Explanations of Internationalization Strategies

Perspectives on internationalization strategies are varied ^{Footnote 10} ; however, there are themes running through the debate that highlight the essential issues. Three common threads have emerged in the debate, and they revolve around the concepts of ownership, internalization, and location. Firms venture overseas if they are able to exploit advantages they may have in relation to the ownership of resources. The manner in which they may do so depends on the extent to which they can minimize transaction costs, either through direct foreign investment (FDI; internalization) or the licensing of production. Alternatively, a firm may identify and use location-specific resources that allow for comparative cost reduction. ^{Footnote 11} Dunning’s eclectic paradigm draws these explanations together to form an intuitive framework that explains the motivations for FDI. Ownership, location, and internalization (OLI) are all-important elements in the decision to move offshore. ^{Footnote 12}

This article looks at the issue from a different perspective. It uses these concepts to evaluate the performance of FDI by American life insurance companies in the Australian market in the late nineteenth century.

The eclectic model provides a useful toolbox to apply to analyzing the issues that impacted the performance of the Big Three life insurers in Australia. OLI played a role in determining outcomes for these companies. The OLI paradigm suggests that a successful internationalization strategy requires a firm to have varying degrees of advantage in respect to the ownership of resources, the location of production, and the method used to produce. Organizational capability is a driver; it influences the mode of entry, scope of ownership advantage, and extent to which location-specific advantages can be realized. It is argued that while other impediments to success may have existed, OLI factors were critical in determining the ability of American insurers to integrate into the Australian market.

Dunning refers to three types of ownership advantage: the exploitation of monopoly power allowing the creation of barriers to entry, the possession of resources and capabilities that allow greater technical efficiency, and the competencies of managers to manage business abroad more effectively than their competitors. ^{Footnote 13} Location advantages represent a wide range of factors that encourage the potential for a firm to complement its core competencies. As well as natural resources, they may include business and institutional factors that enable a firm to compete effectively in an overseas market. ^{Footnote 14} Internalization refers to the choice of production method. A firm may elect to provide the product in a number of ways, for example, through licensing agreements, joint ventures, or own production. The choice may be based on any number of theoretical underpinnings, including the transaction cost argument, agency theory, efficiency, and market power explanations. ^{Footnote 15}

The focus of the eclectic model has been on the manufacturing sector. In this respect, the ownership of physical resources has been seen as an important consideration. The application of this approach to the services sector has been the subject of debate. Johanson and Vahlne, for example, have questioned its usefulness in respect to the service sector. ^{Footnote 16} Other research has concluded that the principles provide a good foundation for understanding the internationalization of services. ^{Footnote 17} In respect to the insurance industry, Katrishen and Scordis found that theoretical explanations of the behavior of multinational firms do have some validity. ^{Footnote 18}

Notwithstanding these findings, it is clear that the characteristics of ownership, location, and internalization are not a perfect fit for service industries. The issue reflects the problems associated with applying a standardized paradigm across a spectrum of industries. Recent debate has called for revision of OLI concepts to take greater account of firm-specific advantages. ^{Footnote 19} Da Silva Lopes suggests that the ownership advantage should be divided into three types: general, firm-specific, and product-specific. General advantage refers to specific country advantages. Utilizing a Chandlerian framework, firm-specific advantage is defined as those generic across products and focuses on management capabilities of the firm. Product advantage takes into account the capacity to successfully differentiate products. ^{Footnote 20} Da Silva Lopes concludes that, over time, firm-specific advantages are key to explaining successful internationalization. ^{Footnote 21} Lunden also feels that the typology of ownership advantage is useful, yet also argues that different types of advantages will exist for different firms. Three different types of ownership advantages can be identified: tangible/intangible assets advantages, scale and scope advantages, and institutional advantages. The last has a focus on the ability of management to adapt corporate norms and cultures to diverse settings. ^{Footnote 22}

It is also recognized that there are other possible factors that may play roles on international expansion plans, including influence of push factors (such as domestic competitive and regulatory pressures) and pull factors (such as income differentials and differences in rates of return). While these pressures may encourage a move offshore, they do not necessarily account for the success (or otherwise) of the strategy. Instead, it could be argued that the more significant driver is the management capabilities of a firm to take advantage of national differences.

