Returns to Scale in the Life Insurance Industry

Abstract

In this paper the long-run cost curve for the Canadian life insurance industry is estimated with an output measure consisting of a weighted sum of activities. It is shown that previous studies of returns to scale in life insurance used biased proxies for output which led to exaggerated estimates of the degree of returns to scale. Statistically significant (but not economically significant) returns to scale appear to exist in the Canadian industry, but the evidence is not conclusive.