Abstract

In the insurance industry, claims tend to constitute the major proportion of total annual outgoings across almost all product lines. This study develops a cost function of insurance claims and applies the model to 1988–93 data from the United Kingdom and New Zealand life insurance industries. We find a similar set of results for the two countries. In general, the results support the hypothesis that larger life insurance firms on average face bigger claims-to-premium ratios than smaller life insurance firms. The evidence concerning the relationships between claims and the composition of output and between claims and the degree of reinsurance is mixed, but there is clear support for the view that stock firms have a less severe claims experience than mutuals. We conclude that the model provides intuitive insights into the determinants of insurance claims, which could help to stimulate and direct further research.