The Development of Australian and U.S. Life Insurance Markets in Mid-Nineteenth Century

At the time that American companies first signaled their interest in Australia, life insurance was a comparatively young but growing market. There were two key influences on the structure and development of the Australian life insurance market in the nineteenth century. The first was the market failure of early insurance companies, which were predominantly stock companies. These companies were generally established by operators with little experience or capital assets. The market was notoriously unstable, and was all but wiped out during a sharp economic contraction in the 1840s. ^{Footnote 23}

It could be argued that failure of stock companies was due to a mismatch between organizational form and product fit. Evidence provided by the experience in other countries suggests that this could be a factor. Lilljegren and Andersson examine the impact of organizational structure on risk-taking in the Swedish property insurance market. They find that mutual structures are more successful in managing underwriting in more homogeneous risk pools, such as fire and marine. They were less adept in the more variable vehicle and property insurance markets, in which stock companies performed better. ^{Footnote 24} Likewise, Adams and colleagues show that both mutual and stock companies operated successfully in the Swedish fire market between 1903 and 1939 because they specialized in different segments of the market. ^{Footnote 25} A lack of financial data makes it difficult to substantiate the impact of organizational form on the performance of early Australian life insurers. Despite this, Blair argues that there is some evidence to suggest that stock companies were more successful in term insurance than life insurance because it was a better organizational fit. ^{Footnote 26}

The first mutual life insurer was established in 1849, although the real expansion in the number of offices did not occur for another decade. The growth in the market mirrored what was happening in the wider economy. It was not until the 1860s that colonial economies began to graduate beyond a complete reliance on the primary sector. Leveraging off the wealth generated by the gold rushes of the 1850s, the colonies entered a phase of economic expansion. Industrialization and urbanization supported a growing population, the majority of which were located in key urban centers, including Sydney and Melbourne. ^{Footnote 27} Growth in income per capita ^{Footnote 28} reflected the rise of an aspirational middle class. It was this cohort of the population that drove the growing demand for life insurance products. ^{Footnote 29} From 1869 and for the next decade, the market expanded considerably both in terms of the number of firms and the number of policies sold.

The second influence on development was the predominance of mutual structures in the industry. Between 1869 and 1885, ten mutual companies were established, mostly from 1869 to 1872. ^{Footnote 30} A limited number of stock companies also opened their doors for business, but they failed to flourish. ^{Footnote 31} Mutuals were dominant in the life insurance market. The explanation for this lies not just in the economic context of market failure, such as that put forward by Hansmann, ^{Footnote 32} but also in a sociological context. Johnston Birchall argues that mutualism was embedded in the social culture of collective responsibility. ^{Footnote 33} In this respect, Australian mutuals in the nineteenth century were a reflection of a broader self-help ethos that combined with contemporary religious and moral doctrines. The success of Australian mutual life insurers at this time was due both to the business model adopted and because it struck a chord with the emerging Australian identity as the economy and society transformed and moved away from its settler origins. ^{Footnote 34}

Table 1 indicates the state of the market in 1885, and that the major player was Australian Mutual Provident (AMP). Other firms were much smaller, both in terms of assets and new premium income. The pattern of development is unusual in the sense that, for nearly two decades, AMP was effectively the sole supplier. This allowed it to establish a strong brand loyalty, which was reflected in its share of the market. The development of the industry starting in 1869, and preference for mutual structures, is evidenced with the number of new offices. Although other organizations did not match the size of AMP at this stage, they were young and energetically pursuing growth.

Another feature of the Australian life insurance market was the almost total lack of overseas competition. Unlike in the fire insurance market in which British firms dominated, in life insurance there was virtually no international presence to speak of. Although some British companies advertised in local directories from time to time, there is little evidence of any business conducted by them. ^{Footnote 35} It was against this backdrop that the Big Three American insurers set up shop in the 1880s.

