Claims' estimation in multiproduct life insurance firms: preliminary United Kingdom results

Abstract

In the insurance industry, claims tend to constitute the major proportion of the total annual outgoings across almost all product lines. This preliminary study develops a cost function of insurance claims and applies the model to 1988–93 data from the UK life insurance industry. In general, the results support the hypothesis that larger life insurance firms on average face bigger claims-to-premium ratios than smaller firms. There is also evidence of a positive relationship between claims and the degree of specialization in the provision of life insurance products. Finally, 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.