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A cost efficiency analysis of the insurance industry in Mexico

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Abstract

In Mexico, the low participation of insurance activity in national production, in contrast to similar Latin American economies, is a concern. Industry’s regulator promoted more intense competition at the dawn of the century. Was deregulation followed by improvements in the financial and economic performance of Mexican insurance firms? The purpose of this paper is to answer this question through a comprehensive analysis of cost variations in an intertemporal manner, by breaking them down into the economic sources that produce them, including productivity. Cost frontier estimation was grounded in a joint production technology of desirable and undesirable outputs, modeled in an input-oriented fashion. Our results demonstrate that even though some companies achieved cost reductions from technological progress or improvements in efficiency, the Mexican insurance market does not show signs of significant productivity gains.

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Notes

  1. Kunreuther et al. (2013, p 5) illustrate this situation with the insurance buyer’s mantra: “the best return is no return at all”.

  2. All the figures describing the insurance market provided herein are limited to the companies classified by CNSF in the insurance category, excluding those firms engaged in pensions, health services, financial and reinsurance guarantees categories.

  3. It is important to mention that in Mexico, since 2002, new insurance companies are only allowed to deal in products exclusively meant for either people or property, and only those companies having the authorization prior to this change in legislation can market both types of risk (Article VII of the General Act of Institutions and Mutual Insurance Companies). See CNSF (2002).

  4. GMAC Insurance Holdings Inc., subsidiary of Ally Financial Inc., was the main shareholder of ABA Insurance from 2000 to 2013. Meanwhile, General Electric Capital Assurance Company, subsidiary of GE Capital, was the main shareholder of GE Insurance from 2003 to 2007.

  5. The insurance companies with majority ownership of BBV, BBVA, Citigroup, HSBC and Santander were included in this category.

  6. The World Bank (2014) points out an increase in the GDP per capita from 6.6 dollars in 2000 to 9.8 dollars in 2012 in Mexico.

  7. Bennet indicators are preferred to Laspeyres and Paasche indices to avoid weights in excess of the years with highest price or quantity levels, especially in the comparisons of years with significant differences. The axiomatic proof of this advantage of Bennet indicators is found in Diewert (2005) and the graphical representation thereof in Sahoo and Tone (2009).

  8. A summary of the contribution to cost variation of all the effects according to the sign of the estimated quantity is showed in Table 3.

  9. Regulation in Mexico also marks the recording of other types of expenses that are not directly related with the risk premium operations, for example the expenses of analogous and related services associated with complementary services provided by the insurers to the insured, for instance in the management of copayment of medical services. See CNSF (2011).

  10. In all cases, annual results were aggregated in three-year periods to facilitate their interpretation. Detailed results are available under request to the authors.

  11. Milgrom and Roberts (1992) explain that adverse selection and moral hazard characterize the insurance industry draining resources and damaging the welfare of the society.

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Authors and Affiliations

  1. GNP, Cerro de las Torres 395, Col. Campestre Churubusco, Ciudad de México, 04200, Mexico

    Ana María Reyna

  2. ITESM CCM, Calle del Puente 222 Col. Ejidos de Huipulco, Ciudad de México, 14380, Mexico

    Hugo J. Fuentes

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  1. Ana María Reyna
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  2. Hugo J. Fuentes
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Correspondence to Ana María Reyna.

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Reyna, A.M., Fuentes, H.J. A cost efficiency analysis of the insurance industry in Mexico. J Prod Anal 49, 49–64 (2018). https://doi.org/10.1007/s11123-017-0521-7

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