Similarities in the historical patterns of growth in life insurance are evident in Australia and the United States. In respect to the American story, two turning points are important to understanding the background leading to the establishment of these life insurance offices in Australia. The first was in the 1840s, when mutual organizations came to prominence. The second was in the 1870s, when a slowdown in growth and a rationalization of the industry occurred. As was the case in Australia, it was an economic downturn leading to the demise of a number of stock companies that facilitated the emergence of mutual insurers. In 1841 there were three mutuals in existence. Over the next decade, this number expanded to eighteen. ^{Footnote 36} Keller writes that mutualization was the “ideal solution” because it required little initial capital and spread risk and reward among members. ^{Footnote 37} The Big Three were established at this time: Mutual Life in 1842, New York Life in 1843, and Equitable in 1859.

Another period of influence was the decade of the 1870s, which was associated with an industry rationalization that saw the number of firms in operation halve. ^{Footnote 38} Murphy argues that with a downturn in sales in 1870, the market experienced a “catastrophic collapse, which marked the end of the first major era in the history of life insurance.” ^{Footnote 39} The corporate structures that emerged in the following decade encouraged the development of a very different market going forward.

In the wake of the ensuing industry reorganization, the market became more concentrated. By 1881 the Big Three accounted for 40 percent of the value of insurance in force. ^{Footnote 40} There was a clear distinction between these firms and the older, more established survivors. Led by men such as Henry Hyde, of Equitable, a more entrepreneurial and at times ruthless approach to business was adopted. This was manifest in the types of products sold, the way they were sold, and the manner in which the newer breed of firms established and protected market share. ^{Footnote 41}

Innovations in the types of insurance products sold contributed to the transformation of the market. Tontine insurance, first introduced by Equitable in 1868, became the signature product. The tontine was a deferred dividend product that divided the final payout of a life insurance policy between its face value and the accumulated surplus from the investment of premium income paid. The type of tontine insurance sold by American insurers at this time had lengthy dates to maturity, often between ten and twenty years. It represented a pool of funds that only surviving members had full access to. For policyholders who died before the maturity of the policy, their beneficiaries only received its face value. Likewise, policyholders whose premiums had lapsed received nothing or only a small part of their outlay. Those who continued to contribute for the duration of the tontine received the face value of their policy plus its dividend income and a share of the dividend pool created as other members dropped out. This type of policy had a number of advantages for the insurer over the more traditional annual dividend policy, which older and more conservative companies sold. North argues that the tontine was a major source of capital accumulation. Regular premiums invested over an extended period of time provided a steady stream of capital growth. This was reinforced by the sales method adopted and also high policy lapse rates over the life of the product. ^{Footnote 42}

The platform used to build business in domestic markets was adopted overseas. Expansion into Western European markets was followed by ventures in Britain, Russia, Latin America, the Far East, and the Antipodes. Tapping into the emerging needs of the middle classes in industrializing countries, they were able to replicate their success at home. ^{Footnote 43} These companies were more successful in Europe than other parts of the globe. In this respect, it was marketing technology that provided an advantage. Many European markets were driven by “outworn tradition” characterized by bureaucratic and inefficient sales systems. ^{Footnote 44} In other countries, American companies encountered hostility not only from local competitors but also from governments. Regulatory restrictions and other business difficulties, even in neighboring countries such as Canada, made for what Keller has described as “unsatisfying ventures.” ^{Footnote 45}

The Big Three in Australia

The arrival of the Americans was heralded by the local financial press, confident of the superiority of local companies, stating “not one but two have at length mustered sufficient courage to make the attempt.” ^{Footnote 46} U.S. companies commenced with a publicity campaign the like of which had not been witnessed in the colonies. It boasted of the competence and international success of these companies and the attractiveness of the particular type of insurance they sold. Equitable championed itself as “the pioneer in all reforms which have made American life assurance famous throughout the world.” It disingenuously touted itself as a mutual company by virtue of the statement that it “originated all reforms and improvements in that living, active, efficient system.” ^{Footnote 47} Mutual of New York advertised that it was the “Largest Life Insurance Company in the World,” and New York Life Insurance claimed that “all profits belong to policy holders.” ^{Footnote 48}

