Efficiency, Productivity and Returns to Scale Economies in the Non-Life Insurance Market in South Africa
- 112 Downloads
This paper undertakes a comprehensive analysis of efficiency, productivity and returns to scale economies in the non-life insurance market in South Africa from 2007 to 2012. The data envelopment analysis technique is employed to estimate efficiency and returns to scale while productivity growth is analysed with the Malmquist index. Truncated bootstrapped regression and logistic regression techniques are used to identify the determinants of efficiency and the probability of operating under constant returns to scale. The results indicate that non-life insurers operate with about 50 per cent inefficiencies, while about 20 per cent of insurers operate at an optimal scale. We also observe productivity improvements attributable to technological changes. The results of the regression analysis reveal a non-linear effect of size on efficiency and constant returns to scale. Product line diversification, reinsurance and leverage also have a significant relationship with efficiency and constant returns to scale. A major contribution of this paper is the analysis of efficiency convergence using the growth convergence theory. Implications for management and industry regulation are drawn from the findings.
Keywordsefficiency productivity returns to scale convergence insurance South Africa
We thank two anonymous reviewers and the guest editor for their helpful comments. We also acknowledge the assistance of the Insurance department of the FSB in providing the data for this study and Africagrowth Institute for sponsoring the research. All normal caveats apply.
- Cooper, W.W., Seiford, L.M. and Tone, K. (2000) Data Envelopment Analysis: A Comprehensive Text with Models, Applications, References and DEA-Solver Software, Boston, MA: Kluwer Academic Publishers.Google Scholar
- Cummins, J.D., Turchetti, G. and Weiss, M.A. (1996) Productivity and technical efficiency in the Italian insurance industry, working paper No. 96-10, Wharton Financial Institutions Center, Philadelphia, PA, from www.fic.wharton.upenn.edu/fic/papers/96/9610.pdf.Google Scholar
- Diacon, S.R. (2001) The efficiency of UK general insurance companies, working paper, Centre for Risk and Insurance Studies, University of Nottingham.Google Scholar
- Färe, R., Grosskopf, S., Norris, M. and Zhang, Z. (1994) ‘Productivity growth, technical progress and efficiency change in industrialized countries’, The American Economic Review 84 (1): 66–83.Google Scholar
- Fischer, I. (1922) The Making of Index Numbers: A Study of their Varieties, Tests, and Reliability, Boston, MA: Houghton-Mifflin.Google Scholar
- Jensen, M.C. (1986) ‘Agency costs of free cash flow, corporate finance, and takeovers’, The American Economic Review 76 (2): 323–329.Google Scholar
- Kennedy, P. (2008) A Guide to Econometrics. 6th edn. Malden, MA: Blackwell Publishing.Google Scholar
- Klumpes, P.J.M. (2007) Consolidation and efficiency in the major European insurance markets, working paper, Imperial College, London.Google Scholar
- Noulas, A.G., Hatzigayios, T., Lazaridis, J. and Lyroudi, K. (2001) ‘Non-parametric production frontier approach to the study of efficiency of non-life insurance companies in Greece’, Journal of Financial Management and Analysis 14 (1): 19–26.Google Scholar
- Sinha, T. (2004) The Indian Insurance Industry: Challenges and Prospects. Zurich: Swiss Re, from www.icpr.itam.mx/papers/SinhaSwissRe.pdf.
- Swiss Re (2011) World Insurance in 2010: Premiums Back to Growth—Capital Increases. Sigma 2011/2Zurich: Swiss Re.Google Scholar
- Tornqvist, L. (1936) ‘The bank of Finland’s consumption price index’, Bank of Finland Monthly Bulletin 10: 1–8.Google Scholar