Share:


Does efficiency promote competitiveness of the insurance industry?

    Hui Shan Lee Affiliation
    ; Fan Fah Cheng Affiliation
    ; Annuar Md Nassir Affiliation
    ; Nazrul Hisyam Ab Razak Affiliation

Abstract

This paper contributes to the existing literature by examining the efficiency and competitiveness of the Takaful insurance. We employ the Data Envelopment Analysis (DEA) to compute the efficiency of Takaful operators, while Panzar-Rosse (P-R) H-statistic method is used to evaluate the degree of competition. The findings indicate that the inefficiency in Takaful’s operations is affected by the scale of operations but not by inefficiency in managerial practice. Actuaries need to pay attention to estimating provisions for outstanding claims, as this factor is negatively influencing the efficiency of Takaful insurance. Additionally, the managers are cautioned not to overspend on commissions paid to the agents because this will reduce the profit of the Takaful operators. The findings to a very large extent indicate that improvement in efficiency will increase the entry of a more viable competitor to participate in the Takaful industry.  The regulators need to implement prudent monitoring of the operations of Takaful insurers because improvements in efficiency will make Takaful operators more competitive. The implications further shed light on the motivation for insurance firms to improve efficiency that enable them to charge lower price to enhance competition which may benefit both the firms and customers.

Keyword : data envelopment analysis, efficiency, Takaful insurance, Panzar-Rosse, competition, risk based capital framework

How to Cite
Lee, H. S., Cheng, F. F., Nassir, A. M., & Razak, N. H. A. (2018). Does efficiency promote competitiveness of the insurance industry?. Journal of Business Economics and Management, 19(4), 566-591. https://doi.org/10.3846/jbem.2018.5547
Published in Issue
Nov 21, 2018
Abstract Views
2961
PDF Downloads
1391
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

References

Aktan, B., & Masood, O. (2010). The state of competition of the Turkish banking industry: an application of the Panzar-Rosse model. Journal of Business Economics and Management, 11(1), 131-145. https://doi.org/10.3846/jbem.2010.07

Alhassan, A. L., & Biekpe, N. (2016). Competition and efficiency in the non-life insurance market in South Africa. Journal of Economic Studies, 43(6), 882-909. https://doi.org/10.1108/JES-07-2015-0128

Alhassan, A. L., & Biekpe, N. (2017). Liberalization outcomes and competitive behaviour in an emerging insurance market. African Development Review, 29(2), 122-138. https://doi.org/10.1111/1467-8268.12245

Andries, A. M., & Capraru, B. (2014). The nexus between competition and efficiency: the European banking industries experience. International Business Review, 23(3), 566-579. https://doi.org/10.1016/j.ibusrev.2013.09.004

Apergis, N., & Polemis, M. L. (2016). Competition and efficiency in the MENA banking region: a nonstructural DEA approach. Applied Economics, 48(54), 5276-5291. https://doi.org/10.1080/00036846.2016.1176112

Asia Insurance Review. (2016). Takaful: Global gross contributions rose by 5% to US$23.2 bln in 2015. Retrieved from http://www3.asiainsurancereview.com/News/View-NewsLetter-Article?id=35885&Type=MiddleEast#

Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management Science, 30(9), 1078-1092. https://doi.org/10.1287/mnsc.30.9.1078

Biener, C., Eling, M., & Jia, R. (2017). The structure of the global reinsurance market: an analysis of efficiency, scale, and scope. Journal of Banking & Finance, 77, 213-229. https://doi.org/10.1016/j.jbankfin.2017.01.017

Biener, C., Eling, M., & Wirfs, J. H. (2016). The determinants of efficiency and productivity in the Swiss insurance industry. European Journal of Operational Research, 248(2), 703-714. https://doi.org/10.1016/j.ejor.2015.07.055

Bikker, J. A., & Haaf, K. (2002). Competition, concentration and their relationship: an empirical analysis of the banking industry. Journal of Banking & Finance, 26(11), 2191-2214. https://doi.org/10.1016/S0378-4266(02)00205-4

Bikker, J. A., & Leuvensteijn, M. V. (2008). Competition and efficiency in the Dutch life insurance industry. Applied Economics, 40(16), 2063-2084. https://doi.org/10.1080/00036840600949298

Charnes, A., Cooper, W. W., & Rhodes, E. (1978). Measuring the efficiency of decision making units. European Journal of Operational Research, 2(6), 429-444. https://doi.org/10.1016/0377-2217(78)90138-8

Coccorese, P. (2012). Information sharing, market competition and antitrust intervention: a lesson from the Italian insurance sector. Applied Economics, 44(3), 351-359. https://doi.org/10.1080/00036846.2010.508721