Although two of the three American companies proclaimed mutual life insurance status, their governance structures were very different from that of their Australian counterparts. Australian mutuals were strictly governed by by-laws that mandated specific codes of conduct that could not be altered without policyholder approval. Boards of directors were limited to between five and seven members. The term of directors was also limited: after a specified period, they were required to retire and stand for reelection. In the case of AMP, two directors were retired annually, with one being eligible for reelection. ^{Footnote 49} In the case of National Mutual, a revolving calendar saw the existing cohort of directors replaced every three years. At Temperance and General, two directors retired every year. ^{Footnote 50} In addition, the conduct of the business was also prescribed. Policy proposals had to be approved by the board of directors before acceptance. Risky applications were rejected on a regular basis. The investment of funds was also regulated and restricted to mortgages, government securities, loans to policyholders, and office premises for use by the organization.

Governance structures of U.S. companies were more complex. Douglass North outlined the typical structure characteristic of the Big Three. ^{Footnote 51} He distinguished between the formal and informal organization. Formally, corporate power rested with a board of trustees, elected by the respective stakeholders. ^{Footnote 52} The management structure was much larger than Australian firms with respect to the board of trustees. In the case of Mutual Life, which North took as typical, there were thirty-six trustees. These trustees held the nominal corporate power and were assisted by six standing committees and an executive committee consisting of a company president, two vice presidents, a general manager, and treasurer. ^{Footnote 53} The degree to which stakeholders had influence over the organization was limited. North argues that the election process was a “purely formal device” to satisfy regulatory requirements. ^{Footnote 54} In practice, the voting system did not encourage voter response and could be easily usurped by the use of proxy votes held by key executives. ^{Footnote 55} Over time, the Big Three developed reputations as “one man companies,” with executive power being informally vested in each organization’s president: Hyde, of Equitable; McCall, of New York Life; and McCurdy, of Mutual Life. ^{Footnote 56} The influence of these men extended throughout the executive structure, which allowed them to modify by-laws and governance codes to suit their own agendas. The spread of nepotism was apparent in all companies, with close family connections being appointed to positions of authority and sons succeeding fathers in key roles. ^{Footnote 57}

Such practices encouraged the spread of arrangements that took insurers outside their formal codes of practice. In relation to the investment of funds, this led to growing links with investment banks. This alliance influenced the direction of the investment of funds and resulted in a complex web of financial transactions. ^{Footnote 58} Unlike the conservative approach of Australian life offices, the structure of these arrangements made the American companies less transparent and accountable to stakeholders. The management of the large American insurers and the power wielded by their executives was very different to that of Australian offices. It was an issue that local companies were quick to pick up on and draw attention to, particularly in respect to their commitment to Australian policyholders. ^{Footnote 59}

Despite the fanfare that accompanied the entrance of American insurers, progress in building market share was slow. The snapshot in Table 2 gives an indication of the relative share of policies in force. ^{Footnote 60} After a decade in business for Equitable and New York Life, and six years for Mutual Life, they were still among the smaller businesses in the market. The Australian market, however, was only a fraction of their wider international commitment. Premium income for New York Life in 1895 was worth in excess of USD 10 million, for Equitable it was over USD 9 million, and Mutual Life approached USD 5 million. ^{Footnote 61}

The outcome of the efforts of the Big Three to build a market presence in the Australian colonies can be understood in terms of the OLI paradigm. Essentially, the American companies did not have the skill sets, locational advantage, or organizational capabilities to successfully grow their business in the Australian colonies to the extent envisaged. Table 3 summarizes the results in terms of the extent of advantage that these firms had over those in the host market.

