized translog cost function is a statistically significant improvement over the
Cobb-Douglas functional form which has been commonly used by other researchers. Further
research is needed to explore the welfare implications of the finding that the production
of direct writers may be characterized by increasing returns to scale.
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