Cummins, J. D., Rubio-Misas, M., & Vencappa, D. (2017). Competition, efficiency and soundness in European life insurance markets. Journal of Financial Stability, 28, 66-78. https://doi.org/10.1016/j.jfs.2016.11.007

Cummins, J. D., & Weiss, M. A. (1993). Measuring cost efficiency in the property-liability insurance industry. Journal of Banking and Finance, 17, 463-481. https://doi.org/10.1016/0378-4266(93)90046-G

Cummins, J. D., & Weiss, M. A. (2013). Analyzing firm performance in the insurance industry using frontier efficiency and productivity methods. In Handbook of insurance (pp. 795-861). New York, NY: Springer. https://doi.org/10.1007/s11123-012-0302-2

Cummins, J. D., Weiss, M. A., Xie, X., & Zi, H. (2010). Economies of scope in financial services: A DEA efficiency analysis of the US insurance industry. Journal of Banking and Finance, 34(7), 1525-1539. https://doi.org/10.1016/j.jbankfin.2010.02.025

Cummins, J. D., & Xie, X. (2013). Efficiency, productivity, and scale economies in the U.S. property-liability insurance industry. Journal of Productivity Analysis, 39(2), 141-164. https://doi.org/10.1007/s11123-012-0302-2

Eling, M., & Schaper, P. (2017). Under pressure: how the business environment affects productivity and efficiency of European life insurance companies. European Journal of Operational Research, 258(3), 1082-1094. https://doi.org/10.1016/j.ejor.2016.08.070

Fah, C. F., & Sin, L. H. (2014). Relationship between earnings response coefficient of insurance firms and exgrowth opportunities, earned premium incomes and commissions in Malaysia. International Business Research, 7(6), 164-173. https://doi.org/10.5539/ibr.v7n6p164

Goud, B. (2016). World Takaful Report 2016. Retrieved from http://www.takafulprimer.com/main/downloads/ms_5860.pdf

Gujarati, D. N., & Porter, D. C. (2009). Basic econometrics. Singapore: McGraw-Hill Irwin.

Jeng, V. S. C. (2015). Competition and its variation over time: an empirical analysis of the Chinese insurance industry. The Geneva Papers on Risk and Insurance − Issues and Practice, 40(4), 632-652. https://doi.org/10.1057/gpp.2015.4

Kader, H. A., Adams, M., Hardwick, P., & Kwon, W. J. (2014). Cost efficiency and board composition under different Takaful insurance business models. International Review of Financial Analysis, 32, 60-70. https://doi.org/10.1016/j.irfa.2013.12.008

Kumar, M., Charles, V., & Mishra, C. S. (2016). Evaluating the performance of Indian banking sector using DEA during post-reform and global financial crisis. Journal of Business Economics and Management, 17(1), 156-172. https://doi.org/10.3846/16111699.2013.809785

Lee, H. S., Low, K. L. T., Chong, S. C., & Sia, B. K. (2018). Influence of secondary and tertiary literacy on life insurance consumption: case of selected ASEAN countries. Geneva Papers on Risk and Insurance: Issues and Practice, 43(1), 1-15. https://doi.org/10.1057/s41288-017-0050-7

Malaysian Takaful Association Annual Report. (2015). Malaysian Takaful Association Annual Report 2015.

Panzar, J. C., & Rosse, J. N. (1987). Testing for ‘monopoly’ equilibrium. The Journal of Industrial Economics, 35(4), 443-456. https://doi.org/10.2307/2098582

Spierdijk, L., & Koning, R. H. (2014). Estimating outstanding claim liabilities: the role of unobserved risk factors. Journal of Risk and Insurance, 81(4), 803-830. https://doi.org/10.1111/j.1539-6975.2013.01518.x

Sufian, F. (2011). The nexus between financial sector consolidation, competition and efficiency: empirical evidence from the Malaysian banking sector. IMA Journal of Management Mathematics, 22(4), 419-444. https://doi.org/10.1093/imaman/dpr015

The Financial Stability and Payment Systems Report. (2015). The Financial Stability and Payment Systems Report.

Todorov, A. B. (2016). Assessing competition in the Bulgarian insurance industry: a Panzar-Rosse approach. International Journal of Economics and Financial Issues, 6(3), 872-879.

Williams, R. L., Anzsar, J., Bulmer, R., Buntine, J., Byrne, M., Gedalla, B., Goswamy, P., Grant, J., Heah, W., Keshani, S., & Shah, J. (2016). Application of the solvency II actuarial function to general insurance firms. British Actuarial Journal, 21(3), 476-530. https://doi.org/10.1017/S1357321716000052