Ownership advantage relates to the unique or competitive advantages the new entrant may have over those already operating in the market. ^{Footnote 62} These advantages may take a variety of forms but relate intrinsically to the capabilities of the firm to exploit the attributes of the new market. Advantages can include market power, resource ownership, and strategic or entrepreneurial skills. American companies possessed limited ownership advantages. The major Australian mutuals were well-established and firmly entrenched. American firms had no monopoly power in this market and were unlikely to acquire it. As Table 1 indicated, the Australian life insurance market was highly concentrated. In 1885 the top three firms accounted for 81.3 percent of industry assets and 64.2 percent of new business. ^{Footnote 63} The three largest domestic life insurance offices made use of their first-mover advantage to capture a broad and very loyal consumer base. The approach taken by the management of these institutions was unambiguously conservative. They erred on the side of caution in the acquisition of new business, the investment of funds, and the conduct of their executives. In contrast, American companies were viewed as flamboyant risk-takers with little or no allegiance to local policyholders. ^{Footnote 64}

Undermining the efforts of the Big Three to build market share in the colonies was a long standing war of words between the American companies and the larger Australian mutuals, in particular AMP. The “pamphlet wars,” as they were known, spanned two decades of often-vitriolic diatribe directed at discrediting the claims of one company or another. Deploring the state of affairs encountered, Equitable, in its Australian prospectus, claimed: “It is no exaggeration to say that no other Life Insurance Company has ever been assailed so widely or violently.” ^{Footnote 65}

Not only were American insurers unable to establish market power but they also encountered a degree of antagonism, the like of which they had not seen before. The diversion of resources to counter this opposition created further difficulties for the Americans, who retaliated in equal measure. Every aspect of business was attacked by both parties, and claims and counter claims colored what was a very acrimonious relationship between local firms and their American counterparts. ^{Footnote 66}

The longevity of the pamphlets wars and the bitterness they engendered highlighted the difficulties associated with international expansion. In this regard, American companies suffered from a liability of foreignness. The constraints to success lay in the parochial nature of the local market and the loyalties of its customer base.

A further impediment to the expansion of American life insurers was the already innovative nature of products available in the Australian market. In this respect, the American companies did not have the advantage they had found in other countries, such as Britain and many European states.

In Australia, the new arrivals had to compete with products, which, by world standards, were considered very liberal. Competition among local insurers in the 1870s encouraged a number of product developments that eased restrictions on policy conditions. Early life insurance policies had laid down strict conditions covering things like place of residence, employment, and travel. In 1875 Mutual Life Association began to offer policies with no restrictions on residence, occupation, or habits. Other insurers followed suit in quick succession.

Further reforms included the introduction of the principle of nonforfeiture. The National Mutual Life Association claimed to be the first in the world to make this concession. ^{Footnote 67} Previously, a lapse in premium payment voided a life insurance policy. The nonforfeiture system allowed for the continuation of the policy in the absence of payment for as long as its available surrender value. AMP followed suit, listing eight areas of policy in 1875. These included the lifting of limitations on death by suicide, dueling, or at the “hands of justice.” ^{Footnote 68} A further measure taken to expand the attractiveness of life insurance was the introduction of loans to policyholders. National Mutual introduced loans on policies in 1871. It was in widespread use by the mid-1870s. Endowment insurance was another type of insurance that underwent an exponential growth in demand in the latter part of the nineteenth century. By the turn of the century, it represented more than half the number of policies in existence and around 40 percent of the total amount insured. ^{Footnote 69}

The liberality of Australian life insurance policies was not something American insurers had experienced in other markets. To gain a foothold, they too had to make similar concessions. A further complication was the notable absence of tontine insurance products in colonial markets. This was a product little understood and, in order to market it, the Big Three had to educate consumers on its principles. In this task, they encountered fierce opposition from local companies that campaigned vigorously against this form of insurance. ^{Footnote 70} Resistance to the product’s uptake was heightened by claims widely promoted in the press that it was little more than a form of gambling. ^{Footnote 71}

