The Canadian Puzzle: Why Have the American and Canadian P/C Insurance Cost Structures Evolved Differently?

Kelly and Kleffner (2006) have documented that the structure in the Canadian P/C industry is materially different from that of the American P/C industry. As historical literature has rationalized the structure of the American P/C insurance industry, this represents a puzzle and a new explanation needs to be found. The attempt to solve the puzzle is relevant to actuarial practice as it directly impacts the business strategy of the insurer, to financial markets as it speaks to the efficient organization in the retail sector of the delivery of financial services, and to the theory of industrial organization as it speaks to the way the P/C insurance markets evolve. Using NAIC data from 1992-2010, the information on the distribution channel as documented in the A.M. Best's Aggregates and Averages for the matching period and quantile regression, the results on the structure of the American P/C insurance industry are reproduced, the rationalizations reviewed and the interpretations criticized. The P/C insurance industry is found to have been consolidating in the last two decades and this leads to the exploration of the role of economies of scale. The resolution of the puzzle finds its source in the role of economies of scale for various generic business strategies.

Keywords: Financial service industry, economies of scale, differential evolution of markets