Joseph A. Fields

Expense preference behavior in mutual life insurers

The effect of alternative ownership structures, stock versus mutual, on the cost of production is studied for firms in the life insurance industry. The effect of differential incentives on the cost structure of both groups of firms is examined by means of a multiproduct cost function. This research shows that despite differences in legal form and incentives of managers, stock and mutual firms in the life insurance industry are similar in terms of the types of products sold, the average cost of production, and the form of the relationship between cost and production.

Wealth effects of regulatory reform *1: The reaction to California's proposition 103

Abstract This paper investigates the effect of Californias Proposition 103 on the market value of publicly traded property- and liability-insurance companies. The passage of this referendum on November 8, 1988 moved California from a market-oriented to a heavily regulated insurance-pricing system. During the period surrounding the election, the average stock price of insurance companies doing business in California declined by 6.91%. The decline is positively related to the proportion of a firms premiums affected by the referendum and the proportion generated in other states where insurance regulation is likely to change, and negatively related to the firms profitability.

An analysis of efficiency in the delivery of financial services: The case of life insurance agencies

Scale and scope economies are examined for life insurance agencies that distribute multiple financial products. The results of this study suggest that there are significant administrative returns to scale for firms that sell a mix of financial products. The findings for scope estimates are inconsistent, suggesting that there are positive and negative cost complementaries for pairs of products. Subadditivity can be rejected, suggesting that joint distribution of financial products is not necessarily more efficient than specialization and that different-sized agencies are not necessarily at a cost disadvantage.

An international comparison of scale economies in banking: Evidence from Turkey

In this article economies of scale are examined for Turkish banks. The literature on economies of scale in depository institutions is substantial. Yet, virtually all published articles have examined production/costs using data for developed countries, such as the United States, Canada, and Israel. Here we examine data from a country that has an economic system vastly different in terms of per capita productivity. Despite the differences, the results are similar across countries in that we find no significant evidence of economies of scale at output levels near the sample mean. This suggests that the conclusion from examining banks in developed countries—that a bank does not have to be large in order to be competitive from a cost perspective—holds in a less developed country.

Lloyd's Financial Distress and Contagion within the US Property and Liability Insurance Industry

The intra-industry effect of Lloyds financial distress on publicly traded US insurance companies is examined. Given Lloyds prominence in the international insurance industry, large losses raised questions about the industrys capacity for certain types of risks and the financial solvency of other insurers. The market value of US property-liability insurers fell significantly at the announcement. This decline is related to the firms revenues from insurance and reinsurance exposure. Results support contagion between Lloyds distress and the US insurance industry. The study raises concerns about the potential for a systematic disruption of the supply of reinsurance in the international marketplace.

An Examination of Profitability in Spatial Markets: The Case of Life Insurance Agency Locations

This article analyzes the effect of location on the profitability of life insurance agencies, where profitability is measured by the amount of output per unit of expenses. The model posits that satisficing and spatial information barriers lead to persistently profitable market niches. The results reveal significant variation over metropolitan areas in the production, cost, and profitability of life insurance field offices. Profitability is positively related to the number and size of policies and growth of the metropolitan area and negatively related to population size. Reduction of overhead via a lower number of clerical positions generally contributes to profitability. Because of information barriers, specific niches exist for agencies so that it is worthwhile for firms to invest in a systematic analysis of locational and demographic factors when planning distribution systems.

Coupon Resets Versus Poison Puts: The Valuation of Event Risk Provisions in Corporate Debt

Abstract This paper examines the valuation of the two major types of event risk indenture provisions, poison puts and coupon resets, on the debt of industrial companies. In contrast with earlier work by Crabbe (1991), we find that protection provided by poison put type of covenants is not valued by investors. The inclusion of coupon reset provisions, however, lowers the yield spread of new issued industrial bonds by 32 basis points. The yields on bonds with low credit quality ratings are reduced by including coupon reset provisions in the bond indentures.

Informational Asymmetries in Retroactive Insurance: Authors' Reply

We would like to thank Professors Smith and Witt (S-W) for their interesting commentary on our work. We concur with S-W that the ideas presented in our article [5] concerning the importance of information and transaction costs tend to reinforce rather than contradict, the tax arbitrage argument presented in their earlier article [3]. The main difference is with regards to estimates of the size of the alternative effects. The difference on this point is substantial and we feel that the arguments made in the S-W comment are not valid criticisms for a number of reasons that we outline in this reply. The primary difference between the parties is in determining whether tax arbitrage provides sufficient incentive to undertake the transaction. The two parties S-W and Venezian and Fields (V-F) disagree as to what assumptions are appropriate in determining the economic feasibility of the contract. To determine which argument is correct it is necessary to examine the assumptions made by both parties to see which set is most likely to produce an accurate prediction. S-W argue that tax arbitrage is sufficient while V-F argue that under a set of assumptions typical for the industry during the period of time that the MGM fire occurred tax arbitrage alone does not provide enough incentive for the transaction. Since the time of the MGM fire the Tax Reform Act of 1986 (TRA-86) has substantially changed the incentives for retroactive coverages. Even if tax arbitrage was relevant under the prior code it clearly is not significant enough to warrant the use of retroactive policies under the current act. The discussion below will examine the situation both pre and post the TRA-86, although failure of the tax arbitrage argument under the previous code also implies its failure under the current code. Several assumptions are necessary in estimating the return from tax