An area in which the U.S. companies did have some competencies was in marketing and sales techniques. The spread of the tontine in the United States was accompanied by the advancement of the insurance salesman to sell the product. Aggressive marketing was the hallmark of companies like Equitable, which built a large agency force to sell its products. ^{Footnote 72} The general agency system relied on the efforts of a commissioned agent to coordinate and manage an army of sales staff employed to sell insurance products. ^{Footnote 73} It was accompanied by a sophisticated media-based publicity machine. During the 1880s and 1890s, newspapers were used regularly to push the interests of one insurer over another. ^{Footnote 74} However, it was the publication and distribution of pamphlets that demonstrated the growing sophistication of marketing skills. The volume of pamphlets saturated the market. Between 1884 and 1905, the Big Three published at least 118 different pamphlets designed for an Australian audience. ^{Footnote 75} Many of these were reprinted multiple times. ^{Footnote 76} AMP—which was quite active in promoting the pamphlet war—launched sixty-two pamphlets in their “campaign against American life offices.” Over time, the visual appearance of these pamphlets became more extravagant in an attempt to attract attention. ^{Footnote 77} The use of color and graphics were techniques that were later adopted more universally and translated into regular advertising. The Big Three were experienced in bringing their message to the attention of the public. However, Australian offices were quick learners, cherry-picking marketing and sales techniques and adapting them to suit their own systems. Advantages that American companies may have had in this respect were short-lived, as Australian offices developed similar skill sets. ^{Footnote 78}

In terms of locational factors, American companies were at a disadvantage. Although the Australian colonies had and were experiencing similar macroeconomic trends to those in America, it was on a much smaller scale. Three problems relating to the issue of location manifested for American companies. First was the size of the market and its geographic dispersion. Colonial economies, although expanding in the latter quarter of the nineteenth century, were doing so from a comparatively small base. The total population of the Australian colonies was 2.3 million in 1880, rising to 3.1 million in 1890, and 3.7 million in 1900. ^{Footnote 79} Around 35 percent lived in the five largest cities, especially Sydney and Melbourne. ^{Footnote 80} The remaining 65 percent of the population was widely geographically dispersed throughout the colonies.

The wide distribution of the population created a second set of issues. Servicing such markets was associated with high costs and the potential for moral hazard problems. The platform through which life insurance was sold was through the agency system. This system utilized the services of largely independent salesmen paid on a commission basis. The practice used in other countries was followed. A presence was established in a large metropolitan center, and then agents were contracted to provide the sales service. From this process, a web of sales agents grew to service the wider perimeters of the geographic market. U.S. companies started by acquiring the services of experienced men from local offices and then proceeded to infiltrate as much of the market as possible. An upshot of this was the escalation of costs because higher commissions were offered to attract agents. ^{Footnote 81}

One tactic used was to access markets in which the local presence was limited. These markets were usually very remote, and thus expensive and less easy to manage. Local offices retaliated with an increase in their own presence in these areas as they became less sustainable. Areas of remote Queensland are a case in point. The rumor of Equitable agents scoping out the north Queensland town of Townsville was enough for AMP to open an office there posthaste. ^{Footnote 82} Rural and remote areas were also associated with higher risks. Mortality rates were generally lower in the major cities as compared to the rest of the colonies. ^{Footnote 83} While there is no data on comparative loss ratios, it is likely that the American companies experienced higher trends than Australian competitors such as AMP. The mortality experience of AMP was said to be lower than any other life insurer in the world. ^{Footnote 84} A snapshot of the claims experience of the various companies reinforces the differentials. There is also no consistent data on policy discontinuation over this period; however, the 1891 Industrial Census of New South Wales provides an indicator of relativities. The number of policy discontinuations due to death and maturity for each company in 1891 is detailed in Table 4. The disparity between local and American firms is evident with both Equitable and Mutual of New York having much higher levels of claims. The average amount paid was also greater, reflecting the American practice of taking on larger risks. The quality of the risk portfolio of Australian companies was better than their U.S. counterparts because they insured for lower sums and took a conservative approach to policy approval. ^{Footnote 85}

Venturing into new and distant markets created a third issue: the risk of moral hazard. This could manifest both in the behavior of the policyholder and the agent. Policyholders could defraud the company or falsify policy information. Agents could operate dishonestly or engage in behavior bringing the company into disrepute. This could include engaging in twisting (the practice of selling policies to customers who had just acquired a similar one from another company) or rebating (the practice of giving the first year’s premium as a rebate on a new policy). The spread of agents of American insurers witnessed a rise in complaints from the public and local companies on the aggressive behavior of some individuals. ^{Footnote 86} An increase in the practice of twisting occurred at this time. The Australasian Insurance and Banking Record attributed the introduction of this “most objectionable” practice to an American company, most likely Equitable. The activities of the agents of this office made it not a competitor but a “pirate” stealing the business of other insurers, the Australasian Insurance and Banking Record declared. ^{Footnote 87}

