Investment Returns of Life Insurers: Tests of Agency Theory and its Alternatives

Agency theory leads to proposals that managers of asset portfolios would not necessarily maximize net return on invested assets for any level of risk. Because investment income accounts for approximately one third of the total income of life insurers, the rate of return on invested assets can substantially affect an insurer's products and profitability. Prior research has shown systematic differences in general insurance expenses between classes of insurers, but continued viability of all classes of insurers through time. This study tests the predictions of agency theory and its alternatives concerning the investment yields of life insurers and finds offsetting differences in the investment results of these insurers. The study also finds significant economies of scale in the investment function that help explain what might otherwise appear to be an unjustified emphasis on firm growth. This study has important implications for participants in the industry, regulators, consumers and investors.