Efficiency and Competitiveness in the U.S. Life Insurance Industry: Corporate, Product, and Distribution Strategies

Abstract

The U.S. life insurance industry is facing increasing competition from alternative financial services providers, including banks, mutual funds, and investment firms, as well as from international competition.¹ Insurers traditionally have been sheltered from price competition that has resulted in low average efficiency and a wide dispersion in efficiency among firms in the industry. Although increased competition has resulted in improvements in overall efficiency during the past decade, many firms are still operating at levels of inefficiency that will be unsustainable in the long run. Firms that fail to improve are likely to face declining sales and downward pressure on profit margins, leading to their eventual exit from the market either through merger, insolvency, or voluntary withdrawal. Even firms that are successful in one area, such as in minimizing costs, may be less successful in attaining other objectives, such as maximizing revenues. Thus, the vast majority of firms in the industry can benefit from improvements in their operations; and even the leading firms must continually seek to innovate to maintain their leadership positions.