The issue of moral hazard was one that both domestic and international life insurers faced. Australian companies, however, were able to reduce the impact of this problem by embedding checks and balances in their sales systems. The branch structure was one way in which information problems associated with moral hazard could be addressed. Using a hub-and-spoke approach, branch offices supported localized offices that formed the basis on which canvassing agents accessed rural and remote areas. A key function of branch and local offices was to build relationships in their respective communities. The selling of insurance was only one function of these offices; they also provided mortgage finance to local businesses. Local managers were directed to develop relationships with business leaders and play an active role in the community. ^{Footnote 88}

The branch approach also allowed domestic firms to contain the sales-management problem by employing canvassing agents rather than independent agents in localized areas. Canvassing agents were tied to one specific company and subjected to stringent screening processes. ^{Footnote 89} An outcome of this method was that sales commissions could be better controlled and the behavior of agents monitored. Localized branches also allowed the company to obtain detailed information on the population cohort, enabling the identification of potential problematic policies.

The American firms were at a disadvantage in terms of the internalization of functions that would have enabled them to minimize moral hazard issues and lower transaction costs. They were unable to replicate the branch system used by indigenous firms. This system had taken years to build and was supported by a strong and highly centralized management structure. It allowed better informational flows both in terms of policy risk and agent behavior. Other spinoffs, such as extending financial relationships into the community, enabled domestic firms to create a loyalty base among their policyholders. American insurers had neither the will nor capacity to build this type of organizational structure to manage their business in the Australian colonies.

The American agency system was at another disadvantage because firms relied on independent actors to pursue courses of action that would promote the expansion of market share. In terms of location, this had repercussions, including that these firms were unable to reap the benefits expected from this offshore market. One serious problem encountered was escalating costs.

High expense ratios troubled directors back home. Hyde, of Equitable, expressed his frustration at this issue in 1892, stating: “I am going to cut down expenses in Australia if I [have to] discharge every agent there and bust the whole thing.” ^{Footnote 90} Business costs and expense ratios were necessarily high as the three American insurers built their bases in the Australian market. The distance between a home office and Australian agencies made it difficult to monitor effectively the actions of local agents. Managers in Australia were known to make extravagant advances and pay high commissions to attract agents in an attempt to build business rapidly. The affairs of Equitable, for example, were found on inspection to be “something of a mess”; not only were agents overpaid but it had proved difficult to retain reliable managers. ^{Footnote 91}

Consistent data on expense ratios for the Big Three in Australia is not available. The figures that are reported tend to indicate that expenses were higher than major competitors such as AMP. Statistics of Australian Mutual Provident and of the three American life insurance offices prove this point. The AMP’s expense ratio was probably the lowest of all insurers, falling from 16.8 percent of premium income in 1884 to 12.9 percent in 1888. The expense-to-premium-income ratio of Mutual of New York increased from 14.5 percent to 25.6 percent in that period. Equitable’s ratio went from 19.7 percent to 22.2 percent, and New York Life’s fell from 22.7 percent to 21.5 percent. Figures reported in the Bulletin newspaper in 1906 indicate that this relativity had not altered much by the turn of the century. In 1900, AMP’s expenses per £100 of premium income was around £9. This was compared to New York Life at £19 and Mutual Life at £21. ^{Footnote 92}

Competitors such as AMP did their own calculations, claiming the ratios were much higher in the three American companies, ranging between 26 percent and 30 percent. ^{Footnote 93} While this may be an overembellishment, it is clear that expense ratios for the Big Three were comparatively high, placing them at a disadvantage against their local rivals.

The organization of sales functions was problematic for American companies. Their domestic sales system did not translate well into the Australian environment. As a result, they were not able to effectively lower transaction costs to a level that would reap internal advantages. Local companies had been able to do this more efficiently through their branching approach. Although their systems were also costly to manage, they were able to reap other benefits by fostering a close relationship with the communities they had a presence in.

The Big Three did grow their businesses, but they never reached the comparative levels of the major mutuals. The annual income and number of policies held by the various companies is detailed in Table 5. The total amount insured by AMP increased from £39.3 million in 1893 to £49 million in 1901. National Mutual nearly doubled its total insurances, from £6 million to £11.3 million during this time. The increase attributed to Equitable was £4 million to £4.7 million; Mutual of New York, £1.1 million to £1.8 million; and New York Life, £1.6 million to £2.3 million. ^{Footnote 94} Of the ten Australian life insurers, only two sold fewer policies, and four had less total value assured in 1901. By the end of the nineteenth century, the business of the Big Three in Australia had not reached the level expected by their respective board of directors. ^{Footnote 95}

For the Big Three, the results were disappointing. However, for the broader market, the increased competition provided an impetus to develop and grow in a number of ways. Innovation, the application of more sophisticated marketing techniques, and the geographic expansion of business were all encouraged in response to the increased competition associated with the entrance of U.S. companies.

It has already been noted that Australian insurers provided some of the most liberal life policies in the world. Policy development had been ongoing during the 1870s. In the 1880s, attention turned to the benefits provided to policyholders. As mutuals, any share of the surplus was periodically added to the value of the life insurance policy. This was usually done every five years. In the early 1880s, organizations such as AMP, reacting to competitive pressures, began to assign bonuses annually. The bonus could be claimed in a number of ways, including in cash, applied to the payment of the next premium, or added to the total payable at the conclusion of the policy. Although the shift to annual disbursement was more costly, insurers were largely able to absorb this because of consistently high rates of interest realized on other investment portfolios. Between 1877 and 1897, rates of interest averaged around 6 percent. ^{Footnote 96}

New tables of rates were also introduced, designed to be more attractive to the public and to offer greater flexibility. AMP introduced seven new tables of rates in 1895. These ranged from provisions for young children, trust investment policies, and alternative types of annuities. ^{Footnote 97} The limit of the total value of insurance payable was also increased. Traditionally, the limit of risk on a single life was relatively low at around £5,000. During the 1880s, this doubled to £10,000. These changes combined to make tontine policies relatively less attractive.

Marketing and media skills also advanced as local insurers countered the publicity machine of American insurers. ^{Footnote 98} The “pamphlet wars” may have engendered hostility between local and overseas offices, but they also taught Australian insurers the value of publicity and how to harness it to their advantage. ^{Footnote 99} During the 1880s and 1890s, newspapers were used regularly to push the interests of one insurer over another. ^{Footnote 100} However, it was the publication and distribution of pamphlets that demonstrated the growing sophistication of marketing skills. The skills developed over this period encouraged the growing demand for life insurance. ^{Footnote 101}

The endeavors of the Big Three in Australia came to an abrupt end with the introduction of more stringent controls imposed as a result of the findings of the Armstrong Inquiry in 1905. This inquiry was set up by the State of New York legislature to investigate the business practices of life insurers. It uncovered a trail of fraud and corruption. ^{Footnote 102} The outcome of the inquiry resulted in restrictions in a number of areas of business operation. In particular, the limitation on the amount of new business to USD 150 million per annum led to a reassessment of the value of the Australian venture. However, the directors of the Big Three were already considering their foreign operations prior to the outcome of the inquiry and looking to downsize or exit from some markets. ^{Footnote 103}

Mutual Life took the step in March 1906, informing its Australian policyholders that it had been decided to “largely reduce the working expenses of the company around the world.” As a result, its Australian business would be dealt with from its head office. ^{Footnote 104} Equitable had preceded this move with similar correspondence to their Australian policyholders. ^{Footnote 105} New York Life remained, but its business declined substantially starting in 1906. While it took a decade or more for the business of these companies to run out, their ventures in the Australian colonies were essentially over. ^{Footnote 106}